Weekly shopping lists

Warren Buffet’s advice includes to invest in what you know. There are few items that most people are familiar with and rarely do without.

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Personal preferences tend to shape most of our purchases, but there are some types of items that most people use on a daily basis. Products such as food, beverages, household goods, personal care items, and basic clothing are often grouped together as consumer staples. They’re often known as ‘non-cyclical goods’ as demand stays relatively stable regardless of the state of the economy. 

While consumers have been cutting back due to inflation, in some cases it’s a question of changing brands or finding cheaper alternatives rather than avoiding the product. Passing on increased costs for essential goods tends to have less blow back than for discretionary items. However, it’s a very competitive industry and brand loyalty is limited. Changing packaging sizes and product innovation are vital tactics. 

Consumer staples are a good option for investors wanting consistency rather than quick growth. They’re a suitable choice for those interested in more regular dividends rather than capital growth. They’re often large companies offering a variety of merchandise across various countries, benefiting from economies of scale and logistics networks. 

Procter & Gamble Company ($PG)

Consumer goods giant Procter & Gamble (P&G) had net sales of US$80b in 2022. Fabric and home care was the largest segment and accounted for around 35% of net sales, followed by baby, feminine and family care at 25%. Prominent brands include Gillette, Pampers and Head & Shoulders. It has a relatively concentrated presence in developed markets, particularly in North America with 49% of sales and Europe at 21%.

P&G has historically had higher operating margins than its competitors, but this has not always converted into good stock price performances. Q2 2023 saw an operating margin of 23.0%, a decline of 1% from the previous quarter. Strategy has focused on streamlining the business to focus on the highest earnings brands in recent years and started with a significant sale of beauty units in 2018.

However, maintaining leading products across several categories comes with constant pressures to advertise and improve their offerings. The ideal scenario for investors would be to find a business able to consistently sell greater volumes, more higher priced items and be able to pass on price increases to consumers. In Q2 2023 P&G’s managed to grow organic sales by 5%, with a 10% increase coming from higher pricing and an 1% addition from more favourable product mixes, offsetting a 6% fall in shipping volumes. 

P&G remains exposed to currency fluctuations and they had a negative 6% impact on sales in the most recent quarter. This was a factor in Earnings Per Share (EPS) declining 4% to US$1.59 in Q2 2023. While management is optimistic about future sales growth, they also point to headwinds from commodity, shipping and material costs. Despite this, investors could still benefit from the company’s dividends. They’ve increased for a remarkable 66 consecutive years and given this pattern, the next is likely to be greater than the $0.9133 per share received in January. 

UBS analyst Peter Grom upgraded his stock rating from neutral to buy for P&G and price target to US$163 from US$157. He expects the share price to recover after a period of underperformance, with earnings reaching an inflection point in FY24 due to higher margins and the reopening of China. 

Unilever plc ($UL)

Multinational consumer goods firm Unilever is more focused on Europe and emerging markets. Around 46% of group turnover is exposed to the Asia Pacific Africa region, which is better suited for investors that expect emerging markets to grow faster in the coming years. It has a larger focus on food related products compared to P&G, with sales of €13.9b for nutrition and €7.9b from ice-cream in FY22. Other major sales segments are beauty & wellbeing (€12.3b), personal care (€13.6b) and home care (€12.4b). 

Unilever is the smaller firm with a market cap of US$[134b] and has a lower share price of US$[53.58], compared to P&G’s US$[359b] and US$[152.22] respectively. It had tighter operating margins of 17.9% in 2022, but managed positive overall sales growth of 11.4% due to higher prices offsetting lower volumes. Exchange rates actually had a positive contribution to their bottom line, as the strong US Dollar has less impact on Unilever’s more global mix of markets. 

Investors looking for a turnaround story might want to watch Unilever’s next steps closely. The same activist investor, Nelson Peltz, that pushed P&G to concentrate on its most profitable brands has now joined their board and many expect the firm to implement the same strategy. However, 53% of the group’s turnover already came from billion Euro brands, like Magnum, Sunsilk and Rexona, which achieved underlying sales growth of 10.9%. Not everyone is convinced that efficiencies can be significantly improved and analysts have a consensus of rating of ‘hold’ for the stock. 

However, Unilever is unlikely to stray too far from their traditional plans and rather build on existing components. The business acquired low cost rival the Dollar Shave Club for US$1b to reach new and younger customers, it was their first direct to consumer brand. It’s generally been accepted that integration has not gone smoothly and revenues remain below expectations. Instead investors with faith in the ‘lipstick effect’, a phenomenon that sees smaller luxury items hold up during downtimes, could be rewarded again. The category saw 20.8% growth in sales over the same period. 

Unilever’s forward looking commentary points to inflation as an ongoing challenge and that cost saving exercises will need to continue. The existing sales trend of lower volumes and higher prices is also set to advance, with no certainty of change in the second half of 2023. However, a 28% increase in the EPS over the previous financial year to €2.99 sees the firm rate considerably higher than P&G when adjusted for currency in this respect. Investors can also expect a regular dividend from the firm, with the latest being €0.4268 per share in March 2023.

Empty baskets 

The consumer staples sector has several other options for investors. Those with their eyes on the U.S. market might like retailer Walmart ($WMT), which has managed to create a network of 4,700 stores located within 16km of 90% of the U.S. population. As consumers deal with sticky inflation across most goods and higher property costs, bulk buying from Costco Wholesale ($COST) could become even more attractive. 

Others might like to go directly to the source and invest in a firm focused only on food and beverages. It could be hard to avoid the eight brands worth over US$1 billion from Kraft Heinz Company ($KHC) when buying groceries. People will indulge in little treats like Coca-Cola Co ($KO) products instead of more going out if times are tough. For investors just wanting some exposure to the sector, the Consumer Staples Vanguard ETF ($VDC) is a simple solution.


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