consumer staples
TRANSCRIPT
Consumer Staples COVID Factors to Watch – 100 Read-Throughs from Earnings Weeks 1 + 2
Consumer Staples | Industry Primer
We combed through 37 earnings releases/calls—globally—from April 15th to May 1st and
identified 100 read-throughs to our Staples coverage. Presented via our factors to watch
(Emerging Markets (EM), On Premise Shutdown, Production Disruption, Travel Retail, Health &
Hygiene, Pantry Loading, Recession Trade Down, Big Brands Effect). Relevant highlights
from releases in coming pages.
We closely link these factors to our proprietary interactive financial model & accompanying
note Guidance for Investing in a World without Guidance. We suggest investors use
the read-throughs and modeling tool in tandem.
Thematic read-throughs
Pantry loading reversed in April. Across several categories, the off-premise “panic
buying” that ended in March subsequently subsided. Molson Coors, Colgate, Church &
Dwight all citing consumption normalizing in April. Beverage and Food seeing smaller 2nd
and 3rd waves of re-stocking unlike household staples largely reversing in growth trends.
Big Brands back in vogue. Danone called out “putting on hold the small, niche brands
that propelled the food revolution,” in-line with sentiment that multinationals are winning
with retailers and consumers. Whether due to availability of larger pack sizes, better
distribution capabilities, or trusted brand quality, this effect is likely to last through the crisis.
Recession trade down an open-ended question. Companies cannot estimate the
length of this recession, but quick to identify price-points that may be negatively impacted.
Portfolio/price evolution for Procter, Clorox, Church, Keurig possibly more recession proof.
Traditional channels problematic… As COVID-19 intensifies in Latin America, Africa,
and EMEA, focus on large traditional channel (‘mom-and-pop’) resiliency. Unlike big box
retailers, most of this channel shut in lockdowns or more isolated from supply chains. Arca,
Mondelez calling out extended issues which could take 6-9mo to resolve.
…with India & Mexico consistently called out. Strict lockdowns in 5th and 15th largest
global economies exacerbating macroeconomic instability prior to COVID. Manufacturing
shutdowns crippling movement of labor and goods. Colgate, Mondelez, Arca, Procter
expecting negative headwinds in these regions through 2Q.
Read-throughs to Staples Earnings this Week
REYN (Outperform rated): Positive. Keurig, Packaged Foods citing shift to coffee & food-
at-home. Big Brand effect (#1 share in foil, parchment paper) and Pantry Loading.
MNST (Outperform rated): Negative. C-stores weak globally per Arca, Coca Cola Europe.
Possibly impacted by trade-down (energy high price point) but beverages usually resilient.
BRBR (Outperform rated): Mixed. “On-the-go” consumption gone. Possibly benefits from
trade-down vs. high-end shake competitors. Costco SSS March +10% vs. Feb +12%.
5 May 2020
Equity Research
Americas | United States
DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS,
LEGAL ENTITY DISCLOSURE AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business
with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.
Research Analysts
Kaumil Gajrawala
212 325 3227
Pallavi Bakshi
212 538 8434
Theo Brito
212 325 4637
5 May 2020
Consumer Staples 2
Factors to Watch as COVID-19 Spreads
We identified factors we think will be key to assessing the impact of COVID-19.
The relative heat map below outlines potential negatives (Emerging Markets, On Premise
Shutdown, Production Disruption, Travel Retail) and potential positives (Health & Hygiene,
Pantry Loading, Big Brands Secular Effect).
We closely link these factors to our proprietary interactive financial model and
accompanying note Guidance for Investing in a World without Guidance. We suggest
investors use these tools in tandem.
While not possibly all encompassing, this map can help guide investors on where they should
focus attention as the situation evolves.
Figure 1: CS COVID Heat Map updated 5/1/2020
Source: Company data, Credit Suisse estimates
Changes to map since 4/24/2020:
Benefit from H&H: No change.
On-Premise Shutdown Closes Bars/Restaurants: No change.
Pantry Loading: No change.
*New* Recession Trade Down: Add Reynolds (positive); Constellation & Boston Beer
(Neutral to Negative)
*New* Secular “Big Brands” Effect: Add global HPC, Monster, Anheuser Busch, Boston
Beer, Molson Coors.
Geographic Exposure: No change.
Supply Chain/ Disruption: No change.
Travel Retail Closed: No change.
Benefits from
Health & Hygiene
On-Premise
ShutdownPantry Loading
*New* Recession
Trade Down
*New* "Big Brands"
Secular Benefit
Geo: Emerging
Markets
Supply Chain/
Production
Travel Retail
Headwind
CHD Church & Dwight
CL Colgate-Palmolive
CLX Clorox
PG Procter & Gamble
REYN Reynolds Consumer
BRBR BellRing Brands
KDP Keurig Dr. Pepper
KO The Coca-Cola Co.
MNST Monster Beverage Co.
PEP PepsiCo
ABI Anheuser-Busch InBev
SAM Boston Beer Co.
STZ Constellation Brands
TAP Molson Coors Beverage
Ho
useh
old
&
Pers
onal C
are
No
n A
lco
ho
lic B
evera
ge
& F
oo
d
Alc
oh
olic
Bevera
ge
5 May 2020
Consumer Staples 3
1. A Boost for Health & Hygiene Providers
While we believe the largest benefit in health & hygiene sales will be a one-time impact, HPC
companies stand to benefit in the medium-term from increased consumer concern.
Factor Read-Throughs 5/1/20
1. Clorox: “With the pandemic expected to have a sustained positive impact on
consumers' disinfecting and hygiene habits, we'll invest further in our brands, turn
incremental usage into loyalty.” (5/1/20 Earnings Call)
2. Colgate Palmolive: “…we're doing a lot of things very, very quickly to adapt to some
of the consumer behavior changes we've seen, particularly around the importance of
health and hygiene and how that plays out with some of our products… But the
efficiency and hygiene nature of liquid hand soap may lend itself to increase brand
penetration. Products like spray cleaners and wipes, we'll see more penetration grow
and we're expanding those as well.” (5/1/20 Earnings Call)
3. Hindustan Unilever (India): “Health, Hygiene & Foods have been resilient given the
nature of the crisis that we have been going through and the nature of the consumers
buying patterns… We believe that the heightened need for hygiene and sanitation is
not going to disappear overnight, It will come down from the peak levels, definitely, but
it's not going to disappear. People will hopefully understand that having the right kind
of behavior with sanitation and hygiene is a proposition which keeps you healthy and
safe… There will be a spike in liquid soaps. There will be a spike in soaps with health
credentials. I'm sure people will be much more conscious about washing their hands
more number of times, whether also using a disinfectant, cleaning surfaces, making
the environment more hygienic. These are some things which will be there for some
time. We are not going to go away. And hopefully, it will translate into some prominent
shift of consumer behavior.” (4/30/20 Earnings Call)
4. Reckitt Benckiser: “The three spaces RB plays in - Hygiene, Health and Nutrition -
fit well together with a very attractive mix of market dynamics, consumer pull, preferred
strong brands, customer relationships and marketplace presence, and new products
that support an attractive earnings growth model… It's a little hard to predict exactly
how much of the penetration and frequency increases, particularly in the Hygiene
categories will sustain. But what is clear is that what we are seeing from customers is
a greater desire to engage on this because we will see a step-up in both penetration
and frequency in the case of Hygiene.” (4/30/20 Earnings Call)
5. Church & Dwight: “As a result of the pandemic, consumers are stocking up on
household staple products, such as laundry detergent, cat litter, bathroom cleaners,
baking soda and personal care products such as vitamins and supplements and nasal
hygiene products.” (4/30/20 Earnings Call)
6. Procter & Gamble: “We will serve what will likely become a forever altered health,
hygiene and cleaning focus for consumers who use our products daily or multiple times
each day. There may be an increased focus on home, more time at home, more meals
at home, more cleaning of homes, with related consumption impact. Share results and
track channels through March showed broad-based growth. Vicks respiratory products
were up more than 4 points. Metamucil and Pepto Bismol up 3 points. Always pads,
Always Discreet, Tampax, Tide, Dawn, Cascade and Gillette blades and razors each
up 1 point or more. Pantene, Head & Shoulders, Old Spice, Native, Secret, Crest, Mr.
