These consumer goods stocks are a safer haven than the rest

Demand for so-called consumer staples, or household essentials like groceries and cleaning supplies, tends to be more resilient than for more discretionary items like clothes or electronics, let alone big-ticket items like cars. This proved largely true as inflation hit consumer budgets in 2022. The S&P 500 consumer staples subindex is down just 2.7% for the year, compared with a 37% decline in the consumer discretionary subindex and a 19% decline for the broad S&P 500.

Look just a little closer, though, and the picture gets more complicated. Makers of one staples category—packaged food—performed starkly better than those producing household goods like paper towels and soap. Campbell Soup and General Mills, for instance, are up 30% and 25% for the year, respectively. Meanwhile Procter & Gamble, which makes Pampers diapers and Gillette razors, and toothpaste and dish soap heavyweight Colgate-Palmolive are both down around 7%. Clorox, which makes things like Glad trash bags and Brita water filters, besides its namesake bleach, is down 18%.

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There are several reasons for the divergence. First is the lingering impact of Covid-19. Sales of both kinds of staples soared in the early days of the pandemic, but the days when consumers were stocking up on cleaning supplies is long over. That is less true for food: Many people upgraded their kitchens and cooking skills during the pandemic, and at-home food consumption has remained elevated.

But there is more to the story. Among major listed companies, household-goods companies are far more global than packaged-food ones. P&G, for instance, got 53% of revenue outside of North America in fiscal 2021, compared with 29% outside of the U.S. for Kraft Heinz. Economic weakness abroad has affected sales, and the strong dollar has meant these overseas earnings are worth less in dollar terms.

Importantly, their more-international nature also makes these companies more reliant on global supply chains, note Barclays analysts Lauren Lieberman and Andrew Lazar. This means they have been more affected by global disruptions due to everything from China’s lockdowns to war and energy shortages in Europe, as well as soaring shipping and logistics costs.

Comparing four of the biggest food companies—General Mills, Kraft Heinz, Campbell Soup and Kellogg—with four major household goods companies—P&G, Colgate-Palmolive, Kimberly-Clark and Clorox—it is clear that the latter have suffered greater margin pressure as a result. The food companies on average saw gross margins decline by 2.4 percentage points between 2019 and the last four reported quarters, while the household-goods companies saw a drop of 4.7 percentage points, according to figures from S&P Global Market Intelligence. At Clorox, margins fell a whopping 8.7 percentage points over the period.

This helps explain why certain food companies haven’t kept up with their peers. Mondelez, which makes Oreos and Cadbury chocolate, has suffered from its highly international profile, with 71% of sales coming from outside the U.S. in 2021. Its stock is basically flat so far this year, and gross margins have declined by around 3.5 percentage points compared with 2019.

Companies have all raised prices to counter higher costs, but the impact of these price hikes on consumer demand has tended to be bigger in household goods, say Ms. Lieberman and Mr. Lazar. In part this could be because consumers are still saving money by eating at home rather than dining out, making demand for groceries more resilient. It could also be because consumers have been faster to switch to private-label household goods like trash bags than with foods.

The picture could brighten somewhat for household-goods companies in 2023. If inflation keeps slowing, that could pad margins and prompt the Federal Reserve to keep slowing or even halt its rate increases, which in turn could dampen the U.S. dollar. Reopening in China could boost consumer demand there and ease supply bottlenecks.

Yet the household-goods group still isn’t cheap, with the four major ones cited above currently trading at an average multiple of 25.5 times forward earnings, according to FactSet, compared with 17.6 times for the group of food companies. Given how poorly the household-goods category has fulfilled its traditional safe-haven role this time around, investors might want to rethink that premium.