Investing in ASX consumer staples stocks

What are ASX consumer staples stocks? 

Companies that produce goods or services with non-cyclical demand are categorised as consumer staples stocks. These companies produce things like food and beverages, hygiene products, and household goods. Alcohol and tobacco also belong in the category. 

Essentially, consumer staples are items people will continue to buy regardless of their financial situation. 

In a downturn, people may stop buying new clothes and toys, but they’ll keep buying food, drinks, soap, and the like. Demand for consumer staples tends to stay relatively constant regardless of which point of the economic cycle we are at. Demand for certain consumer staples, such as alcohol, may even increase in an economic downturn. 

Consumer staples differ from discretionary products, which meet people’s wants rather than needs. Consumer discretionary products include luxury brands, high-end travel, expensive beauty products, and pricey toys. 

Because they are non-cyclical, spending on consumer staples does not ebb and flow the way spending on discretionary consumer goods and services does. Consumer staples have a low price elasticity of demand because people will still buy these products and services even if the prices rise. 

Why invest in them?

Consumer staples shares tend to fall less than other shares during a stock market downturn. This is because demand for products these companies sell does not tend to decline much, even during recessions. This means these businesses generate consistent revenue throughout the economic cycle. For this reason, they are considered defensive stocks. 

Consumer staples stocks attract investors with their steady cash flows and dividend yields. Because of their non-cyclical nature, consumer staples shares usually continue to pay dividends through recessions. 

Consumer staples stocks also provide important diversification benefits. Because they don’t respond to changes in the economic cycle in the same way consumer discretionary shares do, they can help balance riskier stocks in a portfolio. 

Top consumer staples stocks on the ASX

There are nearly 80 consumer staples companies listed on the ASX. These range from the big supermarket chains to food, grain, and crop producers to alcohol retailers. Here are three top consumer staples stocks based on market capitalisation from high to low.

Woolworths

Woolworths is Australia’s largest retailer, operating Woolworths supermarkets and Big W discount department stores nationwide. In FY22, supply chain disruptions, product shortages, and flooding led to an inconsistent customer experience and a financial performance below aspirations.

Nonetheless, sales increased 9.2% in FY22 to $60,849 million. Net profit after tax (NPAT) was up 0.7% from FY21 to $1,514 million. Earnings per share (EPS) increased 3.6% to 124 cents per share and a dividend of 92 cents per share was declared. 

Despite the difficulties Woolworths faced in FY22, it reached several important milestones in its supply chain transformation, opening four new distribution centres during the year. COVID-related costs should substantially decline in FY23 compared to FY22 as customer behaviours normalise and the operating rhythm of the business continues to improve.

Coles

Coles is a leading Australian retailer, processing more than 20 million customer transactions each week. It operates more than 800 supermarkets and 900 liquor stores trading as Liquorland and Vintage Cellars, among others. Coles Express, the company’s fuel and convenience offering, has more than 700 sites across Australia. 

In FY22, sales revenue increased 2% on the prior corresponding period to $39.4 billion. Earnings before interest, tax, depreciation, and amortisation (EBITDA) grew 0.2% to $3,440, while NPAT grew 4.3% to $1,048 million. 

Coles believes it is well-positioned in a market facing macroeconomic challenges. Rising food inflation and costs of doing business will impact earnings. However in FY23, Coles plans to open around 20 new supermarkets, close nine, and renew about 40. 

Endeavour

The Endeavour business finished FY22 with 258 Dan Murphy’s stores and 1,417 BWS stores. It added 33 new stores during the year, and 81 store renewals were completed. 

FY22 was a significant year for the Endeavour business, being its first as an independently listed company following its spinoff from Woolworths. While group sales were flat year over year at $11.6 billion, NPAT grew 11.2% to $495 million. 

In its FY23 first quarter update, Endeavour reported accelerated sales at its hotels, with trading well ahead of pre-COVID levels. On a three-year basis, trading is well ahead in both hotels and retail, with hotels thriving as Australians embrace social occasions after years of disruptions. 

There has been a rebound across all hospitality categories, and live music is becoming a feature of the business once more. Hotel sales for the first quarter were $538 million, an increase of 90.8% on the prior year, with strong trading across the bars, food, gaming, and accommodation segments. 

What to look for when buying consumer staples shares

Investors in ASX consumer staples shares are likely to prioritise dividends and steady growth ahead of the potential for accelerated capital growth. Consumer staples shares tend to be steady performers and act as a hammock in market downturns. This is because consumer staples companies can continue to generate sales and profits during economic slowdowns. 

Many big-name brands you buy daily are consumer staples stocks available to purchase on the ASX individually. For example, Bega Cheese Ltd (ASX: BGA) and A2 Milk Company Ltd (ASX: A2M).

Investors can gain exposure to ASX consumer staples companies by buying shares in them directly or by investing in an exchange-traded fund (ETF) that focuses on the sector. Investors are not limited to Australian shares either – certain consumer staples ETFs offer global exposure. 

Pros of investing in ASX consumer staples shares 

Diversification: Consumer staples shares can provide significant diversification benefits to portfolios as they are not as susceptible as other types of shares to the vagaries of the economic cycle. 

Dividends: Customer demand for the food and services offered by consumer staples companies is fairly consistent, so these companies tend to have consistent cash flows and are thus able to pay dividends even during periods of downturn. 

Safe haven: The relatively constant demand for the products and services of a consumer staples company means they can act as a safe haven for investors during a bear market. 

And the cons

Slow growth: Consumer staples shares tend to be slow and steady businesses, so they don’t have the same potential for rapid share price increases as some other stocks on the market, such as tech companies. 

Potentially slow to adapt: Size can be a weakness when there is a shift in customer demand. Large consumer staples companies may be slower to adapt to market changes than smaller competitors. 

Are consumer staples stocks a good investment?

Whether these types of shares are a good investment for you will depend on your investment goals and financial situation. 

ASX consumer shares can provide a share portfolio with protection in the event of a recession. This is because consumer staples shares are non-cyclical, so changes in the economic cycle don’t impact them as much as cyclical shares. 

ASX consumer staples shares can also provide diversification benefits and balance to a portfolio. Not to mention dividends, which can be a tax-effective way of receiving investment returns if franking credits are attached to the shares you own. 

An investor seeking rapid capital gains is unlikely to be attracted to consumer staples shares but should nonetheless recognise the valuable contribution they can make to a portfolio. Take your time making your investment decision and if necessary, seek professional advice.