Clean, Gain, and Bounce, each growing share.” (4/17/20 Earnings Call)
7. Unilever: “Prior to the COVID-19 outbreak, hand sanitizer was a tiny part of our
business, yet over the last two months, we have opened more than 30 new production
lines, including third parties to make hand sanitizers. And in the UK, we converted one
of our plants in just 3 days to support this effort… Our home and hygiene brands,
including Cif surface cleaners and Domestos bleach products, benefited from
increased demand for household cleaning with double-digit underlying sales growth…
5 May 2020
Consumer Staples 4
People are buying more hygiene products for hands and for household surfaces. This
is one of the changes we expect to see continue beyond the immediate crisis.”
(4/23/20 Trading Statement)
8. Kimberly Clark: “Overall we do expect some near-term volume decline in K-C
Professional. However, I will say there's a long-term opportunity to serve a very
important need, as creating healthier workplaces and focus on hygiene becomes more
important going forward.” (4/22/20 Earnings Call)
9. Essity: “In Personal Care, we saw volume growth in all categories except for Medical.
And in Consumer Tissue, we had very high sales growth in Europe, in LATAM and
significantly lower sales in China with Vinda, due to the fact that they are at a different
phase, as you know, of the pandemic. In Professional Hygiene, we had higher sales in
Europe, LATAM, and not least in North America, and for the same reason, lower sales
in China…And in spite of everything that's going on, we focus on innovations and the
long-term importance of hygiene and health.” (4/23/20 Trading Statement)
10. Pental Ltd (Australia): “Experiencing elevated levels of consumer demand for White
King disinfectant cleaning products and Country Life anti-bacterial soaps.” (4/24/20
Trading Statement)
11. Hengan International (China): “Personal and household hygiene products industry
as the daily necessities continue to see firm support from steady growth of China's
economy and national income…growing hygiene awareness of citizens and their
pursuit of better living quality will continue to expand the personal and household
hygiene products market, bring more development opportunities to the industry.”
(4/16/20 Annual Report)
Factor’s Impact on CS Coverage
Clorox: The EPA endorsed Clorox as a product effective in killing the COVID-19 virus,
along with Lysol and Purell. Scanner data for the 4wks ending 4/4/20 shows multipurpose
cleaners up +150%, bathroom cleaners +120%, and bleach up +130%. This excludes
bulk of wipes business skewed to online and club channels. Company reported industry
leading growth in Disinfectants.
o 24% of business in Health & Hygiene with ~8% in disinfectant wipes (42% market
share). CEO commented company is “ramping up production to accommodate higher
demand in US… includes production of Clorox wipes, sprays, and bleach…sales of
product categories such as wipes rose double-digits…” More information on the
impact of COVID-19 and influenza here.
Colgate: Personal Care is 20% of the global business. We estimate soaps (Softsoap and
Protex) are a high single digit percentage of Colgate’s business. Scanner data for the 4wks
ending 4/4/20 shows soaps +130%. This excludes online and club sales. Company
reported strong volume growth in Oral Care and Soaps.
Procter & Gamble: Various categories of exposure from Family Care (Puffs facial tissue),
Home Care (Swiffer and Comet cleaners), and Personal Care (Vicks cough, cold, flu relief
and Safeguard soap). We estimate these various segments are a high-single digit
percentage of Procter’s business. Scanner data for the 4wks ending 4/4/20 shows bath
tissue and kitchen tissue +85% and OTC cold/flu medication +90%. This excludes online
and club sales. Company reported strong volume growth in Home Care and Health.
5 May 2020
Consumer Staples 5
2. “At-Home” Orders Shut On Premise Locations
Factor Read-Throughs 5/1/20
12. Keurig Dr. Pepper: “We experienced declines in our away-from-home business due
to office closures and the slowdown of hospitality and fountain foodservice.” (4/30/20
10-Q )
13. Coca-Cola Europe: “Overall, we believe that roughly 75% of our away-from-home
channel has been severely impacted by lockdown measures with the widespread
closure of restaurants, bars and leisure facilities. The remaining 25%, to include
independent convenience and petrol stations, while still open for business, also not
been immune to the crisis given less people are on the move. Since the crisis began in
mid-March, we've seen our away-from-home volumes decline anywhere between
45% to 85% across our markets as restrictions widened and lockdown measures
were implemented.” (4/28/20 Earnings Call)
14. Mondelez: “Our world travel retail business dropped significantly, and also away-from-
home was impacted. All this led to reduction in traditional trade and the away-from-
home hit gum and candy, which is sold more often in away-from-home channels.”
