Consumer Staples: News-Driven Profits and Price Competition

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Yesterday, we went over the fundamentals of the financial sector. We saw that financials, like energy, are a class of stocks with a vital but often hard to read relationship to the macroeconomy. Today, we’re going to look at a very different category: consumer staples. This category is all about stable earnings, albeit with limited growth potential.

The Consumer Staples sector is made up of firms whose main lines of business involve consumer goods like food, beverages, and household products. These products stand in contrast to the housing, entertainment, and retail-related stocks found in the Consumer Discretionary sector. As you may guess from their names, these sectors are divided based on perceived consumer behavior.

If a consumer suffers a hit to income or temporarily loses employment, we’d expect them to cut back on some types of spending before others. In the event of a downturn in the business cycle, we would expect to see the same behavior at a macro-scale: total consumer spending on items like autos and new homes will fall before spending on groceries and basic household goods. In economist-speak, we would say that discretionary goods have a higher “income elasticity of demand” than staple goods. Concurrently, we would generally expect the Consumer Staples sector to have relatively limited upside.

Due to these features, consumer staples constitute the quintessential counter-cyclical play at the sectoral level. Indeed, this sector features low correlation with the rest of the market and relatively low volatility.

Famous names from this sector range from mega-retailers like Walmart (NYSE:WMT) to alcoholic beverage companies like Anheuser-Busch InBev (NYSE:BUD) to food makers like General Mills (NYSE:GIS). In addition to pursuing profitable short-plays, deliberately targeting counter-cyclical market segments like consumer staples is another powerful method for creating a risk-neutral news-based trading portfolio.

Consumer Staple Dynamics

With breakthrough tech less likely to have an outsized impact in this sector, we can expect profitable news events to cluster around more fundamentals-oriented events like earnings announcements. With overall sales growth potential limited (except, perhaps, internationally), this sector is all about growing profits through cutting costs, building brands, and gaining market share through price competition.

• Cutting costs can simply lead to higher profit margins. Or, the lower cost can be translated into lower prices.
• Lower prices can be a particular competitive edge in this sector, where we’d expect to see price-sensitive consumers and many highly generic products.
• Branding is particularly powerful in this sector because it represents the only powerful exception to this cut-throat price competition. Because products are otherwise hard to differentiate, having a respected brand-name can lead to immense market power—the ability to price a good above the price of its inputs.

Any investors who have visited a supermarket can see that Consumer Staples offers interesting intra-sectoral dynamics as well. Products as generic as butter are elaborately tiered for more price-conscious and brand-conscious consumers. Generic brands compete purely on price by forgoing the marketing costs of building a brand.

Profitable news events from this sector often include logistical innovations, brand licensing deals, retailing agreements, and major acquisitions. If you’d like to learn more about using the news to find market-beating profits in every sector of the stock market, we recommend one of our totally free virtual training seminars. There’s no hard sell or hype, just an up-close look at a platform that empowers its users to get on the data-driven profits hedge funds have been raking in for decades. You can claim a spot in our next open session using the button below: