U.S. consumers spend an average of 16% of their disposable income on food, alcoholic beverages, personal care and tobacco products. These everyday goods are part of the consumer staples sector, a non-cyclical sector representing about 10% of the overall market. Consumer staples are distinctive in that they are largely unaffected by economic conditions; consequently, sales and earnings growth tends to be stable. While this article does not seek to provide any investment recommendations, it can be used as a starting point to researching the companies and investment products that represent the consumer staples sector.
TUTORIAL: Economics Basics
What is the Consumer Staples Sector?
The consumer staples sector consists of manufacturers and distributors of food, beverage and tobacco products, and producers of non-durable household goods and personal products. This sector also includes food and drug retailers and consumer super centers. Consumer staples are products that are regularly purchased by the vast majority of consumers, and may be considered necessities, like food, or products that are not necessities but are nonetheless frequently purchased by a significant percentage of consumers.
Consumer staples are non-cyclical in nature, and the demand for these products tends to be fairly stable despite changing economic conditions. Most of the consumer staples are referred to as consumer packaged goods (CPG) or consumables - those products that are quickly consumed and that need to be replaced on a regular basis. Products like soap, laundry detergent and toothpaste will be purchased by consumers regardless of what the economy or stock market is doing. The demand for certain consumer staples, including discount foods, tobacco and liquor, can actually increase during periods of slow economic growth or recession. (Learn more about non-cyclical stocks in Cyclical Versus Non-Cyclical Stocks.)
Since the demand for consumer staples is generally consistent, the sector's performance generally relies on slow and steady growth. For the past five years, stocks in the consumer staples sector have significantly outperformed the market, returning nearly 30% versus 2.5% for the S&P 500. Recently, however, the S&P 500 consumer staples sector, which represented 10.2% of the S&P 500 Index, was up 0.9%, versus a 4.5% increase for the S&P 500 index (year-to-date through March 25). For 2010, the sector index rose 10.7%, compared with a 12.8% rise for the S&P 500 Index.
Despite the fact that consumers will continue to purchase these staples, the sector has been impacted and challenged by pricing sensitivity, weakened developed markets and crowded emerging markets. Big names like McDonald's (NYSE:MCD), for example, are being forced to confront increased competition in emerging markets. In addition, food producers in the sector have been struggling with rising commodity costs.
Even though consumer staples have underperformed in recent years, the consumer staples sector may be poised to make a comeback as investors look to its relative stability, dividend potential and historical performance.
TUTORIAL: Stock Basics
Investing in Consumer Staples
Investors may find the consumer staples sector attractive due to its stability. In addition, consumer staple stocks often pay dividends. Because many of the companies in this sector are well-established, they have a history of paying and raising dividends, both of which are appealing to investors. Investors have a variety of choices when it comes to investing in the consumer staples sector. A large number of individual stocks, such as Conagra Foods (NYSE:CAG), Colgate-Palmolive (NYSE:CL) and Proctor & Gamble (NYSE:PG), are available to investors looking for exposure to the consumer staples sector.
Investors can also choose from a number of consumer staples-based exchange traded funds (ETFs) to gain wider exposure, including Consumer Staples Select Sector SPDR ETF (NYSEArca:XLP), comprised of 41 holdings, including Wal-Mart (NYSE:WMT), Proctor & Gamble, Philip Morris International (NYSE:PM), and Coca Cola (NYSE:KO); Vanguard Consumer Staples ETF (NYSEArca:VDC), with 109 holdings including Proctor & Gamble and Coca Cola; and PowerShares Dynamic Food & Beverage Portfolio (NYSEArca:PBJ), comprised of consumer discretionary (28.31%), consumer staples (68.987%) and industrials (2.72%) holdings.
The Bottom Line
The consumer staples sector has historically performed well, offering investors the opportunity to invest in a relatively stable sector and to invest in what they know. This approach, of course, has long been hailed by guru-investor Warren Buffett in what he calls the "circle of competence" - an investment strategy that focuses efforts on those companies that the investor best understands and has the most familiarity with. Despite sub-par performance over the last year, the consumer staples sector may become more appealing as investors look to invest in companies with stable earnings, growth potential and generous dividends. (For additional reading, also check out 4 Tips For Buying Stocks In A Recession.)
Note: The author does not currently hold any of the stocks or funds mentioned in this article.