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The rising tensions from coronavirus have put a spotlight on consumer staples stocks. Consumer staple companies are known for generating consistent revenues even if the economy is going down. By producing and selling those products which are always in demand, consumer staple companies have established themselves as a safe haven in recessionary times.
In the current times, where global equity markets have been hard due to coronavirus fears, the consumer staples space has gained increased attention from investors.
Focus on Providing Quality Products
In order to gain a competitive advantage in the market, it is very important for consumer staples to offer good quality products at reasonable prices. In addition to this, a company can also go for a larger scale and diversification of activities to gain to deal with any potential disruption in the market. To understand this further, let’s take the example of Freedom Foods Group Limited (ASX: FNP), an Australian company which is involved in the manufacturing and selling of specialty cereal and snacks and plant and dairy beverages in several countries including Australia and China.
The increasing scale and diversification of the company’s activities help it in mitigating potential impacts from short term disruption to a particular market. With the new transformational Nutritionals capability, the Group is evolving its scaled dairy capabilities into a high value-added protein based ingredients and consumer application platform. The Freedom Foods Group has been achieving strong growth through key brands including Australia’s Own and Freedom Foods in retail and MilkLab in out of home channels, in the key markets of Australia, SE Asia and China.
Increasing scale by Launching new products
In the first half of FY20, FNP launched 40 new product formats into retail, grocery, out of home and export markets, supported by increased marketing expenditure. Further, the company also launched specialised Nutritional Ingredients including Lactoferrin (LF), Micellar Casein (MCC) and Whey Protein Isolate (WPI). Over the period, the company also established a Chinese Wholly Foreign Owned Enterprise (WOFE) to improve service and efficiency within its China operations.
Often consumer stables are impacted by the challenging climate conditions as it affects their ongoing operations, hence many companies try to make their operations sustainable so that they can withstand the impact of uncertain weather events.
Focus on Sustainable Operations
Australia’s leading grower, packer and marketer of fresh fruit and vegetables Costa Group Holdings Limited (ASX: CGC), witnessed significant challenges in CY2019, due to drought and weather events in the second half of the year, impacting the fruit sizing and yield in the company’s late season citrus, berry and avocado crops.
The company recently assured the market that it is committed to making its operations sustainable so that it can better withstand environmental risk including unforeseen and extreme weather events, and maximise opportunities with respect to improving the company’s economic efficiency as well as profitability over the medium to long term.
The company’s key investments to address extreme and variable climate conditions include protecting the company’s Mundubbera Queensland table grape farm with netting, with 100% of the early season crop to be permanently covered by the end of 2020; investment in early stage technology to improve yield forecasting utilising climatic data and ongoing R&D developing blueberry varieties for more challenging growing climates.
Reducing Cost of operations
Reducing the cost of operations is a great way to increase profit margin without putting additional burder on consumers. Wine company, Treasury Wine Estates Limited (ASX:TWE) has successfully improved Commercial wine business in the last six years by removing costs and outsourcing supply to third party suppliers.
Implementing Premiumization strategy
Treasury Wine Estates is also known for its successful implementation of premiumization strategy – strategy of emphasizing on superior quality and exclusivity of products. Premiumisation has been driving the operating performance of the company across all regions, with NSR from the Luxury and Masstige segments growing 7% in 1H20, and now representing 73% of Group NSR. Particularly in Australia & New Zealand, the company saw continued momentum in premiumisation and lower CODB (cost of doing Business).
The strength of TWE’s premiumisation strategy and diversified global business model has allowed the company to deliver robust results, despite some market challenges. TWE remains focused on continuing the successful execution of its strategy, with the structural changes and investments made by the Company in recent years leaving it well placed to deliver sustainable, margin accretive growth into the future.
Metcash’s focus on Cash and diversification
Metcash limited (ASX: MTS) is also among those consumer staples which are focussed on cost reduction. The company recently released its half year results for FY20, wherein it advised that the continued focus on costs by Metcash’s food pillar is anticipated to help mitigate the impact of cost inflation over the remaining of FY20. In the first half of FY20, the total Food pillar sales grew by 1.2%, with Supermarkets wholesale sales ex tobacco being positive for the first time since FY12 while liquor business delivered its sixth consecutive year of earnings growth.
With respect to the diversification of operations, Metcash has a strong and diversified Hardware business which continued to perform well despite Trade sales being affected by the slowdown in construction activity. The business has good initiatives, including continuing to invest in the network alongside its retailers, and remains well positioned to manage through the downturn in the business cycle.
Although consumer staple stocks gain from the consistent demand of necessary products, one must note that the operations of these stocks might not be immune to coronavirus outbreak. Hence, investors are advised to keep a close check on the impact of coronavirus on the operations of consumer staple stocks.
