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SOURCE Zacks Investment Research, Inc.
CHICAGO, June 11, 2014 /PRNewswire/ -- Today, Zacks Equity Research discusses the Consumer Staples, including PepsiCo, Inc. (NYSE:PEP-Free Report), Coca-Cola Company (NYSE:KO-Free Report), Molson Coors Brewing Co (NYSE:TAP-Free Report) and Kimberly-Clark Corp (NYSE:KMB-Free Report).
Industry: Consumer Staples
The dismal run of Consumer Staples continued in the first three months of 2014, after lackluster performances in 2013 and 2012. Continued pressure of a difficult consumer spending environment, foreign exchange headwinds and declining volumes were cited as the main reasons for this weakness.
Middle-class consumers struggled to cope with rising gas prices, delayed income tax refunds and higher payroll taxes. In addition, difficult operating conditions in Europe and a slowdown in some Asian countries, like China, also weighed on the sector's outlook. Consumer staple stocks have also underperformed the S&P 500 as a whole in the past year.
Unlike discretionary items, demand for consumer staples remains relatively stable across the economic cycle. This perceived safety of the group's business outlook is a major reason why consumer staple stocks tend to become more in demand in times of uncertainty.
Consumer staple stocks are certainly not the only safe or defensive stocks, but they do benefit from heightened perception of risk in the marketplace. This is the reason why consumer staple stocks have done reasonably well year to date, with the average price of consumer staple stocks in the S&P 500 up +7.8% vs. a gain of +6.7% for the index as a whole in that time period.
But consumer staple companies are witnessing sluggish growth in the developed markets due to market saturation, which along with stagnant disposable incomes and increased competitive activities have added to the companies' woes. This is the reason why companies have been looking to faster growing emerging markets. That's a good strategy in the long run, but the near-term outlook for many of these markets remains uncertain.
The policy environment has changed rapidly from pricing and import controls in some emerging countries to political unrest in others that has temporally disrupted business operations. The ongoing currency fluctuations are also problematic, as a stronger dollar reduces the value of outside-U.S. sales and in turn limits growth. In fact, the market growth rate of developing countries slowed down in the last reported quarter.
Lackluster top-line growth, lower volumes as well as currency headwinds have been a drag on the results of consumer staples companies in the first half of 2014 and have led many of them to provide a weak outlook for 2014. In such a scenario, some of these companies managed to increase their earnings solely with the help of cost controls, inorganic growth and share buybacks, which signals a lack of real growth.
Let us look into the initiatives undertaken by the companies to bolster their earnings in an uncertain and volatile macro environment.
In a crowded and competitive space, consumer product companies need to regularly innovate and upgrade their brands to create differentiated value propositions for their customers and to remain successful.
In May, beverage giant PepsiCo, Inc. (NYSE:PEP-Free Report) unveiled its new digital soda dispenser, Spire, which will allow customers to make up to 1,000 personalized carbonated beverages by selecting their favorite Pepsi brands. Spire is expected to directly compete with The Coca-Cola Company's (NYSE:KO-Free Report) Freestyle fountain machines, available since 2009.
While global brewer Molson Coors Brewing Co (NYSE:TAP-Free Report) plans to bring novelty in its brands in 2014 including Coors Light, Carling, Staropramen and Blue Moon to drive top-line growth, consumer products giant Kimberly-Clark Corp's (NYSE:KMB-Free Report) strives to upgrade its diaper and feminine care products in Brazil, China and Russia in 2014.
Kimberly-Clark also expects to make further progress by expanding the adult care products and baby wipes internationally. It also has an innovative pipeline in North America that includes Huggies diapers and baby wipes, GoodNites youth pants, Depend briefs and Viva towels.
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