The Challenge for the Consumer Product Firms

Consumer product companies have historically had an excellent run, as Mitchell Corwin points out in Morningstar, enjoying dependable profit margins, cash flow and steady growth. But recently the cost of doing business for these firms has increased dramatically.

Their traditional ability to pass price increases through to willing retailers eroded with the emergence of the retailers' own power from the likes of Wal-Mart (WMT), Costco (COST), Kroger (KR) and Walgreens (WAG), and in the latters' increasing interest in private label products.

So the consumer product industry went for beefing up its brands, and improving R&D. This raised costs, which has recently been compounded by rocketing prices of inputs (wheat, corn, oil and dairy products). Corwin reported that at the recent 2008 Consumer Analyst Group of New York conference in Boca Raton, Fla., General Mills (GIS), ConAgra (CAG), and Kellogg (K) "all cited that they expect input costs to rise in the high single digits this year. This is a worrisome outlook, given that these companies are striving for mid-single-digit revenue growth."

Achieving dependable earnings growth in such an environment is not easy, and Corwin notes that the ones most likely to rise to the challenge are such stalwarts as Proctor & Gamble (PG), Kellogg, and PepsiCo (PEP). Foreign diversification, especially into the emerging markets, could provide some protection. Campbell Soup (CPB), Sara Lee (SLE) and Unilever (UN), according to Corwin, were clearly pursuing such a strategy, with some - Coca-Cola (KO) and Kraft (KFT) - doing so through acquisitions.

See also: Relevant sector ETFs include the iShares Dow Jones U.S. Consumer Goods Sector Index Fund (IYK), Consumer Discretionary Select Sector SPDR ETF (XLY), Consumer Staples Select Sector SPDR ETF (XLP), Vanguard Consumer Discretionary ETF (VCR), Vanguard Consumer Staples ETF (VDC). See also the full list of sector ETFs.