Going Long Consumer Staples
We are hosting our 1H22 Consumer Staples Themes call tomorrow at 2:30 PM ET. We will outline our thesis for going long Consumer Staples.
Hedgeye’s Macro team is calling for either Quad 1 or shallow Quad 4 in Q1, followed by an increasing likelihood of Quad 4 in Q2. Consumer Staples has the highest expected value of any sector in Quad 4. However, not all companies will enter Quad 4 with the same outlooks.
We see an inflection in margins ahead for the sector. Cost increases have become increasingly larger headwinds for margins in Consumer Staples. CPG companies are experiencing cost increases for everything from labor, to packaging, to food ingredients, to transportation. Peaks are generally processes, not points. Since food at home is a relatively small portion of CPI, we can have peak inflation while food prices continue to make new highs. Food manufacturing costs are peaking while price increases are accelerating, signaling strengthening margins ahead.
We reshuffled our position monitor to account for international sales mix, exposure by commodity, pricing plans, the elasticity of demand, margin outlook, competitive dynamics, and secular growth trends. We are adding General Mills, Keurig Dr Pepper, and Pilgrim’s Pride to the long list. For our short list we are adding Anheuser Busch InBev while removing J.M. Smucker and Conagra. Our updated position monitor is as follows:
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CLICK HERE for the live webcast and materials at the time of the event. |
Coffee house traffic up vs. pre-pandemic (BRCC)
The top ten coffee chains had traffic growth compared to 2019 beginning in May while traffic to restaurants were down except in the months of July and October. Despite consuming more coffee at home during the pandemic consumers still made trips to coffee houses. Since Starbucks started to change the coffee category decades ago coffee is seen as much more than a beverage. The coffee house is the experiential destination for a brand. According to Placer.ai cross-shopping patterns in California between Dutch Bros and Starbucks have shown the growth of Dutch Bros locations has not impacted Starbucks visits or customer loyalty.
Black Rifle Coffee Company (BRCC) is set to take share in the coffee house category with its store growth plans, but it does not have to source it from the competition. BRCC benefited from the pandemic driven growth in at-home coffee consumption. The company is accelerating its outpost (store) growth in 2022. Growing its outposts is the second driver in BRCC’s three-pronged growth strategy.
Fresh meat substitutions (PPC)
Sales of fresh meat increased 3.6% YOY in the 13 weeks ended October 3, while sales compared to three years ago increased 22.1%. The average price for fresh meat per pound increased 12.3% to $4.13 in Q3 according to IRI. Typically, when consumers experience inflation in the meat department they eat more at home vs. restaurants and buy more on promotions. However, the percent of fresh meat sold on promotion dropped 5% points to 28%. Consumers are also eating more at home than they had in the past. Substitution and decreased consumption are the consumers' only alternatives now. Chicken should benefit from being the lower-priced protein relative to beef and pork.
For the quarter ended October 3 beef sales increased 3.2%, while chicken increased 4.7%, pork increased 6.3%, and turkey increased 1.0%. Sales of beef and chicken by cut are shown below. Sales of meat alternatives decreased 2.5% in Q3 but increased 4.8% for the year ended October 3. Household penetration of plant-based items is about 10%, with only half of households purchasing the items once.
