Once again, technology stocks are grabbing the financial headlines. They have powered most of the gains in the S&P 500 in 2023.
In fact, Apple and Microsoft alone now account for a record 13.5% of the index—the most ever for the top two stocks.
While it’s tempting to buy big tech right now, the safer investing route—and the one I prefer is sticking with—is consumer staples companies that have strong brands.
Consumer Goods Companies Bonanza
Consumer goods companies had a remarkably strong 2022, despite a sharp rise in raw material costs and stretched household budgets. In fact, consumers swallowed big price increases in 2022 without batting an eyelid.
Companies in the sector hiked prices by 10% on average in the fourth quarter of 2022, according to Bernstein analysis, with volumes a mere 2% lower—and that trend has continued into 2023.
Most food and beverage companies were able to pass along large price increases in the first quarter, with sales volumes only edging down.
Here are just a few examples cited by the Financial Times: At AB InBev, North American beer prices rose 5.6% while volumes fell slightly. Kraft has long struggled with sales volumes, and in the first quarter they fell 6%—but prices were up 13%, and margins are widening. And Kellogg’s, best known for cereal, had a 14% benefit to sales from its price mix. Its management said it has been surprised by price elasticity remaining well below historical levels.
The story seems to be the same almost everywhere in the consumer staples sector. Companies up and down the value chain are passing on big—sometimes very big—inflation-plus price increases, and consumers are willing to pay. There is precious little evidence of trading down to cheaper alternatives.
This is a testament to the power of brands. But only companies able to maintain the luster of their product names can pull this off consistently: consumers will pay more for trusted products, which then deliver higher profits to the brand owner, cushioning it against…
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