Zacks Industry Outlook Highlights: Coca-Cola, PepsiCo, Kraft Foods, H.J. Heinz and Unilever PLC

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Mar 27, 2012, 09:30 ET

CHICAGO, March 27, 2012 /PRNewswire/ -- Today, Zacks Equity Research discusses the Consumer Staples Industry, including Coca-Cola (NYSE: KO), PepsiCo (NYSE: PEP), Kraft Foods Inc. (NYSE: KFT), H.J. Heinz Company (NYSE: HNZ) and Unilever PLC (NYSE: UL).

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A synopsis of today's Industry Outlook is presented below. The full article can be read at

http://www.zacks.com/stock/news/71944/Consumer+Staples+Sector+Outlook+-+Mar.+2012

Stocks in the Consumer Staples sector carried out their traditional defensive role as the broader equity markets came under pressure over concerns about the prolonged weak US economy and the debt crisis in Europe. But the group has been a laggard as momentum returned to the market over the last three months. In 2011, the sector index grew 10.5% versus a flat finish for the S&P 500 index.

The group's defensive attributes stem from its ability to buck sluggish economic growth as food, beverage, household products and cosmetics companies that manufacture and market non-durable consumables are considered essential to daily life, such as food, drink, toothpaste, deodorants, toilet paper, etc. Although staples' top-line is expected to continue the uptrend of the last few quarters going forward, margins will remain under pressure due to elevated food prices.

Road Ahead

The macro-economic environment remains uncertain. However, we have seen that product demand has remained relatively stable for companies that are more exposed to fast-growing emerging markets in comparison to the slow-growing developed markets. Moreover, favorable foreign exchange translation and lower production costs in developing markets resulted in higher operating margins than in the US. Therefore, consumer staples companies have performed decently despite the challenges in the US and Europe.

Beverage companies, such as Coca-Cola (NYSE: KO) and PepsiCo (NYSE: PEP) are showing interest in the emerging markets of India, Russia and China, as the developed markets are nearing saturation.

Coca-Cola has already invested over $2 billion in the last 18 years in India and remains very optimistic about its Indian operations. Further, Coca-Cola has seen a double-digit growth rate in India aided by its top-brands, which includes Thumbs Up, Sprite and Maaza. Over the next five years, Coca-Cola, along with its bottling partners, will make a further investment of $2 billion to build consumer marketing, infrastructure and brands in India.

PepsiCo had invested $500 million in India in 2008. In 2009, PepsiCo poured in $200 million in India and also plans another $500 million investment over the next three years. PepsiCo expects emerging markets like India, China, Russia and Brazil to drive its growth in future.

As part of an ongoing push into emerging markets, Coca-Cola also plans to invest $3 billion in Russia from 2012 to 2016. Coca-Cola plans to invest $4 billion in China over three years starting in 2012, thus raising its total investment in China between 2009 and 2014 to $7 billion.

The largest packaged food maker, Kraft Foods Inc. (NYSE: KFT), following its takeover of Britain-based chocolates and confectionary company Cadbury Plc in 2010, expects to invest in the biscuits, candy and gum categories in India. Kraft's brands like Oreo cookies and Tang powdered drink mix have also created its own space in India. Kraft is also aggressively investing in Brazil, Russia, China and Indonesia.

H.J. Heinz Company (NYSE: HNZ) also remains well positioned in the key emerging markets of Russia, India, China and Indonesia. With the acquisition of Quero brand from the Brazilian food manufacturer Coniexpress S.A. Industrias Alimenticias in April 2011, Heinz expects its sales in the Latin American market to double. In addition, Heinz expects investments in emerging markets to generate more than 20% of its total sales in fiscal 2012.

Tough Job Markets

Overall, the job environment remains tough, though there has been some modest improvement lately in the sectors of beverages, tobacco, food and hygiene items. Still, the unemployment scenario is expected to remain relatively high in 2012. We thus believe that the private label goods, which are comparatively cheaper than the branded items, will attract consumers.

Rise in Raw Material Costs

Further, the substantial rise in raw material prices remains a drag on margins of most of the companies in this sector.

Therefore, to survive in an environment of escalating prices, many companies in the consumer staples sector have "right-sized" portions and packages of their products to push higher prices to consumers. PepsiCo had reduced the Lay's "Family Size" potato-chip bag from 16 ounces to 14 ounces in 2009, due to rising prices of raw materials, while Heinz has also reduced the portions of its several products in the third quarter of 2012.

Companies have also been focusing on managing costs through cost reduction initiatives. Coca-Cola is undertaking various productivity initiatives to streamline its cost structure and boost profitability. In 2011, the company successfully completed its four-year productivity program, with annualized savings over $500 million, and has made plans to launch a new global productivity initiative in 2012 that will target $350 to $400 million in annualized savings by the end of 2015.

Unilever PLC (NYSE: UL) is also raising its prices and carrying out cost reduction initiatives to combat the input cost headwinds, but still expects the commodity prices to rise in 2012.

In spite of the price hike, these companies bring out new innovative products to cater to the ever-changing demands of customers. Unilever launched 10 new brands in its Home care segment in 2011, including the Domestos Toilet System in the UK and Sunlight hand dishwash in Indonesia and Vietnam. In the Hair section, Unilever experienced success with Dove Damage Therapy, the introduction of Suave Pro-Styling range, the re-launch of Clear and the launch of TRESemmé in Brazil.

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