Why are ASX consumer staple stocks struggling right now? Shouldn’t they be doing better?

ASX consumer staple stocks should be doing well right now, but they aren’t. In fact, consumer staples is the 2nd worst-performing industry group on the ASX, while consumer discretionary stocks are up over 9% this year – only trailing tech stocks as the best performer. How can it be? Aren’t there tough economic times right now, causing people to cut back on non-essential goods? What else explains the fate of stocks like Universal Store (ASX:UNI) and Baby Bunting (ASX:BBN)?

It’s complicated.

ASX consumer staple stocks

Before delving into the current challenges facing the consumer staple industry, it’s important to understand its role in the stock market and the composition of the ASX sector specifically. Consumer discretionary stocks are companies that produce essential goods such as food, beverages, household items, and personal care products. This sector is known for its stability and consistent returns, making it a favourite among risk-averse investors. It is also considered recession-proof as people will always need essential goods regardless of economic conditions.

Looking specifically to the ASX 200 and there are 11 stocks that are in this category.

• Bega Cheese (ASX:BGA)
• Coles (ASX:COL)
• Costa Group (ASX:CGC)
• Elders (ASX:ELD)
• Endeavour Group (ASX:EDV)
• GrainCorp (ASX:GNC)
• Inghams (ASX:ING)
• Metcash (ASX:MTS)
• A2 Milk (ASX:A2M)
• Treasury Wine Estates (ASX:TWE)
• Woolworths (ASX:WOW)

Together, these companies are worth $92bn and generate over $150bn in revenue. Nevertheless, the indice is heavily dominated by Coles, Woolworths and Endeavour which account for 77% of  the total market capitalisation and 75% of revenues, with a combined capitalisation of $70.8bn and $116.8bn in revenues. Endeavour used to be part of Woolworths, but was spun off.

Investors can see this is a diverse list, comprising of supermarkets, food companies specialising in individual food types and agricultural technologies. Each of these have their own challenges. We see a few in particular as causing underperformance.

The Current Challenges

We see one of the main factors contributing to this struggle is increased competition. With more and more companies entering the market (like Aldi in the supermarket segment), there is a saturation of products, leading to lowered prices and reduced profit margins. This has put pressure on established consumer staple companies to innovate and differentiate their products in order to stay competitive. Input costs have not helped margins either, nor has the problem of retail theft.

Another factor impacting this industry is changing consumer preferences. With the rise of health-consciousness, people are shifting towards healthier and organic options, which may not align with traditional consumer staple products. This has forced companies to adapt and diversify their product offerings, which can be an expensive and time-consuming process. And even though companies like Inghams have healthier alternatives, consumers may opt for newer brands – not believing traditional offerings can change their ways. The irony with Inghams is that chicken is a cheaper and healthier alternative type of meat compared to beef, pork and lamb…but that doesn’t mean there aren’t unhealthy types of chicken, particularly fried.

What Investors Should Know

Despite the struggles facing the consumer staple industry, there are some potential opportunities for investors. With stock prices declining, it may be a good time to invest in established companies with strong fundamentals and a track record of success. Additionally, investing in companies that are adapting to changing consumer preferences and diversifying their product offerings can also prove to be beneficial in the long run. Just remember that Woolworths is up 40% in 5 years and Coles is up 30% in that same time frame.

And turning our attention to consumer discretionary stocks. We significant doubt that FY24 will deliver better results than FY23 given the cost of living crisis is getting worse. Yes, a short-term boost from Black Friday and Boxing Day are saving some share price bacon for now, we don’t imagine shareholders will be thrilled when results come through.

It’s important for investors to carefully research and consider the financial health and strategies of consumer staple and consumer discretionary companies before making any investment decisions. It’s also essential to keep an eye on any potential changes in consumer behaviour or market trends that could further impact the sector as a whole, as well as the sub segments these companies operate in.

Conclusion

In conclusion, while the consumer staple industry may be struggling at the moment, it is not a cause to give up on the sector and put all your money into consumer discretionary stocks. With careful consideration and research, as well as longer-term patience, investors can still find opportunities within this sector. However, it’s crucial to stay informed and monitor any developments that could potentially impact this industry in the future.

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