Isn’t the Consumer Staples Sector Defensive?

Consumer: “Alexa, place an order for Dawn Ultra dish soap.”

Alexa“Before I place your order for Dawn Ultra, would you like to try Amazon Basics dish soap? Amazon Basics dish soap has a 5-star rating and based on your usage patterns you will save $10 a year.”

Consumer: “Sure I’ll give it a try.” 

Brands give consumers the perception of quality and consistency, but in a world of online shopping with consumer reviews, how many consumers will continue to pay a premium for the branded household product when a highly rated generic alternative exists?

Now to tie everything together we’ll throw rising inflation expectations into the mix. If inflation increases and these companies aren’t able to pass through price increases to consumers as they have in the past, then the predictable growth in cash flows these companies have historically enjoyed may no longer exist. This is something we believe the market is fearful of. While a true long-term trend has yet to emerge, we thought it would be useful to explain our thoughts as to why the Consumer Staples sector might be struggling. Of course, this is just a theory but we think it’s useful to have a narrative that helps to explain what’s going on in the market.