2019 outlook: Consumer staples

Looking ahead, beverage companies appear poised to benefit from the world's growing thirst for variety and choice in soft drinks.

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Looking at trends over the past year that I believe will continue into 2019, I find a number of reasons to be interested in the beverage area.

To start, I think some of the competitive concerns that hamper other consumer staples categories—in particular, the competitive threat posed by private-label and retail brands—are much less of an issue for beverage companies. In fact, so far no private-label energy drinks have popped up to compete against the likes of, say, Monster Beverage’s offerings. Some companies are so dominant in the beverage segment that it has given them, in many cases, solid pricing power, which I think will continue.

Also, large beverage companies like the Coca-Cola Company are at the forefront of mining data to better segment potential consumers—down to so-called micro opportunities—and drive better pricing. Beverages lend themselves to finer targeting because they can be offered in cans, bottles, and other containers in a growing array of sizes, colors, themes, and "specials." By contrast, something like breakfast cereals usually come in just regular and family size.

Five years ago, most Coca-Cola shoppers selected between a 12-ounce can or a 2-liter plastic bottle. Producers used to push volume—think "supersizing"—but nobody really needs to drink 64 ounces of soda in one serving! Coke has lately shifted to a "value over volume" approach, with the result that consumers have far more options: 10-ounce cans, retro-style mini bottles, "foreign" sizes, and so forth. By increasing the variety of offerings, beverage firms can add value for consumers and themselves. Coca-Cola has been doing this for years, and is only getting better at micro opportunities, thus optimizing the per-ounce price mix.

Other beverage companies can benefit from what I see as unique pricing opportunities. For example, swelling volumes have largely driven Monster’s success; however, the company has increased prices only once in the US in the past 10 years. Over the coming year, I think we’ll see Monster take some re-pricing opportunity. And Monster is not alone: I think the entire beverage industry has a pricing advantage over many other categories. As a result, I see a lot of latent opportunity to boost pricing in the segment, especially given recent upticks in wages and the inflation rate. Moreover, the beverage industry is highly consolidated, a plus in an inflationary environment. As a market-share leader, Coca-Cola could be the first to raise prices—and competitors likely will soon follow.

Lastly, many beverage companies are diversified, both geographically and across product lines. North America accounts for only around 20% of Coca-Cola’s global volume—with revenue growing in the low single digits. But while volume growth may be slowing here as consumers switch to healthier drinks, overseas markets still show a growing appetite for soft drinks. Plus, many companies known for their soft drinks actually have other types of products. In the case of Coca-Cola, 30% of its portfolio comes from non-carbonated offerings such as water, juices, and teas.

Next steps to consider

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

Get more investing ideas and sector insights.

Go back to the full 2019 sector outlook.

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