Recent challenges are subsiding

Consumer staples stocks have been held back by several factors in recent years. Broadly, investors have rotated away from defensive stocks towards cyclical and higher-growth stocks, including those tied to artificial intelligence. However, sector-specific challenges have also had an impact. For example, staples companies increased pricing during the pandemic, significantly outpacing wage growth and leading to consumer pushback and a decline in sales volumes. Another example, is the front loading of consumption in some categories such as pet care and spirits during the pandemic, driven by stay-at-home policies.

These sector specific challenges appear to now be easing. For example, over the last two years, wage growth has come in ahead of price increases, effectively giving back some value to the consumer and closing most of the pricing gap created during the pandemic. Similarly, the headwind for certain food and beverage segments, due to the rapid adoption of weight-loss drugs, is subsiding. Furthermore, the sector is attractively valued, with consumer staples stocks now at, or close to, a 25-year low in terms of relative valuation compared to the rest of the market.

As investors, our focus remains on companies with strong fundamentals and long-term growth potential combined with a reasonable valuation. For staples stocks, we look for companies that have exposure to the most attractive categories, geographies and channels, and that are also investing to support their brands in the form of marketing, and research and development (R&D). Specifically, we are finding opportunities in companies that are navigating the shift in demographics, companies with good emerging market exposure, companies with the ability to leverage fragmented or digital distribution channels, and companies that are investing in their brands and innovating.

Beneficiaries of the shift in demographics

Over the last 25 years, rapid population growth has provided a fundamental underpinning for the staples sector. The next 25 years will be very different as slowing population growth and ageing demographics become the norm. While the world’s population is increasing, this growth is primarily a function of sub-Saharan Africa, where it is notoriously hard to make returns in hard currencies.

More broadly, fertility rates are declining and government initiatives to fuel fertility have generally failed. Staples companies are facing pressure on their top-line growth from these declining population growth rates, with volume growth in the sector likely to become increasingly scarce.

Some staples categories are relatively well insulated from these demographic dynamics. For example, spending on pet care, coffee and consumer health products continues to increase as consumers age. Nestlé stands out for its strategic focus on pet care, coffee and nutrition – categories that together account for 65% of its sales and its profits. This exposure should allow Nestle to grow faster than traditional food players and we expect the company to outperform over the long-term.

Companies with good emerging markets exposure

Consumer staples companies with access to emerging markets have exposure to a more rapidly growing middle class than in developed markets. Emerging market consumers are also more used to seeing consistent price increases and thus are less likely to change their purchasing decisions in reaction to price increases that have been put in place to protect against inflation.

For example, beverage giants Heineken and Pernod Ricard derive two thirds of their sales volumes from emerging markets, where per-capita alcohol consumption remains low. This exposure is helping both companies to offset softer alcohol demand in developed markets.

Over the past several decades, developed markets have trended towards lower alcohol consumption, with most countries exhibiting declines in per capita intake. This shift has been driven largely by more health‑conscious consumers and younger cohorts who drink less overall. A notable exception has been the United States, where per capita consumption continued to grow.

Beneath the headline decline, category dynamics diverge. The most pronounced contractions have been in wine and non‑Western style spirits (for example, cachaça in Brazil and baijiu in China). By contrast, Western style spirits – such as Scotch whisky and Cognac – have delivered solid per‑capita volume growth, supported by premiumisation (“drink less but better”), a clearer value proposition, and evolving health and gender considerations. Beer tells a different story: per‑capita consumption is declining by roughly 0.5–1% annually, leaving global beer volumes broadly flat. Most of this pressure comes from historically large beer markets – the US, China, Russia and Germany – suggesting as investors we should limit exposure to these geographies when allocating to beer.

Companies with exposure to fragmented distribution channels

Digital disruption is the new reality for brands. The rise of e-commerce – accelerated by Amazon’s bold entry into the grocery space – has fundamentally redrawn the competitive map. Online platforms now account for a growing share of staples sales, and the rules of engagement have changed. The continued growth of online groceries and the dominance of platforms such as Amazon could further compress the margins for consumer staples players and alter traditional supplierretailer relationships.

On digital shelves, visibility is everything. With limited screen space and algorithm-driven search results, only a handful of brands are ever in front of the shopper. Retailers are leveraging private label products to intensify competition, forcing established brands to bid more aggressively for advertising space. This new battleground not only increases price transparency but also puts downward pressure on supplier margins. The winners in this environment will be leading brands and private labels, which are steadily gaining share, as well as companies with a fragmented distribution channel. The losers are likely to be mid-tier brands, which risk being squeezed out of the market, and companies with highly consolidated distribution channels.

As an example, consumer health players such as Haleon and Reckitt are leveraging a fragmented pharmacy distribution channel to maintain pricing power. There are around 3.6 million pharmacists globally working across more than two million points of sale. Pharmacies remain a highly fragmented channel with 70% operating as independent stores. Several regulatory barriers mean that the consolidation of the pharmacy channel in most countries remains difficult. In addition, in most countries the sale of medicines over the internet is either not allowed or restricted to the online operations of existing brick and mortar pharmacies.

Finally, pharmacists very often act as healthcare providers, providing advice to consumers, which then translates into purchase through recommendation. A study conducted in key markets showed that when a pharmacy recommends a product brand to a consumer, between eight to nine consumers out of 10 purchase the recommended brand. Haleon’s extensive salesforce, with more than 4,500 sales representatives, is able to establish a direct interaction with pharmacists, promoting the company’s products via this vital channel. These factors act as a barrier for the entry of large-scale players, such as Amazon, into the pharmacy channel in most countries.

Companies investing to support brands

Investment to support brands is crucial for consumer staples companies given slowing growth, consolidating distribution channels and a consumer that is seeking value. Value-consciousness is now at the heart of purchasing decisions. Shoppers are more attentive than ever to deals, promotions and pack sizes that fit their budgets. Lower-income families are gravitating towards smaller, more affordable packs, while higher-income consumers continue to buy in bulk, although they tend to wait for discounts before making larger purchases.

Against this backdrop, we favour companies that are maintaining or increasing their spend on marketing and R&D. L’Oréal, for instance, allocates more than 30% of sales in marketing to keep its brands top‑of‑mind with consumers. This sustained spend delivers a share of voice roughly 1.5 times its market share, helping the company consistently outperform the market. British American Tobacco has a solid traditional cigarettes business, which it uses to fund investments supporting next generation products, including its leading nicotine pouches franchise Velo. As nicotine consumption evolves, we therefore believe British American Tobacco is well positioned to capitalise on new growth areas.

A pivotal moment for consumer staples

Ageing demographics, a renewed focus on value by consumers, and the rapid evolution of digital commerce are all reshaping fundamentals for the consumer staples industry. The companies that will thrive are those that innovate in high-growth categories and geographies, leverage digital or fragmented channels, and maintain operational discipline.

With the sector continuing to trade at a large discount to historical norms, we have remained focused on companies with strong fundamentals and long-term growth potential combined with a reasonable valuation. We believe the next phase of growth will belong to those companies that are able to combine resilience with the agility needed to meet the evolving needs of consumers. These are stocks that we are focused on.