The consumer staples sector has been generally weak over the past few quarters due to a difficult consumer spending environment that emanated from slow job growth and tightened credit availability. In addition, difficult operating conditions in Europe and a slowdown in some major emerging countries threatened growth.
Most of the large consumer staples stocks have somehow managed to increase their earnings on the back of cost controls, innovation, acquisitions and share buybacks, but only a few have been able to deliver impressive top-line growth – thus signaling a lack of real growth.
Consumer product companies therefore regularly need to innovate and upgrade their brands to boost consumer confidence and create differentiated value propositions for their customers in order to remain successful. Other than enhancing their products, the companies are also focusing on shifting consumer preferences, increasing health consciousness and rising obesity concerns. The companies are now inclined toward making healthier and nutritious products.
In order to boost profits and top-line growth, most consumer staples companies are divesting low-margin brands, improving the supply chain and implementing cost-reduction initiatives. These help the 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, despite top-line growth. (Read:China ETFs jump on Government Reform Afterglow)
Besides costs saving initiatives, many consumer staples companies are shifting their focus to emerging markets to boost sales. With market saturation, low disposable income of consumers, uncertain macroeconomic conditions and increased competitive activity in developed markets, these companies are diverting their resources to explore emerging markets.
However, increasing presence in the emerging markets also brings along the negative impact from currencies for many consumer staples companies. A stronger dollar reduces the value of outside-U.S. sales and in turn limits growth in the emerging markets. But with improving standard of living in developing countries, the companies are now focusing on increasing pricing to derive profits, which was difficult earlier.
Playing the Sector through ETFs
Given the defensive nature of this sector, it will outperform when equity markets are more bearish and underperform when bullish. The ups and downs of the sector due to the U.S. and global exposure can be played with a wide array of ETFs. (See all Consumer Staples ETFs Here)
Consumer Staples Select Sector SPDR ETF (NYSEARCA:XLP):
Launched on Dec 16, 1998, XLP is an ETF that seeks investment results corresponding to the S&P Consumer Staples Select Sector Index. This fund consists of 42 stocks of companies that manufacture and sell a range of branded consumer packaged goods, with the top holdings being Procter & Gamble, Coca-Cola and Philip Morris International Inc (PM). The fund’s expense ratio is 0.18% and pays out a dividend yield of 2.63%. XLP has about $5.7 billion in assets under management as of Oct 24, 2013.