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De-jargoned | Consumer staple stocks

LiveMint logoLiveMint 27-05-2014 Vivina Vishwanathan

Have you ever imagined life without toothpaste? What would be your reaction if someone said that you will not get any detergents to wash clothes? Would you for any reason decide not to buy toiletries? Products without which you can’t imagine living with are consumer staples.

FMCG versus consumer staples

Consumer staples fall within the fast-moving consumer goods (FMCG) category. For example, toothpaste and soap are consumer staples but a packet of chips and instant noodles are not. This part of the consumer industry focuses on frequently, especially daily, consumed mass market products—food items, personal care items, alcoholic and non-alcoholic beverages, soap, detergent and even tobacco products.

Shares of companies that sell such products—for instance, Hindustan Unilever Ltd, ITC Ltd and Colgate-Palmolive Ltd—are called consumer staple stocks.

Most products in this category are price inelastic because no matter what the price, people will still buy them. However, a down-trade is possible. In bad times, say, during a recession, consumers, especially in the low income group, could switch to cheaper products in the same category, or consume lesser quantities of that item.

Also, during a slowdown, consumer staple companies usually don’t raise prices.

Staple versus discretionary

Internationally, consumer staples are a well defined sector. Here, only a thin line separates consumer staple from the consumer discretionary sector. Unlike consumer staples, consumer discretionary products are those that people may or may not buy, for example, washing machine, clothing, automobiles, air-conditioners and fast-food. Major consumer durable companies, which are consumer discretionary too, include Titan Co. Ltd, Videocon Industries Ltd, Blue Star Ltd and Whirlpool of India Ltd.

Market performance

In terms of stocks, the FMCG index of a stock exchange can be considered as a proxy index for consumer staples and the Consumer Durable index for consumer discretionary items. Stocks in both these categories are defensive stocks.

Consumer staples companies are generally able to generate sales and profit even during difficult times but the level of growth may suffer as they usually do not increase the prices of their products. Such defensive stocks can be considered as a hedge as they generally perform well in a bad market. But this doesn’t happen all the time. In a “risk off” environment, consumer stocks are generally the favourite among investors.

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