Consumer staples stocks faced challenges in 2023, but there are signs of improvement in 2024, according to Goldman Sachs. While some household product makers may see growth opportunities this year, Clorox might not be among them.
In 2023, the S&P 500 and Nasdaq Composite experienced significant gains, driven by investor appetite for risk and the performance of big tech stocks. However, consumer staples struggled amid the speculative mood and higher interest rates. Their traditionally stable performance during uncertain times was overshadowed, and dividends appeared less attractive as bond yields rose. As a result, the Consumer Staples Select Sector SPDR ETF remained stagnant throughout the year, despite the broader market rally.
However, there’s been a turnaround with the new year, with the XLP ETF showing a 2.2% increase year-to-date. While still lagging behind the S&P 500, this progress is notable, and analysts are becoming more optimistic about the sector. High-profile companies like PepsiCo, Anheuser-Busch InBev, and Church & Dwight have received upgrades in 2024.
Goldman Sachs analyst Bonnie Herzog recently began covering several household product makers, acknowledging that the sector still faces challenges. However, she suggests that investors shouldn’t overlook it entirely, hinting at potential growth opportunities despite the headwinds.
The consumer staples sector has experienced a turbulent few years, marked by shifting consumer behavior and market dynamics. The demand for cleaning and household products surged during the pandemic years of 2020 and 2021, driven by heightened hygiene concerns as people spent more time at home. However, this surge in demand was quickly followed by supply chain disruptions and inflationary pressures, forcing companies to implement price increases to offset rising costs.
While price hikes helped to mitigate margin pressures to some extent, they also led to consumer resistance and reduced purchasing volumes as individuals sought to adhere to tighter budgets. Now, as we enter 2024, staples stocks are expected to see fewer price increases, which could encourage consumers to increase their spending once again, thereby boosting sales volumes.
However, Goldman Sachs analyst Bonnie Herzog warns that this shift may also bring back discounts and promotions, which were common before the pandemic. As supply chains stabilize and competition intensifies, companies may resort to promotional strategies to regain market share.
Moreover, the resurgence of private label products is another notable trend in the consumer staples industry. With inflationary pressures prompting consumers to seek more affordable options, private label brands have seen increased demand as shoppers trade down from branded products. This shift underscores the importance of affordability and value for consumers in the current economic environment.
Bonnie Herzog’s analysis highlights both challenges and opportunities within the consumer staples sector. While private label products continue to gain traction, presenting a competitive threat to branded manufacturers like Clorox, there are positive indicators for other companies.
Herzog’s bullish stance on Colgate-Palmolive, Church & Dwight, and Kimberly-Clark is underpinned by several factors. Colgate’s strategic investments in marketing and innovation have bolstered its market share, particularly in essential categories like toothpaste, while its significant exposure to emerging markets positions it for sustained growth. Similarly, Church & Dwight’s international expansion efforts and strong organic growth momentum bode well for its future performance. As for Kimberly-Clark, Herzog believes the company’s potential for margin improvement and volume growth outweighs the skepticism from other analysts.
On the other hand, Herzog’s Sell rating on Clorox reflects concerns about the company’s competitive challenges and loss of market share to private label alternatives. The widening price gap between Clorox products and generics is cited as a key factor contributing to its struggles.
Despite the complexities and disruptions in the consumer staples industry, Herzog’s analysis suggests that certain companies are well-positioned to navigate these challenges and deliver value to investors. Maintaining a focus on essential products and tapping into growth opportunities in emerging markets could be critical drivers of success in the coming years.