In just a month's time, consumer shopping behavior made a massive adjustment. Americans went from busy and on-the-go to stuck at home and shopping almost exclusively online. While e-commerce has and will continue to be a long-term secular shift, this latest development is creating a big one-time jump for the already large digital world.
However, pegging e-commerce as a beneficiary is only part of the story. During the week ending April 5, researcher Black Box Intelligence reported that average restaurants witnessed a staggering 62% drop in comparable-store sales (foot traffic and guest ticket size), and grocery store spend as a percentage of food budgets went from 66% in January to 78% in March.
Take healthcare, home care, and personal care product manufacturing giant Procter & Gamble (PG -0.54%) as another example. The company reported a 6% increase in organic sales and a 16% increase in core earning per share during its January-to-March 2020 quarter, well ahead of expectations. CEO Jon Moeller reported that the company's five largest North American plants produced an average 22% more product in March than the trailing 12-month average.
Other consumer staples companies, from food manufacturers to big-box retailers, are reporting similar surges in orders and customer traffic. But Procter & Gamble said it thinks the bump is more likely to be a permanent one as coronavirus leaves scars on consumers' psyche. Whether it's a temporary effect that will subside over time or a one-time sales jump that creates a new baseline going forward, many consumer staples brands have just been tossed a lifeline.
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Years of disruption coming to an end?
The decade-plus since the Great Recession of 2008-9 hasn't been easy for producers of basic staples. As the economy has grown and consumer trends have shifted, plenty of new upstarts have arisen. Amazon's championing of e-commerce has been only one challenge. Commoditized household basics have also been on the rise, and on that front Amazon has also played a role. Taking what it learned from its third-party marketplace, its own suite of household goods it sells directly to consumers has also been a problem for many old-guard manufacturers.
And then there's been the slew of start-ups, especially on the food front. While eating out steadily rose over the last decade (the U.S. Census Bureau data showed that spending at restaurants exceeded grocery store spending in 2019), additional pressure mounted as fresh and healthier new options popped up on shelves. The consumer vote has been clear: Households want variety, convenience, and health-conscious options.
But it's not as simple as firing up an assembly line with new and innovative products -- food or otherwise. Many consumer staples companies have had to balance investment into their present portfolio of goods with marketing and setting up new digital selling capabilities, and acquisition of new brands to boost growth. The results from striking that balance are mixed. Revenue growth has remained tepid at best, but in many cases total debt has soared along the way. Kraft Heinz, General Mills, and Conagra are three examples that come to mind.
Data by YCharts.
Consumer staples stocks are an endurance race, not a sprint
For many old consumer goods stocks, this crisis is the catalyst they've been waiting for. Whether big sales bumps are temporary or the "new normal," higher profits are likely on the way. For those that had fallen on hard times, I'd expect to see cash on hand get replenished, debt reduced, or both. Higher sales and profits should also help in laying the groundwork for the next 10 years. Permanent or not, increased consumption at home is different than it was in the past. E-commerce will continue to increase in importance, and higher at-home spending will likely spawn a new round of disruptive companies trying to capitalize on the trend. The lockdown to arrest the spread of COVID-19 is thus a gift to many of these companies as they gear up for what comes next.
However, higher profits that allow for updates to operations doesn't mean all consumer staples are a buy. Permanently higher rates of growth would be nice, but don't count on it. Consumer staples stocks are an endurance race.
But at the end of the day, investing in digital capabilities is starting to yield fruit. Procter & Gamble enrolled early on to the Shopify Plus platform for large merchants, and more recently NVIDIA said that the company was using its chips to help optimize manufacturing. If explosive growth is what you're after, tech is where it's at.
But slow-and-steady is OK too if that's your investment style. And as the dust begins to settle post-pandemic, many consumer staple stocks should be in better shape than they have been in a long time.
