These Consumer Staples Companies Are Getting 'Squeezed'

 |  Includes: CAG, FXG, GIS, K, KHC, MCD, PG, RHS, UL, VDC, XLP
by: Income Surfer

It is no secret that middle and low income consumers in the U.S. have struggled to regain their footing following the 2008-2009 financial crisis. Many had their pay cut and some lost their jobs all together. All the while, price inflation continued to creep higher. Now, a full 5 years after the financial crisis, those same consumers face a lower standard of living and reduced disposable income. These struggling consumers are only half of the trouble facing the consumer staples industry.

The consumer staples companies discussed in this article fall into two groups. General Mills (NYSE:GIS), ConAgra Foods (NYSE:CAG) and Kellogg (NYSE:K) represent the food space. Meanwhile, Unilever (NYSE:UL) and Procter & Gable (NYSE:PG) represent some of the more diversified consumer products companies which sell packaged foods in addition to other products (such as health, beauty, and hygiene products). I contend that they are all facing headwinds from multiple sides in 2014. Additionally, I don't believe their stock prices are currently priced low enough to be particularly attractive long term investments. We'll get to all that later. First, the head winds.

Consumer Head Winds

All five of the companies discussed have recently complained about a slow down in consumer spending. The linked Financial Times article expresses very clearly that reduced consumer spending is not an problem isolated to Kellogg:

"Companies from Kellogg to Kraft Foods (KRFT) to McDonald's (NYSE:MCD) are also being hit by weakness in overall food spending as middle and lower income consumers continue to struggle after the recession."

"Analysts said competitive pressures from newly popular products such as Greek style yogurt have helped shrink Kellogg's core US breakfast cereal category."

Don't we all intrinsically know that dry cereal has become a less popular breakfast option? I know that my family and I eat far less dry cereal than we did 10 years ago. In the same article Kellogg announced a plan to cut 2,000 jobs and close down manufacturing capacity. Later in the same article is a quote from a Kraft Foods CEO Tony Vernon, that suggests the industry's problems aren't just about breakfast preference:

"{Mr. Vernon} told analysts on a conference call that shoppers 'have little interest or minimal ability to buy more than what they need for a given week or even a given day.'"

That is a sobering statement from the CEO of any consumer staples giant.

Just last week ConAgra cut its 2014 forecast and lowered expectations for 2015, as reported in the linked Associated Press article. I acknowledge that management said a big part of the forecast cut was the result of struggles in its private label business, which it acquired when it purchased Ralcorp in January 2013. The article says:

"The company also pointed to weaker-than-expected volumes for the consumer foods division-mostly for a few key brands."

It would appear that many of the food industry's largest companies are confirming a reduction in consumer spending.

The linked Motley Fool article further discusses the weakness in consumer spending in both the US and Europe. It goes on to say that:

"{At General Mills} Revenue for the quarter stood at $4.88 Billion, flat from last year, as demand for cereals and packaged food weakened. Unfavorable currency movements offset increased prices. The decline in customer interest mainly occurred because of customers' unwillingness to open their wallets."

These articles all confirm what I have been anticipating. Consumer spending has slowed down over the past few years, as consumers have less disposable income.

The next article is from Bloomberg and discusses Unilever's most recent quarterly earnings. The article starts out

"Unilever, the maker of Magnum ice cream and TRESemme shampoo, said that decelerating growth in emerging markets and stagnant demand in developed countries will continue."

Well that certainly sounds like a bright and sunny sales outlook. Unilever is one of largest, best run, and most diversified consumer products in the world. They sell tons of product lines, in over 100 countries. In my opinion, no company would better know what the global consumer is doing and how they are thinking.

The final article is from the New York Times, and discusses how Procter & Gamble recently cut its sales and earning outlooks for the year. What got my attention in this article, is that Procter & Gamble slashed its growth guidance by more than 30%. To quote the article:

"Procter & Gamble said it now expected growth in core earnings per share of 3 to 5 percent, down from its previous estimate of 5 to 7 percent."

While Procter & Gamble is still forecasting growth, it is now at a very slow rate.

Input Cost Head Winds

The other side of this "squeeze" is on the input cost side. The linked USDA report forecasts 2014:

"... beef and veal prices to be 3%-4% above 2013 levels."

"....1.5% - 2.5% increase in bread and cereal costs in 2014."

I know that the food my family purchases every week (like fruit, vegetables, and dairy) costs noticeably more than it did last fall. Despite their large sizes, I know these consumer staples companies are concerned about higher input costs. In several of the articles above, management discussed their concern that higher input costs will strain 2014 profits. Higher input costs and a very weak ability to pass along those higher costs to consumers, is a risky proposition. Prepare for more belt tightening and reduced profitability going forward.

Investment Outlook

Based on the articles above, it appears all of these companies are facing sales trouble from their consumers and input costs. What a company's management reports to shareholders is only a small part of what makes a great investment decision. I contend the larger portion is based on that company's assets and financial metrics. With the Federal Reserve's current interest rate policy, the consumer staples industry has become a popular place for income investors to seek yield. Unfortunately, these investors have bid up the stock prices for these companies above their historical averages. In order for the current stock prices to be justified, sales and profits have to increase. Based on the statements from the managements sampled above, those increased sales and profits are likely to be muted or hard to come by.

Therefore, I put together the table below in order to compare each company's metrics with its 5 year average. For the most part these companies are selling at metrics well above their 5 year averages. In my opinion, Procter & Gamble and Kellogg look the most overvalued. On the whole, none of these companies look promising to me at the moment. Take a look at the table below and draw your own conclusions, but I will likely hold off on investing in this sector for a while.

Data from

"Price is what you pay, but VALUE is what you get"

~Warren Buffett


I am long GIS, UL, and PG. I do not anticipate adding to these investments in the near term. This article is for informational purposes only and should not be considered a recommendation for anyone to buy, sell, or hold any equities. I am not a financial professional. The information above is provided by the cited news organizations and

Disclosure: I am long GIS, MCD, PG, UL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.