Investing in Consumer Staples

This sector is designed with a market demand orientation approach, grouping industries of goods and services that are essential to the consumer in the global economy.

Unlike other sectors, Consumer Staples includes products that people typically need regardless of the economic cycle.

MSCI

The Consumer Staples sector (identified as Consumer Staples in English in the sources) corresponds to code 30 within the MSCI Global Industry Classification Standard (GICS).

Below are its three main industry groups and their respective subsectors:

1. Distribution and Retail of Consumer Staples (Code 3010)

This group covers companies responsible for getting essential products to the end consumer or to other businesses.

• Drug Retail (30101010): Includes pharmacies and drug retailers.
  • Example: CVS, Walgreens Boots Alliance, etc.
• Food Distributors (30101020): Companies that distribute food products to other companies, often through their own online platforms.
  • Example: Sysco, US Foods, etc.
• Food Retail (30101030): Retailers dedicated specifically to selling food.
  • Example: Sprouts, Whole Foods (Amazon), etc.
• Consumer Staples Merchandise Retail (30101040): Includes hypermarkets, large-format stores and online markets that sell mainly food, household and personal care products.
  • Example: Walmart, Tesco, Carrefour, Costco, etc.

2. Food, Beverages and Tobacco (Code 3020)

This group encompasses producers and manufacturers of consumable consumer goods.

• Beverages (302010): Divided into three sub-industries:
  • Brewers (30201010): Producers of beer and malt liquors.
    • Example: Carlsberg, Asahi, Molson Coors, etc.
  • Distillers and Vintners (30201020): Producers of distilled alcoholic beverages and wines.
    • Example: Diageo, Pernod Ricard, Constellation Brands, etc.
  • Soft Drinks and Non-Alcoholic Beverages (30201030): Mineral waters, soft drinks and natural bottled waters (excluding juices or milk).
    • Example: Monster Beverage, Britvic, Fomento Económico Mexicano, etc.
• Food Products (302020):
  • Agricultural Products and Services (30202010): Growers, plantation owners and processors that do not package or sell directly.
  • Packaged Foods and Meats (30202030): Producers of dairy, coffee, tea, juices, meats, fish and pet food.
    • Example: General Mills, Kellogg’s, Conagra, Hormel, Campbell’s, etc.
• Tobacco (30203010): Manufacturers of cigarettes and other tobacco products, including e-cigarettes.
  • Example: British American Tobacco, Altria, Japan Tobacco, etc.

3. Household and Personal Products (Code 3030)

Includes manufacturers of non-durable goods used in home maintenance or personal care.

• Household Products (30301010): Producers of detergents, cleaners, disinfectants and household paper products (such as tissues or toilet paper).
  • Example: Clorox, Reckitt Benckiser, Henkel, Church & Dwight, etc.
• Personal Care Products (30302010): Manufacturers of cosmetics, perfumes, hygiene items, nappies, vitamins, dietary supplements and herbal medicines.
  • Example: Estée Lauder, Beiersdorf, Colgate-Palmolive, Shiseido, etc.

These are the consumer staples royalty:

Characteristics

• These are straightforward business models, easy to understand and analyse.
• They are companies with strong competitive advantages —especially at the brand level— that allow them to operate with limited competitive pressure.
• In low interest rate environments, many investors traditionally positioned in fixed income tend to shift capital towards this type of company, seeking reasonable returns with a contained level of risk.
• Often, when acquired at attractive valuations, they can generate returns both from multiple expansion (re-rating) and from business growth and dividend distribution.
• It is key to take advantage of episodes of market irrationality or one-off falls in their share price.

Key metrics

Sales growth is usually moderate —around 4–5%— but very stable thanks to the strong moat (competitive advantage) these companies typically have.

They are capital-light companies; the main cost is usually advertising. Average CAPEX/sales levels in the sector are around 3–5%, which supports high and sustained returns on invested capital (ROIC), above 20%.

Profit margins typical of the sector:

• In food and personal care: operating margins around 15%.
• In tobacco or non-alcoholic beverages: higher margins, close to 30%.

The high predictability of earnings and cash flows allows them to support high debt levels without issue. In this sector, net debt/EBITDA ratios above 2x can be acceptable.

It is essential to review market share and geographic diversification of sales and products. It is desirable to invest in companies that do not depend on a single product or a single region, to gain stability and reduce cyclicality.

Common valuation multiples

Remember the motto of this module.

Currently it is common to find consumer staples companies valued in these ranges:

• EV/EBITDA: 10–16x
• EV/EBIT: 16–25x
• P/E: 15–25x
• EV/FCF: 15–25x

The specific level of multiples will depend on expected business growth, debt level (above 4–5x net debt/EBITDA usually penalises), the company’s moat and ROIC.

As they are very predictable businesses, they often trade on high multiples (20–25x); the most reasonable approach is to try to buy at relatively low multiples and add the effect of the dividend.

A useful relationship to keep in mind: with low interest rates valuations tend to be high; with high rates, multiples fall and it is more common to find attractive prices.

TOP company example

• Any of the 10 royalty companies.