What does 2024 hold for consumer staples?

Consumer staple stocks (XLP) have faced growing pains as inflation and recession fears lead consumers to cut back on purchases. Product trade downs, even on basic household necessities, are denting margins for companies like supermarket giant Kroger (KR).

Yahoo Finance Retail Reporter Brooke DiPalma analyzes the setbacks companies have faced amid thriftier customer habits, providing insights into the new minimum pay requirements for food-delivery platforms like DoorDash (DASH) and Uber (UBER).

For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.

Video Transcript

AKIKO FUJITA: All right. Well, it has been a tough year for consumer staples as higher prices take a toll on customers. But could 2024 be a turnaround year for the sector? We want to bring in Yahoo Finance's Brooke DiPalma. And Brooke, you and I were talking about some of the trends that we've seen from these consumer staples companies here over the last several weeks.

And very similar to what we've seen with the retailers on the apparel side, consumers are trading down. They're not willing to spend as much as maybe they once were when they head to the grocery store or something like that just in terms of buying the food and the goods that they need. What do you think that then tells us just about the strategy for these companies going forward? And taking Kroger, for example, and their reliance on Albertsons and that deal getting through.

BROOKE DIPALMA: Yeah. I think that there's so many questions heading into 2024 about how exactly grocery companies, how exactly consumer staples like Coca-Cola, like Kraft Heinz, Hormel Foods, so many others are really going to position themselves to make sure that they're providing value, make sure that they're keeping traffic in these Kroger stores and these other grocery retail giants, while also keeping in mind that we're seeing grocery deflation.

Everyone's wondering, was this the peak of higher prices? Has this finally lapsed where they no longer have the power in order to raise prices and still keep consumers wanting more? And so with those all in mind, I mean, we just saw Kroger now expect fiscal 2023 sales to grow 0.6% to 1%. That's down from their prior forecast to the low end of 1% to 2%.

And in a note from JP Morgan, they said that these headwinds up against Kroger may not go away immediately or they could even get worse. And I think that, really, when you think about just how much these retail groceries, the power that they have to continue to raise prices while consumers are pulling back, everyone's wondering that same question.

BRAD SMITH: Yeah. They said in the statement, the third quarter results highlight the strength and diversity of the business model, but a challenged operating environment, some of those points that you were alluding too a moment ago here. While we're in this space though, let's talk a little bit about food delivery workers. In New York, they got a win yesterday. What do we know about this win? How far-reaching is it expected to be?

BROOKE DIPALMA: Yeah. So Uber, DoorDash, Grubhub, other delivery workers in New York City will now have to pay their delivery workers at least $17.96 an hour after they failed to convince an appeals court to block that minimum payroll. Now, I did just hear back from Grubhub in a statement that they said they were disappointed with the judge's decision and are evaluating their next steps.

And DoorDash spokesperson telling a similar anecdote saying that the sad truth is that the court has chosen to ignore the harmful consequences such as a misguided minimum payroll will cause and failed to justify its decision to allow the city to pick winners and losers in how it is applied. Now, I can't help but think of what's going on in California with the FAST Act. There, fast food workers also will have to increase the minimum wage.

And like we're talking about grocery retailers trying to figure out 2024, all these delivery workers, these fast food companies are really trying to figure out how they're going to go about wages in 2024, what this means for California, what this means for here in New York City in the delivery space. I mean, what does that mean then for consumers? Will they end up having to pay more? How will they offset these higher wages? I think wages are going to be a big story in 2024.

BRAD SMITH: All right. We're going to continue to watch that very closely here. Brooke, thanks so much for bringing these stories to our attention. Continuing to track them as well as many others.