Consumer staples: How to invest in the sector in 2024

According to Goldman Sachs Analyst Jason English, consumer staples companies have faced a challenging 2023, but "next year is very much about the chase for top-line growth." He notes that inflation drove prices higher this year fueling sales growth. In 2024, he's looking for volume growth.

Looking ahead, English expects easing inflationary pressures and intensified promotions to bring some relief to grocery prices in 2024. When it comes to stocks he likes, English favors those that can have continued pricing power and resilient price growth, including companies like Procter & Gamble (PG), Colgate-Palmolive (CL), and Mondelez (MDLZ).

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Video Transcript

JOSH LIPTON: Consumer staples are having a tough year lagging behind most sectors and facing a tough backdrop in 2024. But there is some optimism, according to our next guest, particularly in snack foods. For more on the 2024 consumer staples outlook, we're talking to Jason English, Goldman Sachs managing director.

Jason, it's great to see you. As you know, Jason, listen, 2023, not easy if you were long consumer staples. As an analyst, Jason, what are the core financial metrics you're watching to gauge, you know, how this sector is going to perform now as we head into 2024?

JASON ENGLISH: Well, Josh, some of the last year's underperformance has to do with two sessions ago, where you talked about the fear versus greed index. Needless to say, consumer staples rest heavily on the fear side. So when the market's in agreed on moment as we are right now or mood, clearly my sector is left out behind.

Now from a fundamental perspective, next year is very much about the chase for top line growth. We've had very robust sales growth the last couple of years fueled by pricing. The inflation backdrop required a lot of price growth for these companies. They achieved that they gave leverage throughout the P&L, particularly as some of the input costs have begun to subside, but now focuses on volume, because next year, we're not going to have the type of inflation supporting topline growth. And of late, volume growth just hasn't been there.

In fact, volumes have been declining in the US for these large processed packaged food companies. If they can't get it back to growth, then the top lines are going to stall out. And these P&L's just won't work. They won't deliver the type of bottom line growth that investors and management teams are expecting.

JULIE HYMAN: Yeah. And we've definitely started to hear some food companies, whether it's consumer staples or on the restaurant side, talk about deflation as well that we are now seeing-- going to see creep into some of these goods. Are there any companies that are going to be able to have pricing power going into 2024? And if there are, what distinguishes them from their competitors?

JASON ENGLISH: Yeah. It's a good question, Julie. And this is good news for consumers. Obviously, the cost to buy a groceries has been going nothing but higher the last few years. As we look into next year, in some pockets, we would actually expect a degree of deflation. Some of those are pass through categories like meat or flour. But even in more branded-centric companies, like canned goods, soup, for example, we're seeing deflation as promotions come back to the market.

So these companies need to get volume going, look for them to spend into more promotions. Good news for the consumer, not necessarily good news for many of the companies, because that deflation is really expensive and damaging to the P&L. So the question you asked is spot on, who are the companies who can have continued pricing power, resilient price growth, even if modest? There, we look to companies with emerging market exposure, where we're expecting the rate of inflation in those markets to sustain.

Companies that fit that bill would be Procter & Gamble, Colgate, Coke, Mondelez is some examples. And then we're also favoring snack food companies, where there's a degree of conspicuous consumption that gives brands more power with more brand-centric, also comes more pricing power. And I like snack foods in particular, because the market's really thrown them out with the bathwater this year, because the volume has been weak for the industry at large. And many are arguing that GLP-1s are going to destroy volume. It's caused many of these snack food companies to derail. I think that fear is overdone. And I'm looking for a bounce back next year with snack foods.