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Consumer staples: Feeling the pinch

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 you've faced at the grocery store over the past year, as prices have risen. When you've noticed that a favorite product is suddenly more expensive, do you buy it anyway? Do you go without—at least for that week? Or do you 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.

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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.

Chart shows 2022 year-to-date performance for the consumer staples sector and for the S&P 500.  As of December 9, consumer staples sector stocks had returned 0.37% at the index level, compared with the S&P 500's 16.17% loss year-to-date on a total return basis.
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 3 main players of scale, including recent portfolio holdings Coca-Cola () and Keurig Dr Pepper (). Their dominance gives these companies pricing power to help offset cost inflation. Plus, a lack of private-label alternatives for brand-name sodas, like Coke, 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. One example of this investment thesis is Mondelez International (). In addition to brands recognizable to US consumers—like Oreos and Triscuits—the company makes a number of snack food brands popular in emerging markets. More than one-third of its revenues come from emerging markets, including Latin America and Asia.

Finally, consumer staples companies that make private-label products may hold up well, as their lower price points attract consumers. Examples include Treehouse Foods (), which makes a range of private-label foods, from cheese to crackers to tea, and Reynolds Consumer Products (), which makes private-label trash bags. Edgewell Personal Care (), another recent portfolio holding, manufactures private-label razors.

Fund top holdings*

Top-10 holdings of the Fidelity® Select Consumer Staples Portfolio () as of October 31, 2022:

  • 15.2 % – Coca-Cola Co. ()
  • 14.0% – Procter & Gamble Co. ()
  • 8.3% – Walmart Inc. ()
  • 5.7% – Mondelez International Inc. ()
  • 4.5% – Monster Beverage Corp. ()
  • 4.2% – Philip Morris International Inc. ()
  • 4.0% – Altria Group Inc. ()
  • 3.7% – Constellation Brands Inc. ()
  • 3.6% – Boston Beer Company ()
  • 3.2% – Keurig Dr Pepper Inc. ()

(See the most recent fund information.)

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.

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Before investing, consider the funds' investment objectives, risks, charges, and expenses. Contact Fidelity for a prospectus or, if available, a summary prospectus containing this information. Read it carefully. * Any holdings, asset allocation, diversification breakdowns or other composition data shown are as of the date indicated and are subject to change at any time. They may not be representative of the fund's current or future investments. The Top Ten holdings do not include money market instruments or futures contracts, if any. Depository receipts are normally combined with the underlying security. Some breakdowns may be intentionally limited to a particular asset class or other subset of the fund's entire portfolio, particularly in multi-asset class funds where the attributes of the equity and fixed income portions are different. Under the asset allocation section, international (or foreign) assets may be reported differently depending on how an investment option reports its holdings. Some do not report international (or foreign) holdings here, but instead report them in a "Regional Diversification" section. Some report them in this section in addition to the equity, bond and other allocation shown. Others report international (or foreign) holding as a subset of the equity and bond allocations shown. If the allocation without the foreign component equals (or rounds to) 100%, then international (or foreign) is a subset of the equity and bond percentage shown.

Views expressed are as of the date indicated, based on the information available at that time, and may change based on market or other conditions. Unless otherwise noted, the opinions provided are those of the speaker or author and not necessarily those of Fidelity Investments or its affiliates. Fidelity does not assume any duty to update any of the information.

References to specific securities or investment themes are for illustrative purposes only and should not be construed as recommendations or investment advice. This information must not be relied upon in making any investment decision. Fidelity cannot be held responsible for any type of loss incurred by applying any of the information presented. These views must not be relied upon as an indication of trading intent of any Fidelity fund or Fidelity advisor. Investment decisions should be based on an individual's own goals, time horizon, and tolerance for risk. This piece may contain assumptions that are "forward-looking statements," which are based on certain assumptions of future events. Actual events are difficult to predict and may differ from those assumed. There can be no assurance that forward-looking statements will materialize or that actual returns or results will not be materially different from those described here.

Past performance is no guarantee of future results.

Investing involves risk, including risk of loss.

Stock markets are volatile and can fluctuate significantly in response to company, industry, political, regulatory, market, or economic developments. Because of its narrow focus, sector investing tends to be more volatile than investments that diversify across many sectors and companies. Sector investing is also subject to the additional risks associated with its particular industry.

The consumer staples industries can be significantly affected by demographic and product trends, competitive pricing, food fads, marketing campaigns, environmental factors, government regulation, the performance of the overall economy, interest rates, and consumer confidence.

The S&P 500® Index is a market capitalization-weighted index of 500 common stocks chosen for market size, liquidity, and industry group representation to represent US equity performance. The S&P Consumer Staples Select Sector index comprises those companies included in the S&P 500 that are classified as members of the consumer staples sector, with capping applied to ensure diversification among companies within the index.

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