Which consumer spending trends could persist?

Patrick Diedrickson, CFA, Equities Research Director – Ameriprise Financial

Shopping cart with fresh groceries

We believe pandemic-related shifts in consumer behavior and spending could drive long-term revenue for the Consumer Staples sector. In our view, the sector is attractively valued and offers favorable growth potential for equity investors. 

Managers from consumer staples firms such as Clorox, Procter & Gamble and Church & Dwight stated they view a change in consumer habits — a result of the pandemic and crowd avoidance. As a result, at-home activities such as work, school, exercise and entertainment have led to more cleaning, sanitization, self-care and consumption of foods and beverages.

Despite pent-up demand across consumers who have been cooped up at home, we believe the rise in many at-home activities could trend for multiple years. 

Big-box retailers like Costco Wholesale experienced a favorable sales catalyst during the pandemic, particularly for essentials such as food and household products. This attracted new shoppers and could lead to long-term customer retention, in our view.

Many major retailers also made e-commerce improvements, which made shopping easier and allowed customers to increase their average ticket as well as shopping frequency. Altogether, we believe these retailers could realize favorable revenue trends over the next several years.

In addition to accelerating sales and the potential for more customer retention, many consumer staples firms have greater financial flexibility. That’s because of efforts last year to improve their balance sheets. As a result, we believe there may be increased merger and acquisition activity in the Consumer Staples sector. Additionally, improved financial flexibility could lead to additional product innovation, which could drive volume growth. 

There could also be more growth in global business activity. Several companies with limited overseas revenue plan to pursue international expansion. We believe the overall growth rate for mid-cap companies could accelerate over the next few years, partially due to international expansion.

The sector is not without risks, however. For example, the household products industry faces a decline in birth rates during the pandemic and subsequent recession last year. According to the Brookings Institute, there could be approximately 300,000 to 500,000 fewer births. That could be a headwind for the baby care segment. It’s possible that companies with diaper and baby wipe product lines could experience a temporary revenue headwind over the next 12 to 24 months. 

Input cost inflation and rising supply management costs are also risks. They may pressure profit margins during the year, but we believe higher costs are manageable. Most companies in the sector have started price increases to offset higher costs. That said, cost inflation could lead to additional price increases.

In summary, we believe industries such as household products and food and beverage could experience solid growth over the next several years. Many investors have focused on cyclical sectors related to re-opening as more individuals are vaccinated. In our view, the defensive Consumer Staples sector offers attractive growth potential to long-term equity investors in a diversified portfolio. If you have questions about these trends and implications for your portfolio, talk with your Ameriprise financial advisor.