Pick-Up In Sales May Be Slow For Consumer Staples Makers

Recent improvements in consumer spending are likely to help sales of the makers of daily household goods and packaged foods, but the pace of their sales growth may remain below prerecession levels.

Wednesday's retail sales numbers pointed to a pick up in sales of discretionary items like cars and furniture, and spending in restaurants has risen a notch. But many consumers who traded down to store brands and cheaper offerings on grocery shelves appear to be reluctant to spend much more for their daily necessities. Some of that caution may be reflected in the results of consumer staples companies--which make daily necessities like detergent and soft drinks--as they report earnings over the next few weeks.

Consumer Edge Research estimates that volume growth for the overall consumer staples sector for the first quarter is likely to be around 1.4%, still below the 1.9% growth of early 2008. Organic sales, typically a measure that excludes the impact of acquisitions and foreign exchange, are expected to rise about 2.6%, below the 5.6% of early 2008.

"Consumers are loosening their pocketbook some, but they aren't going hog wild," said Crisman Boggan, an analyst at MTB Investment Advisors, which invests in consumer stocks. "What you'll see in the consumer staples space is a slight shift back into brands versus private label. You'll see a little more splurge spending: a few more cookies, more snacks, less buying of the basic vegetables and pasta."

In the U.S.--the single biggest market for most consumer product companies--many consumer companies have continued to see tepid volume growth. PepsiCo (PEP)--which reports April 22--recently predicted that beverage industry volumes in the U.S. will continue their decline in the current year, before some improvement next year.

Even those companies that are seeing sales pick up are doing so in response to promotions and cheaper new products. Unsure if consumers will trade up to higher priced offerings on their daily purchases, they are choosing instead to offer a bigger variety on price: rolling out more offerings at different price tiers on everything from snacks to detergent.

P&G, looking to offer cheaper options for its high-end Tide brand, has cut prices on detergent brands, taking down prices of its Era detergent offerings to a range of $2.49 to $3.99 from a prior range of $2.66 to $4.66. In recent months, the company has taken down prices for its 50-ounce Cheer bottle to $5.99 from $6.33. P&G sales--which took a hit in the recession--have been showing an improvement in volumes and P&G investors expect that to continue.

"It concerned us more when people were downsizing away from premium price brands into generic brands. However, that trend seems to have abated," said Robert Millen, a portfolio manager at Jensen Investment Management, which holds shares of consumer staples. For P&G's fiscal third quarter, which ends in March, Barclay's Capital expects 5% organic sales growth.

Still, some of these price cuts, lower price products and promotions could take a toll on companies' profit margins. In a February presentation, P&G told investors that it may choose to "prioritize" revenue growth over margin expansion.

Even companies that emphasized their "value" offerings during the recession aren't changing that focus despite signs that the economy is picking up. ConAgra during the recession reformulated its Banquet frozen meals to keep prices to under $1 even though commodity prices were rising.

"I don't believe we are going to see the continued [consumer spending] declines like we have [but] I would characterize it as a bottoming out, a flattening out, more than the start of some thing big," said ConAgra Foods Inc. (CAG) Chief Executive Gary Rodkin. Some consumers in grocery stores seem to be echoing that point of view. Uma Kumar, a shopper in the cooking oils section of a Food Emporium in New York, said she is looking more closely at prices and said she is sticking to what she needs.

-By Anjali Cordeiro, Dow Jones Newswires; 212-416-2200; anjali.cordeiro@dowjones.com

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