By: John Boylan, CFA
The consumer staples sector is often viewed as less volatile than the broader market because of the usually steady sales of the everyday products created by these companies. However, differences between these companies exist, and those that embrace data and technology, improve distribution and have experience in emerging markets should benefit over the long term, in our view. These structural changes, we feel, should lead to opportunities for investors.
Innovation helps fuel long-term growth
Large consumer staples companies are increasing investments in data analysis and technology, which should help growth long-term. A few years ago, smaller companies were able to take market share by using data to identify new trends faster and getting products to market before larger companies. Now larger companies are starting to invest more in data and technology and are structured to make decisions faster. For some companies, getting a product from concept to shelf now takes months as opposed to what used to take a year or two.
Adopting new trends
The growing trend in online grocery shopping should help long-term growth for many consumer staples companies, in our view. Online purchases are often filled and picked up or delivered from a local grocery store. Therefore, stores are working closely with staples companies to ensure the appropriate amount of inventory is delivered to increase product sales and product turnover. Also, large, high-selling brands are often prominently featured on online-shopping websites, making them easier to buy, in our view. We think these trends will favour larger companies over time.
Experience counts in emerging markets
Much of the growth in the middle class worldwide is coming from emerging-markets, such as China. We think exposure to these markets is important, but experience is needed. Flavours and brands that are successful in North America don't always translate well to tastes in some emerging markets. Thus, we favour companies that tailor products to those markets, which takes experience. Also, many developing countries do not have nationwide grocery chains. Servicing hundreds of small stores can be complicated and costly. Companies that have local distribution networks often are more successful. For stock ideas in the consumer staples sector, please speak with your Edward Jones advisor, or visit edwardjones.ca/stocks.
There are several risks associated with investing in consumer staples companies. Changing consumer trends, product recalls, ineffective marketing and advertising, lack of innovation, and poor management all can negatively affect the stock price of companies in this sector. Additionally, increasing regulations, the further escalation of trade uncertainty, and negative foreign currency fluctuations could negatively impact growth.