Consumer staples are fundamentally consisted of companies that cater to household necessities such as food, beverages, and non-durable household and personal products such as feminine hygiene products, alcohol, tobacco, as well as pharmaceutical drugs. The consumer staples sector, also called the consumer defensive sector, encompasses products that are necessary and essential for basic living. They are characterized by products that people are unwilling to cut out accompanied by little regard to the overall economy or their financial situation.
Consumer staples are in demand year-around at a relatively constant level, regardless of the performance of the economy; thus they are considered to be non-cyclical and do not adhere to business cycles. There is a lessened price elasticity of demand as the necessity for these products make the consumer quantity depending on price pretty stabilized.
Comprising nearly 70% of the United States’ gross national product (GNP), consumer spending harbors a lot of leverage over the economy. The S&P 500 Index of consumer staples breaks down the sector into six industries:
Food and Staples Retailing — Examples: Costco, Sysco, Wal-Mart, CVS, Kroger and Walgreens.
Food, Beverage, and Tobacco — Examples: Tyson, ConAgra, Kellogg, Coca-Cola, General Mills, and Philip Morris (maker of Marlboro cigarettes).
Household and Personal Products — Examples: Estée Lauder, Procter & Gamble, Clorox, and Colgate-Palmolive.
Investing in Consumer Staples
Despite the fact that there are no replacements for consumer staples goods, consumers are provided numerous options when shopping for the cheapest products which breeds a highly competitive environment where commodity prices are constantly rising. Thus, in order to compete on price consumer staples, the companies are obliged to maintain their costs down by adopting novel processes and technologies, or they must find a way to differentiate their products by offering innovative products.
Advantages
- Solid, rich dividend yields, earnings even in recessionary periods, sometimes demand even increases during economic downturns. Statistics on “Dividend.com,” convey that the annual dividend rate increased by 8% over the 20 years until 2015. The sector was yielding a promising surplus of 2.01% in 2018.
- Significant role in portfolio diversification. Reliable during recessionary times and low volatility; thus due to the positive influence of its counter reaction in market recessions, it provides balance to a portfolio which includes boom and bust cycles of risky high-growth stocks.
Disadvantages
- Slow growth due to the saturated market and high competition. High cost of advertising and promotion due to necessity of brand building. Challenging process as it requires time and a lot of investment. For instance, 25 of the Top 100 grocery bands are more than 90 years old in the UK. It is quite different to industrial stocks that leverage from their manufacturing facilities and thus capital expenditure which are capitalized and depreciated over years.
The Financial Performance of the Sector
Since 1962, consumer staples has outperformed every sector except for one. The most striking information, however, is that during the last three recessionary periods of negative growth in GDP, the sector outperformed the S&P 500. The sector’s 25 year 12-month rolling earning growth is an average of 7.1% when the market is only 5.5%. Furthermore, the volatility for the sector over the same time period is 11.4% compared to the market’s 18%. Hence, consumer staples has grown by 7.6x versus the market at 4x. It’s highly appealing and preferred for defensive strategies due to its statistically low volatility and higher earning growth.
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Sources:
https://www.investopedia.com/terms/c/consumerstaples.asp
https://www.valuepenguin.com/sectors/consumer-staples
https://www.morganstanley.com/im/publication/insights/investment-insights/ii_consumerstaples_en.pdf