(4/28/20 Earnings Call)
15. Molson Coors: “Specifically, we estimate that approximately 23% of our 2019
consolidated net sales resulted from on-premise consumption, with approximately
17% of our North America net sales and approximately 50-55% of our Europe net
sales each coming from this important part of the industry, and in many of our markets
the on-premise business has been reduced to zero.” (4/30/20 Earnings Call)
16. Carlsberg: “The on-trade sector is severely impacted across markets. For the group,
on-trade accounts for around 25% of volume. The on-trade decline impacts our mix
due to lower premium volumes and draft beer. We saw an impact on government
lockdowns already in Q1, and there will be an even larger impact in Q2 as the
lockdowns have extended. H2 will be impacted as well, although it is currently
impossible to predict the magnitude of this.” (4/30/20 Trading Update)
17. Becle SAB (Mexico): “We also began to see the impact of the COVID-19
containment measures across Mexico with nearly all on-premise locations closed
beginning in March which represent approximately between 20% to 25% of our net
sales. We expect the on-premise closures to continue at least through May, mainly
impacting our wholesaler channel… the problem in Mexico is that on-premise is closed,
but also a lot of states are closing -- prohibiting the sale of alcohol. So then it's even
worse than probably any country.” (4/30/20 Earnings Call)
18. Coca-Cola: “The biggest impact has been a sharp decline in the important away-
from-home portion of our business, which includes eating and drinking channels, as
well as on-the-go orientated channels like convenience retail….While our exposure
varies across markets, away-from-home broadly represents 50% of our business,
given our strong share positions. In some markets, like the US, drive-thru operations
and carryout helped offset some of the pressure, but most restaurants are operating
on limited hours and are seeing overall trips decline sharply.” (4/21/20 Earnings Call)
19. Unilever: “Several factors that adversely impacted the quarter were: first, a decline in
our global Food Solutions business, as restaurants, canteens and cafés were closed;
secondly, a decline in out of home ice cream, as many out of home retailers like
leisure sites, travel hubs, beaches and tourist destinations were closed… Out of home
ice cream sales are about €3bn annually, of which nearly 70% is generated in the
second and third quarters. All the markets are different, but we've typically seen out of
home ice cream sales decline by 50% or more when a country moves into
lockdown…We also have a €2.5 billion global food service business, which is also
heavily impacted as cafés, restaurants and canteens close, and we're typically seeing
5 May 2020
Consumer Staples 6
sales declines of around 67% when a lockdown happens in food service channels.”
(4/23/20 Trading Statement)
20. Essity: “Going forward, we do expect lower volumes [in Professional Hygiene] due to
the fact that fewer people are going to restaurants, staying in hotels, and working from
home and not working from offices. This will have a negative impact and we saw that
in China, for instance, in the first quarter where Professional Hygiene had a big drop in
volumes in the first quarter due to lockdowns.” (4/23/20 Trading Statement)
21. Heineken: “Europe beer volume declined 15.3% in March. Third party volume
declined 49.2% in March as on-trade outlets closed impacting our wholesale
operations. In Italy, most of the month of March was under lockdown and beer volume
declined by -33%, with volume to on-trade customers declining -75% and volume to
off-trade customers up low-single digit. In Spain, in March, total volume declined -
25%, with volume to on-trade customers down by -50% and volume to off-trade
customers up in the low-teens. In France, in March, volume declined mid-single digit,
as the decline in volume to on-trade customers of -50% was partially offset by the
high-single digit volume growth to off-trade customers.” (4/21/20 Trading Statement)
22. Boston Beer: “We’ve seen complete devastation of our keg business, it’s down near
zero and it happened very quickly. So it’s hard to – so that’s what we know. The
lockdown in the states where it’s been implemented has meant that our keg business
is a trickle. How much of that will come back, it’s anybody’s guess. I mean, in a
normal year there is a decent amount of turnover in restaurants anyway. They go out
of business, new ones take their place. So there will be a lot that don’t reopen, some
of those will probably going to close during the year anyway. It’s probably beyond my
capacity to predict how much lower the on-premise business will be in the short term
and the long term, other than it’s going to be lower and it’s going to be significantly
lower.” (4/22/20 Earnings Call)
23. Celsius Holdings: “We feel you're going to see some heavy promotions in June and
July [in North America], which we're already talking to many retailers. Retailers are
going to get -- they need to get consumers back into retail. So you're going to see a
lot of interesting promotions, and enticing consumers to get out and get into retail now
that everyone is getting somewhat accustomed to this at pickup and home delivery.”
