Key Takeaways
- Consumer staples companies earned their reputation as a defensive sector in 2022 by outperforming the broad market.
- 2023 may see persistence of the past year's challenges—including rising input costs and pressured consumers.
- But some companies may shine, including those that can raise prices without losing sales volumes, those with emerging-markets exposure, and firms that manufacture cheaper "private-label" alternatives.
Think of the many decisions your clients have faced at the grocery store over the past year, as prices have risen. When a favorite product is suddenly more expensive, are people still buying it anyway or do they switch to a cheaper brand?
Now think of all the consumers in the country facing those same decisions, and you get a sense of the dynamics that have been driving the consumer staples sector in 2022—and that are likely to persist through 2023.
The consumer staples sector encompasses makers of everyday items like packaged food, toothpaste, and dish detergent. While the sector tends to hold up better than many others during market downturns (because consumers tend to still buy these things even when times are tight), it hasn't been immune to the challenges of inflation and a slowing economy.
In 2023, the companies best positioned to navigate these headwinds may include those that can raise prices without losing sales volumes, those with exposure to emerging markets, and those that make the cheaper "private label" brands (i.e., generic products sold under a store's own brand) that consumers often trade down to in such times.
Weathering the 2022 storm
Consumer staples is considered to be a "defensive" sector for its historical ability to hold up better than most other sectors during a market rout. And it earned its defensive reputation in 2022 by outperforming the broad market despite rising input costs.
Source: Past performance is no guarantee of future results. Consumer staples sector performance is represented by the S&P Consumer Staples Select Sector index. Data as of Dec. 9, 2022. Source: S&P Dow Jones Indices, a division of S&P Global.
A few factors aided the sector. Unemployment was low throughout the year and consumers generally held high levels of savings, making them better able to afford higher prices at the grocery store. Plus, price hikes were everywhere—making consumers more accustomed to seeing them and making them less likely to "trade down" to cheaper products. As a result, many companies were able to raise prices without losing customers. Those that responded quickly with aggressive price hikes fared best.
However, it was still a challenging year for the sector, and while the stocks performed well relative to other sectors, they're still on track for a poor year in absolute terms. High oil costs—a key input into many household products and packaging types—challenged the companies. A strong US dollar hurt companies with sales overseas. And some companies did lose sales as customers traded down to cheaper private-label products.
Sweet spots ahead
In 2023, many of the trends that emerged in 2022 will likely continue. However, consumers may be more sensitive to further price hikes than they were to past price hikes—particularly if the economy softens further and the unemployment rate rises.
Those best positioned for this backdrop may include companies that can raise prices further without losing sales volumes. The soda industry, for example, is very consolidated, with high barriers to entry and only three main players of scale. Their dominance gives these companies pricing power to help offset cost inflation. Plus, a lack of private-label alternatives for brand-name sodas means consumers can't readily trade down to cheaper products. Finally, these companies have plenty of experience introducing products at lower price points, often by resizing their packages to hit a price point the consumer is willing to pay.
Resilience in emerging markets and private labels
Consumer staples companies with exposure to emerging markets could also be well positioned to weather any further economic storms in 2023. Many of these countries have a fast-growing middle class, leading to higher per-capita growth than developed markets. Plus, many emerging-market nations have been battling inflation for decades, which means consumers are used to seeing prices rise and less likely to change their purchasing decisions in reaction to price hikes.
Finally, consumer staples companies that make private-label products may hold up well, as their lower price points attract consumers.
Adapting to the times
Many consumer staples companies are preparing for another year of headwinds by being nimble on package size and smart about spending on promotion and advertising. Should demand slow further, many businesses could also lean in to cost-savings programs, potentially including layoffs and efficiency upgrades. While 2023 may be a year with some challenges for the sector, some companies are likely nonetheless to thrive.