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Consumer staples: Poised for improvement

Key takeaways

  • Consumer staples companies fell out of favor in 2023 as revenue growth slowed and investors shifted their focus to mega-cap tech companies.
  • However, valuations have fallen to compelling levels in the sector, and many companies could be poised for improved profit margins in 2024.
  • Household products companies and companies with strong pricing power could be best positioned for the year ahead.

Consumer staples stocks had a challenging year in 2023. But with valuations now compelling and profit margins and volumes potentially poised to rise in 2024, I believe the sector could have a better year ahead of it—particularly if defensive and dividend-paying stocks come back into favor with investors.

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2023: Squeezed from both sides

The consumer staples sector encompasses makers of everyday items like packaged food, toothpaste, and dish detergent. It’s considered to be a "defensive" sector because consumers tend to still buy such products even when times are tight, and because it includes many mature dividend-paying companies.

But that positioning was a drag, not a boost, on performance in 2023, when investors shunned defensive stocks and showered favor on a narrow segment of mega-cap growth companies (particularly those with ties to artificial intelligence).

At the same time, fundamentals at many companies were squeezed by a challenged consumer. Inflation has pressured these companies for the past 2 years, with some brand-name companies losing market share to generic (also known as private-label) alternatives. In a bid to grow sales volume and market share—and responding to input costs that eased in the past year—some companies slowed their price increases in 2023 and offered more discounts. But this led to decelerating revenue growth in the sector in 2023, which weighed on the stocks even as companies delivered better-than-feared earnings. Higher interest rates also lured many investors toward fixed income and away from dividend-paying stocks.

Chart shows year-to-date price performance of the consumer staples sector versus the S&P 500. As of December 8, 2023, the consumer staples sector had lost 6.53%, compared with a 19.92% gain for the S&P.
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 December 8, 2023. Source: S&P Dow Jones Indices, a division of S&P Global.

Among the hardest-hit segments was packaged foods and meats, a competitive industry due to the presence of lower-priced private-label alternatives. As input costs eased, brand-name food companies stepped up discounts and advertising spending to attempt to gain market share. However, few saw the hoped-for increase in sales volumes. Investor sentiment also shifted against this segment due to worries about how new weight-loss drugs might impact demand.

That said, some segments had a better year than others. Household products companies, for example, saw notably higher gross profit margins, driven by significantly lower input and freight costs.

Brightening outlook for 2024, but with risks

Key for the sector in 2024 may be whether sales volumes improve, with consumers coming back to more brand-name items. If volumes rise, consumer staples companies will likely feel less pressure to ease prices, which would in turn help profit margins. Firms that boosted promotional and advertising spending in 2023 may have an added tailwind. Meanwhile, valuations in the sector have looked compelling versus the broader market and versus sector history. Any decline in interest rates could also boost the attractiveness of dividend-paying stocks.

One unknown—for both 2024 and the longer term—may be the impact of the new weight-loss drugs. How many people will take these drugs and what their effect on sales will be is not yet known. Packaged foods and soda companies may be the most at risk, whereas household products companies and retailers may be less exposed.

A focus on pricing power

I believe that companies with attractive valuations and strong pricing power may offer the strongest returns potential for 2024. Companies that can raise prices or hold them steady may be more likely to meet their profit-margin forecasts. And companies that have invested gains in advertising and long-term brand building may have an added tailwind.

Among the best positioned for 2024 may be household products companies, due to sticky pricing, positive trends on sales volumes, and earnings flexibility. For example, Procter & Gamble () has used strong profit gains from the second and third quarters of 2023 to boost advertising, which means going forward it has flexibility to reduce ad spending, if needed, to meet its future profit targets.

Brand-name soda makers may have the ability to retain or raise prices, because they face little competition from lower-cost, generic alternatives. For example, soft drink companies Coca-Cola (), Keurig Dr Pepper (), and PepsiCo () have generally experienced strong pricing power due to a lack of competitive private-label alternatives.

Fund top holdings1

Top-10 holdings of the Fidelity® Select Consumer Staples Portfolio () as of October 31, 2023:

  • 14.6% – Coca-Cola Co. ()
  • 13.8% – Procter & Gamble Co. ()
  • 7.0% – Keurig Dr. Pepper Inc. ()
  • 5.0% – Mondelez International Inc. ()
  • 4.9% – Kenvue Inc. ()
  • 3.9% – Walmart Inc. ()
  • 3.4% – Altria Group Inc. ()
  • 3.3% – PepsiCo Inc. ()
  • 3.2% – Philip Morris International Inc. ()
  • 3.0% – Kimberly-Clark Corp. ()

(See the most recent fund information.)

A healthy demand base, and potential for improvement

Although the economic outlook remains uncertain, consumers are likely to continue to need the everyday products—from toothpaste to toilet paper— that staples companies produce and sell. When exactly sales volumes pick up may depend on the health of the consumer and economy. However, valuations in the sector remain compelling, especially given the potential for improving profit margins.

Ben Shuleva
Portfolio Manager

Ben Shuleva is a portfolio manager and research analyst in the Equity division at Fidelity Investments.

In this role, Mr. Shuleva manages Fidelity Select Consumer Staples Portfolio, Fidelity Advisor Consumer Staples Fund, Fidelity VIP Consumer Staples Portfolio, and the consumer staples subportfolio of Fidelity U.S. Equity Central Fund. Additionally, he is a research analyst responsible for researching food & non-alcoholic beverage, household product staples, and U.S. tobacco companies.

Prior to his current role, Mr. Shuleva was an equity research associate from 2008 to 2011 where he began his career researching stocks. He has been in the financial industry since joining Fidelity in 2008.

Mr. Shuleva earned his bachelor degree in finance from Southern Methodist University. He is also a CFA® charterholder.

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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. 1. 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.

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Past performance is no guarantee of future results.

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Stock markets are volatile and can fluctuate significantly in response to company, industry, political, regulatory, market, or economic developments. Investing in stock involves risks, including the loss of principal.

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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