2018 outlook: consumer staples

Emerging markets present significant opportunities for multinationals.

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Consumer staples are what many of us consider essential products, such as toothpaste, shampoo, laundry detergent, and packaged foods. Many staples companies are multinational, with some garnering 60% of their sales from emerging markets, home to roughly 6 billion of the estimated 7.2 billion people in the world. A burgeoning middle class and faster population growth than in developed markets make these countries attractive end markets for large multinational staples companies in 2018 and beyond.

For example, there has been a shift in US consumer appetites toward organic, whole foods. This trend could alter the earnings growth prospects for some large packaged-food manufacturers. Companies that can respond effectively to this healthy food movement appear increasingly attractive heading into 2018. In addition, global economic headwinds, such as currency depreciation and slower growth relative to the U.S, have challenged multinational companies that earn a large portion of their profits abroad. However, I continue to see significant growth opportunities for consumer staples companies operating abroad.

All-natural, organic, and whole foods are in

Driven largely by millennials, U.S. consumers increasingly favor foods that are made locally, or from smaller, artisan producers (see chart). Further, many Americans now prefer to buy whole, raw ingredients and prepare more of their meals at home. This trend away from processed foods could hamper the earnings of larger packaged-food manufacturers. In response, some companies have successfully changed consumers' perception of their product lines to appear more natural and "smaller." For example, some have acquired smaller companies and maintained the original branding that consumers have come to recognize as artisan. Others have changed the formulations of their products to eliminate certain ingredients, such as artificial colors or high fructose corn syrup.

Additionally, new companies with unique business models have emerged in the wake of this healthier food trend. For example, a handful of companies will ship all necessary ingredients, detailed recipes, and cooking instructions to consumers looking for a shortcut to prepare healthy meals at home. I continue to seek companies that effectively adjust their product lines to changing consumer preferences, or create innovative new lines of business to capitalize on emerging trends. At the same time, I recognize that as consumers shop for more raw ingredients and prepare more of their meals at home, packaged-food manufacturers may find it difficult to offset that headwind to sales.

Signs of a turnaround in emerging markets

Staples companies saw a dramatic slowdown in emerging-market sales growth in 2015 and 2016, as a strong US dollar forced multinational companies to raise prices. In 2017, sales growth trends began to improve, as economic growth in many emerging markets stabilized. Currency headwinds also subsided, as the US dollar returned to a more benign level. Many staples companies reported improved emerging-market sales growth for the third quarter. This improvement suggests that the cycle may be turning and that we may see sales growth return to levels last seen from 2010 through 2014, supporting what Fidelity's global research team has heard anecdotally from the companies we've met with and seen in local markets.

Quantifying the opportunity

The long-term growth opportunity in emerging markets appears strong across many staples categories. Take toothpaste, as an example. In developed markets, the average per capita consumption of toothpaste is 1.07 milliliters per day (see chart), roughly the equivalent of people brushing their teeth once a day on average. By contrast, consumption in emerging markets is a little more than half that. Moreover, the average annual growth rate for toothpaste sales in emerging markets fell to about 7% in 2015 and 2016, down from about 11% between 2010 and 2014.1 In the next 10 to 20 years, toothpaste consumption in emerging markets could rival that of developed markets, and sales growth could return to previous levels. If consumption rises to these levels, we could see a mid-single-digit annual gain in emerging-market toothpaste sales volumes over time, which—along with price increases—could drive high-single- to low-double-digit revenue growth in the category.

Focus on multinational staples companies

Staples companies with sizable emerging-market exposure may offer some of the sector's strongest earnings-growth prospects. Multinational companies look particularly attractive because they offer a mix of geographic and product diversification and, over time, can often gain market share over local businesses. Multinationals that can successfully adapt to local preferences—whether putting natural ingredients in toothpaste in India or strong scents in laundry detergent in Mexico—are likely to be among the biggest long-term winners.

Next steps to consider

Research the Fidelity® Select Consumer Staples Portfolio (FDFAX).

Get more investing ideas and sector insights.

Go back to the full 2018 sector outlook.

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James McElligott is a portfolio manager and research analyst for Fidelity Investments. He currently oversees several consumer staples sector portfolios and subportfolios. He joined Fidelity Investments in 2003.
1. Source: Bernstein, as of Dec. 31, 2016.
Views expressed are as of Dec. 1, 2016, 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 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 investment themes are for illustrative purposes only and should not be construed as recommendations or investment advice. 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.
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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.
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