From toilet paper to wine: What you need to know about investing in consumer staples

So, you’ve decided to dip your toes into the waters of sharemarket investing. But which companies appeal the most?

While the technology sector is a popular choice among many younger investors, in reality, there is a world of companies awaiting your discovery on the S&P/ASX 200.

Over the next year, we will be focussing the spotlight on the key sharemarket sectors - such as banks, miners and construction - which we think all savvy investors should at least be aware of before making their investment choices. This may assist in understanding how to build a diversified portfolio. Or make it easier in looking at the market in its parts rather than as a whole.

And one of those sectors or industry groupings is Consumer Staples.

Consumer Staples is the fourth smallest of the 11 industry sectors with market capitalisation just below 5% of the S&P/ASX 200. Consumer staples is dominated by Woolworths, accounting for around 46% of the overall Consumer Staples index.

What exactly are consumer staples?

The short answer is: basically, all the stuff in your fridge, pantry and cupboards!

The slightly longer answer is that this sector contains the companies that provide goods that meet the most basic needs or are considered essential products purchased by consumers: food, alcohol, tobacco and household goods, to name a few.

In Australia, there are around 75 companies that are defined in the broad Consumer Staples sector, including supermarket giants, Woolworths and Coles major wine producer, Treasury Wine Estates; wheat marketing company, Graincorp; food producers like Bega Cheese and Inghams; and cleaning products company, Pental.

Probably the best way to understand the Consumer Staples sector is to see how it is broken up. This is done in the table below. Clearly, the sector covers a lot of territory.

Why would you invest in Consumer Staples?

For investors, one of the most appealing aspects of Consumer Staples is that demand for the goods provided by constituent companies is relatively stable over time. People need to eat and drink and keep their homes and themselves clean, through products like Sunlight dishwasher liquid or Softly laundry detergent (both produced by Pental).

During challenging economic times, families may decide to reduce discretionary visits to restaurants and spend less on take-away burgers and pizza, instead cooking more meals at home from ingredients bought at the supermarket.

While the economy may go through cycles of growth and contraction, Consumer Staples tends to be relatively less affected by these fluctuations. And for risk-averse investors, that is a major positive.

What are the risks of investing in Consumer Staples?

That doesn’t mean to say that the sales of companies in the Consumer Staples sector don’t fluctuate with the broader economy.

Currently, with higher interest rates and the rising cost of living, the big supermarkets are reporting that people are switching away from fresh vegetables to frozen varieties. And they are also switching from prime cuts of meat to more mainstream cuts like chuck steak. All these changes in customer behaviour impacts the company’s earnings and therefore may affect its share price.

And when things in the economy do start to pick up, it’s likely investors might start to favour companies that benefit from an environment of faster economic growth, such as those in the Consumer Discretionary sector (think, household goods retailers), Materials (mining) or Information Technology (computer software, cloud services and artificial intelligence).

As is always the case, investors can get exposure to the Consumer Staples sector directly by buying shares in companies represented in the sector. But there are also a number of exchange trade funds (ETFs) that are offered.

Of course, investing in any single sector or company always carries risk, which should be assessed and weighed against your general risk tolerance and investment strategy.

How has the sector performed over time?

Over the past decade, the Consumer Staples sector of the sharemarket has under-performed the broader ASX200 index. Total returns on the Consumer Staples sector have lifted 6.6 per cent on average per annum, below the 8.4 per cent per annum lift for the ASX 200 index.

While the Consumer Staples share price index has lifted 3 per cent a year, dividends have increased on average by 3.6 per cent a year. In contrast, the ASX 200 share index has increased at a faster 4.0 per cent a year while dividend growth has averaged 4.4 per cent a year. Still, Consumer Staples was the second-best performer behind Healthcare when measuring the biggest annual drop in returns over the past decade. That is to say, while it may have performed below average from a returns point of view, the sector is less likely to record a large fall in returns in any one year, as shown by its relative resilience during COVID-19.