Investing in companies that make products people buy day-in and day-out is a smart way to weather an economic storm, but there are some consumer staples stocks to sell which are the exception to that rule. A consumer staples stock includes a whole range of companies— from over-the-counter medicines to household products, food and even alcohol and tobacco.
Many of the largest companies in this space make some combination of those categories and sell them all over the world. This diversification is part of the appeal— the one market falters, the others can pick up the slack. These big names tend to come with a hefty dose of brand power, which allows them to charge more for their products and can be a real asset with inflation on the rise.
Under-performing consumer staples stocks tend to be those that don’t strike the right balance with their pace of price increases. While consumers tend to be willing to stomach some price increases for their favorite brands, their patience isn’t unlimited. At some stage they’ll slide down the value chain and volumes will take a hit. Most consumer goods companies pay a pretty penny for marketing to protect their brand, so when volumes start to decline it can mean their expensive efforts are in vain.
Brand power is pretty much everything in this sector, and companies that lack this key ingredient are consumer staples stocks to sell. Scandals in this space tend to come with expensive long-term consequences. In the current environment, where price hikes are all but inevitable, these companies can’t afford to let a scandal drag their reputation through the mud.
Heineken (HEINY)
Beer-maker Heineken (OTCMKTS:HEINY) has benefitted from consumers’ shifting preference toward more premium drinks, but it’s landed among consumer staples stocks to sell as its performance starts to deteriorate. The latest set of results show Heineken pushed consumers too far with its price increases. As a result, volumes came in well below expectations as people cut back amid the cost of a living crisis.
The price increases meant top-line growth, but that didn’t drop through to profits, which declined. On top of the knock to volumes, Heineken saw a sharp decline in its most profitable area, Asia Pacific.
Heineken is peddling hard against inflationary pressure. Although costs are expected to be more stable in the second half, they’re likely to continue rising. It’s difficult to see how the group can offset these rising costs given the performance this year, and that’s part of the reason Heineken lowered its 2023 outlook.
Ultimately, Heineken is in for a rough year ahead as it struggles in a difficult environment. Asia is likely to continue to struggle and management will have to weigh up continued volume declines against rising costs.
Reckitt Benckiser (RBGLY)
Reckitt Benckiser (OTCMKTS:RBGLY) is the conglomerate behind some of the most recognizable brands in the world, such as Air Wick and Lysol, but it’s still one of the consumer staples stocks to sell. Unlike Heineken, Reckitt isn’t climbing an insurmountable mountain. However, the group is trudging through an uphill battle, which means there are similar, but better options out there.
Like most of its peers, Reckitt is slowly increasing prices in a bid to cover its rising costs. Similarly to Heineken, its volumes are declining. But the good news here is that the volume declines are less about the price increases and more about the end of the pandemic era. The bulk of these declines are coming from hygiene as people spend less in this category.
The group’s margins have started creaking under the pressure of inflated interest and tax costs. And they are having to spend more to boost brand power. Reckitt is at the tail end of a rebuilding period in which they’ve shaken up their portfolio and sharpened its focus.
All told, Reckitt is performing well enough, however there are better picks out there.
Johnson & Johnson (JNJ)
Johnson & Johnson’s (NYSE:JNJ) embroiled in a damaging scandal regarding its talc products, landing it firmly on the list of consumer staples stocks to sell. The group recently struck out once again trying to get the case tossed out, suggesting it isn’t going away anytime soon. By the enormous conglomerate’s own emission, if the case goes ahead it will take decades to litigate and will likely cost the company billions of dollars in lawyers fees alone. If Johnson & Johnson were to lose, it would likely have to pay a hefty financial penalty as well.
However, that isn’t the only issue. Johnson & Johnson’s talc products are marketed toward infants. Even the insinuation that they could be unsafe is enough to erode trust in the brand. A decades-long lawsuit would only refresh consumers’ memory of this scandal over and over again with every new development. It’s an eventuality the group doesn’t want to have to face.
Johnson & Johnson’s largest asset is its brand, and right now that’s hanging in the balance. Even if the company were to win the lawsuit, the damage stemming from years of reiterating alleged product safety issues will be size-able.
On the date of publication, Marie Brodbeck did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.