Fisher Investments on Consumer Staples

5

CHALLENGES IN THE CONSUMER STAPLES SECTOR

Each sector of the stock market faces unique business hurdles. This chapter explores two primary challenges in the Consumer Staples sector:

1. Finding ways to grow in mature industries.

2. Dealing with volatile input costs.

These two challenges apply to opposite ends of the income statement—one impacts revenue while the other impacts earnings. A firm can pursue top-line revenue growth either organically or through acquisition, while bottom-line performance is largely influenced by how firms manage their cost structures.

CHALLENGE 1: GROWING IN MATURE INDUSTRIES

The Consumer Staples sector generally embodies mature industries in developed markets around the world, frequently making growth a challenging endeavor. The primary question facing consumer product firms today: How will the firm generate increasing, repeatable sales from nondurable goods?

Consumer Staples firms seek recurring revenue because it can lead to predictability and consistency in their income statements. Brand allegiance is one vehicle that breeds recurring revenue streams because consumers tend to be fairly loyal (i.e., “sticky”) once they adopt a chosen brand, whether it’s soda, beer, shampoo, detergent, or ice cream.

Customer stickiness is obviously beneficial in generating repeatable sales, but what about increasing top-line sales and market share? Stickiness works against you here, because increasing market share means luring and converting new customers from competing ...