2024 has generally been a difficult year for the European consumer staples sector, due to a slowdown in growth globally. Both food and HPC (home and personal care) sub-sectors have underperformed the European index so far this year.

Emerging from the pandemic, consumers had excess savings they were looking to spend. Although this benefited areas like travel, leisure, luxury and beauty products the most, it also made them (consumers) less sensitive to high inflation in many product areas.

Entering this year as those savings were burned off, and interest rates were the highest they have been for some time. Consumers’ willingness to pay high prices has led them to shop in lower-end channels and switch to supermarket own-brand products. This has been most acute in the US, which typically accounts for around a quarter of European staples sales. Discount retailers like Walmart and Dollar General in the US have done very well, similarly to Aldi and Lidl in Europe. The categories that have taken the most price increases in the last few years, like pet food, coffee and household products, have seen the biggest unwind in demand.

Unilever, one of Europe’s largest HPC food and HPC companies said it is only winning market share in 39 per cent of its businesses in Q2 this year, compared to 48 per cent just around a year ago. Typically, downtrading most negatively affects categories with high supermarket own-brand share like food and HPC products. For categories like beer and toothpaste, private label share is low, and we don’t really see significant downtrading.

To combat lower volume growth, staples are now looking at reducing prices, to try and compete with supermarket own brands. In the first half of this year, food inflation in Europe was only 1 per cent, compared to 10 per cent in the same period last year. Companies are also increasing investment in sales and marketing, and product innovation, to try and restore market share growth. This means that some of the benefit they are seeing from lower input cost inflation is not dropping through to the bottom line, impacting their ability to expand margins.

This has been a big boost to some of their suppliers, like ingredients companies, that make flavours, texturing agents, and fragrances that go into food products, and are benefiting from very strong growth this year.

China remains very challenging for European staples companies with businesses there. Pernod Ricard, for example, Europe’s largest spirits company, reported a decline in sales of 10 per cent last year and expects similar this year. And staples companies in China are grappling with the concerns around an ageing population and lack of growth there.

There are some reasons to be positive. I think clarity on the US election and also the beginning of the rate-cutting cycle is typically good for consumer spending, and consumer staples stocks.

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Inflation: The rate at which the prices of goods and services are rising in an economy. The Consumer Price Index (CPI) and Retail Price Index (RPI) are two common measures.

Rate-cutting cycle: The part of the monetary policy cycle when central banks are cutting interest rates.

Monetary policy: The policies of a central bank, aimed at influencing the level of inflation and growth in an economy. Monetary policy tools include setting interest rates and controlling the supply of money. Monetary stimulus refers to a central bank increasing the supply of money and lowering borrowing costs. Monetary tightening refers to central bank activity aimed at curbing inflation and slowing down growth in the economy by raising interest rates and reducing the supply of money.

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