The global financial crisis of 2008 threatened the existence of a number of key industry players. But many companies in the consumer staples sector managed to survive on the back of effective cost-control initiatives, inorganic growth and share buybacks. A gradual recovery in the European economy last year and the strengthening of the U.S. dollar are also showing up in the results of these companies.
For example, soda giants the Coca-Cola Company (NYSE:KO), PepsiCo, Inc. (NYSE:PEP) and Dr Pepper Snapple Group, Inc. (NYSE:DPS) have outperformed expectations in the first half of 2014 driven by aggressive marketing initiatives, cost containment and improved productivity. A sequential improvement in beverage volumes in the second quarter of 2014 was the highlight of the quarter, which impressed investors. Buoyed by the strong performance in the reported quarter, Dr Pepper Snapple and Pepsi raised their earnings outlook for full-year 2014. We also believe that these companies will keep the momentum going in the second half.
Food company McCormick & Co., Inc. (NYSE:MKC) has also been benefiting from significant cost savings and share buybacks. The company has also raised its fiscal year earnings forecast on the back of solid fundamentals.
Below, we discuss some of these key reasons and what investors in the consumer staple sector can look forward to seeing in the coming months.
OPPORTUNITIES
Innovations
In a crowded and competitive space, consumer product companies need to regularly innovate and upgrade their brands to create differentiated value propositions for their customers and to remain successful.
Innovation has been a driving force for consumer product giants like The Procter & Gamble Co. (NYSE:PG). P&G believes that consistent product innovation, supported by strong marketing and commercialization, will help deliver stronger results over the long term. Notably, the company spends around $14 billion on marketing annually.
Cereal maker General Mills Inc (NYSE:GIS) and global brewer Molson Coors Brewing Co (NYSE:TAP) also has been launching new products to boost revenues. Meanwhile, Keurig Green Mountain, Inc.’s (NASDAQ:GMCR) newly launched Keurig 2.0 brewing machine is expected to counter competition as only its licensed K-Cups work in the model.
Shifting Focus on Health and Wellness and ‘Good-for-You’ Products
The companies are also shifting focus to make healthier and nutritious products in view of increasing health consciousness, rising obesity concerns and growing regulatory pressures.
Most recently, on Sept. 24, three of America’s largest soft drink makers -- The Coca-Cola Company, PepsiCo, Inc. and Dr Pepper Snapple Group, Inc. -- pledged to reduce calories in their beverages by 20% by 2025. Accordingly, the companies agreed to promote bottled water, no-or-lower-calorie beverages and smaller portion sizes to its consumers. Coca-Cola’s bottler Coca-Cola Enterprises Inc. (NYSE:CCE) is also slowly shifting its product mix from colas to energy drinks and other non-carbonated beverages.
Food company B&G Foods, Inc. (NYSE:BGS) and General Mills also plan to roll out more nutritious products in 2014. Natural and organic food/beverages maker The WhiteWave Foods Company (NYSE:WWAV) and United Natural Foods, Inc. (NASDAQ:UNFI) have been benefiting from strong demand of natural/organic food products and expects to continue to gain from the natural/organic food revolution.
Food and beverage companies are not the only ones trying to shift to healthier options. Tobacco companies like Lorillard Inc (NYSE:LO), Altria Group Inc. (NYSE:MO) and Reynolds American Inc (NYSE:RAI) are also adapting to the evolving needs of consumers and have resorted to less harmful alternatives like electronic cigarettes (e-cigarettes).
Divestitures and Restructuring Initiatives
Most consumer staples companies are divesting low-margin brands and implementing cost-reduction initiatives in order to boost profits. These initiatives help companies to reduce the effects of inflating commodity costs and other input costs, which have remained a drag on margins of most companies in this sector.
The Procter & Gamble Company recently announced to divest 90 to 100 brands over the next two years whose sales and profits have been declining over the past three years in order to be a more focused company. Consumer giant Unilever NV (NYSE:UN) has divested many businesses since more than a year to concentrate on its core products portfolio.
Kimberly-Clark Corp. (NYSE:KMB) has also decided to spin-off its health care business, which has been operating on low margins and has been witnessing decelerated sales growth since the last few quarters. In May, snacking giant Mondelez International, Inc. (NASDAQ:MDLZ) announced a spin-off proposal for its coffee business to Netherlands-based coffee company, D.E Master Blenders 1753 in order to concentrate on its core snacks business.
Expansion in Emerging Markets
Besides costs saving initiatives, many consumer staples companies are shifting their focus to emerging markets to boost sales. Relative to the mature North American and European markets, emerging markets such as Brazil, India, China, Mexico, Russia and Southeast Asia are still untapped. Moreover, consumer spending in these markets is also increasing. The rising pool of middle class consumers in emerging markets represents a huge opportunity for these companies.
Tobacco company Philip Morris International Inc (NYSE:PM) has a significant presence in a large number of markets and enjoys robust growth in Asia, Indonesia, Pakistan, China, Philippines and Korea, while PepsiCo generates around 45% of its revenues outside the U.S. Cereal maker Kellogg Company (NYSE:K) has tripled its emerging market business over the last decade. The Pringles acquisition in June 2012 consolidated its position in some of the fast-growing regions.
Acquisitions and Strategic Partnerships
Many consumer staple companies are regularly carrying out acquisitions both domestically and internationally to expand their existing customer base and product lines into new markets. Some of them are also forming partnerships to take a lead in this challenging environment.
In late-August, Tyson Foods, Inc.(NYSE:TSN) completed its much talked about merger with packaged meat producer, The Hillshire Brands Company, thereby inking the biggest deal in the meat industry.
Likewise, cigarette maker Reynolds American is close to acquiring the third largest U.S. cigarette company, Lorillard. While a combination of these two tobacco giants will possibly create one of the strongest global tobacco companies, regulators could object to the deal to protect the U.S. tobacco industry from becoming a duopoly.
Food distributor Sysco Corp.’s (NYSE:SYY) merger with US Foods - the second largest player in the foodservice distribution industry – is also undergoing a regulatory review process by the Federal Trade Commission and may require Sysco and US Foods to divest assets to competitors. The merger can create one of the largest food companies in the country giving Sysco increased size and scale in this low-margin business and will also provide significant cost savings opportunities.
A new wave of consolidation in the brewing industry is also expected in the near term. Speculations are rife that the world’s largest brewing company, Anheuser-Busch InBev SA/NV (NYSE:BUD) aka AB InBev, is seeking finances to buy the second largest, SABMiller plc (OTC:SBMRY).
Keurig Green Mountain has also formed several strategic agreements with coffee and beverage companies like The Coca-Cola Co., Kraft Foods Group, Inc. (NASDAQ:KRFT), The J. M. Smucker Company (NYSE:SJM), Starbucks Corporation (NASDAQ:SBUX), Unilever plc (NYSE:UL), Eight O’Clock and Dunkin’ Donuts by Dunkin' Brands Group Inc. (NASDAQ:DNKN) to offer signature hot drinks of these companies in its K-cups and Vue packs.
Bottom Line
As you can see, there are plenty of reasons to be optimistic about the consumer staples industry over the long haul. How about investing in this space right now?