S&P Equity Research Issues Consumer Staples Sector Predictions for 2011

NEW YORK, Jan. 13, 2011 /PRNewswire/ -- The consumer staples analysts at S&P Equity Research see a mixed picture for the sector in 2011, but believe the sector has defensive appeal when compared to other more economically sensitive sectors.  "Although we view the U.S. and Western Europe as relatively mature markets, we think that developing international markets such as China, India, and Brazil should offer some good long-term growth opportunities," said Tom Graves, Consumer Staples Group Head at S&P Equity Research.

Looking to 2011, the consumer staples equity analysts at S&P expect the following to happen.

1. We anticipate a modest increase in overall U.S. consumer spending on food, with prices moving up more in the second half than they do in the first six months.  We think that somewhat improved economic conditions could support a modest shift toward consumers eating more of their meals outside the home.

2. We expect a further shift toward consumers buying food at non-traditional retailers, including mass merchandisers and convenience stores.

3. We see cross currents having an impact on consumer spending, with both higher-end and lower-priced products being affected.  With improving economic conditions, we anticipate that business will pick up for providers of organic or natural products.  If consumers are feeling better about their economic conditions, we think they will be more willing to pay premium prices for what they consider to be healthier foods or beverages.  However, with U.S. unemployment remaining relatively high, we think price sensitivity and value shopping will remain a significant force at retail, bolstering demand for private label products and discount coupons.

4. In various product categories, we expect that manufacturers of branded consumer products will seek to fend off private label competition with marketing and innovation, such as new products.

5. We see growing consumer and regulatory scrutiny of prospective health concerns and benefits from various foods, beverages, and ingredients.

6. Emerging international markets should provide significant long-term growth opportunities, as U.S. companies focus on changing consumer lifestyles, tastes, health considerations, and demographics.

7. Political conditions and disruptions in food supply could heighten trade barriers between countries.  However, over time, we anticipate that continued globalization will lead to improvement in sourcing raw materials and increased capabilities in meeting global demand.

8. We generally expect increased raw material cost pressure in 2011, including areas such as grains and oil.  We expect that higher material costs will lead to an easing of the promotional environment and some acceleration of retail price increases in 2011.

9. We think that consumer staples companies will continue seeking to reduce operating costs and increase efficiency, which can help to at least partly offset increases in raw material costs.

10. We look for consumer staples companies to continue returning cash to shareholders in the form of dividends and/or stock repurchases.  Currently, major publicly owned companies in the sector provide an above-average dividend yield, and we think this will continue.  The appeal of dividends should be bolstered by a recent extension of relatively low federal tax rates on dividends.

11. We anticipate further M&A activity, helped by a relatively attractive interest rate environment and the strength of stock prices.  In an environment of relatively modest volume gains and limited price increases, we view M&A activity as a means of boosting top-line growth, diversifying geographic and product mix, and bolstering profitability through cost reductions.

12. We think tobacco consumption should continue to decline in the U.S.  However, despite our expectation for a decline in domestic consumption, we believe industry operating profits will rise modestly, as cost-saving efforts and merger synergies should offset greater investment in focus brands.  For 2011 and beyond, we see domestic cigarette consumption falling at a mid-single digit percentage rate per year.

13. We expect further growth from the soft drink industry in 2011, with steady volume trends as companies increase marketing spending beyond core brands, as well as new product introductions.  For U.S. bottlers, we think higher commodity prices may weigh on profit margins.  We think longer-term prospects are good, given our view of improving profit margins stemming from productivity enhancements, higher price realizations for products, and favorable product mix trends.

14. For distillers and vintners, we look for favorable demographics, strong consumption trends, and a possible easing of profit pressures.  We look for consumers to trade up to luxury items over the long-term.

15. For drug retailers, we believe benefits from favorable demographic trends and improving merchandise management will support traffic into stores, help maintain average basket sizes, and expand margins in 2011, despite an unfavorable economic environment, competition from non-traditional formats, and increased drug reimbursement pressure.  However, prescription volume growth may remain weak throughout 2011, with low-single digit growth, as consumers continue to stretch prescriptions, skip doses and split pills in an effort to save money in an adverse economic environment.  At the end of 2011, we expect to see the initial benefits from a large wave of generic drugs that are projected to replace branded counterparts through the end of 2012.

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