(4/21/20 Update)
24. Danone: “Sales in Waters more impacted by food service channel closure as around
40% of the division’s sales are normally consumed away from home.” (4/21/20
Trading Statement)
25. Arca Continental (Mexico): “The On-Premise channel [in Mexico] has a mix of
maybe less than 10%. In the U.S., On-Premise is larger in terms of mix, it's about
15%. That is the channel that has collapsed in the last few weeks, and that is natural.
It's only a takeout service in most of those outlets. So we're seeing declines that are
not down as 0, but they're significant… In the convenience channel, consumers are
making less trips into the stores, and we're seeing slower growth in immediate
consumption packages. Many of our customers, especially universities and colleges,
the travel and hospitality industry and our foodservice on-premise customers are either
closed or have moved to a pickup delivery mode of operations. As a result, volume
performance in the FSOP and vending channels was down significantly in the last 2
weeks of March.” (4/23/20 Earnings Call)
26. Coca-Cola Amatil (Australia): “The first 2 weeks of April have seen 15% volume
declines compared to the previous period with the On-The-Go channel being the main
contributor as volumes were down around 50% on the prior year. For Alcohol &
Coffee, the first 2 weeks of April saw volumes decline by around 20% with on-
premise outlets being severely impacted by the government restrictions.” (4/17/20
Earnings Call)
5 May 2020
Consumer Staples 7
Factor’s Impact on CS Coverage
Multiple countries in lockdown, ranging from “shelter-at-home” to complete restriction of
movement and closure of manufacturing and recreational facilities. In the US, at least 40 states
have closed all restaurants and bars through the end of April. A few are starting limited re-
openings in May. Many workplaces have shifted workers to “work from home” schemes. All
these actions will significantly increase “at-home” consumption in the near-to-medium term.
A shift to at-home entertainment and dining could benefit soft drinks companies (Coca Cola,
Pepsi, Keurig Dr. Pepper), snacking companies (Pepsi’s Frito), and other niche beverages
(Monster, BellRing’s Premier Protein). This would be offset by closures in recreational dining.
Bars & Restaurant (On-Premise) risk:
o The CDC recommends no gatherings of greater than 10 people. Bars and restaurants
are now largely shut, except for takeout. With even fast food and QSRs largely moving
to takeout/ drive thru, we see increased risk to CSD manufacturers.
o Alcohol sales on premise (~16% of total industry) to decline. MillerCoors and
Constellation Brands negatively impacted as they are the #2 and #3 brewers by US
sales on premise.
o Boston Beer Co. 2.5% on premise volume share with no Top-10 brands. On our
estimates, on premise volume is ~10-15% of volume. Fast growing Truly protected
as its predominantly consumed at-home. CEO confirmed no lay-offs yet, with
production capacity actually expanding. Three taprooms shut (we think insignificant to
business). Company reported results, stating, “keg business devastated.”
o Constellation’s Corona and Modelo hold 9% industry volume share and 10% dollar
share. On our estimates, on premise volume is ~14% of total volume.
o MillerCoors’s Miller Lite, Coors Light, and Blue Moon are three of the top ten on
premise brands with 20% industry volume share and 19% dollar share. Per company
on premise volume is ~23% of total MC volume (17% in North America, 50-55% in
Europe).
Risk to CSDs & C-stores:
o Coca-Cola 40% of sales via on premise domestically and internationally (% varies by
markets). U.S. QSR drive-thru is the largest piece (~50%) with a smaller piece at full-
service restaurants and bars/café/cinemas. Internationally, the “hotel-restaurants-café”
channel is important.
o PepsiCo 10% of sales with PBNA at mid-to-high teens with Frito-Lay in low teens,
implying International very low.
o Keurig Dr. Pepper We estimate 20% of sales. Mitigated by at-home coffee brewers
and pods business.
Convenience Stores: Monster is highly exposed to convenience stores. C-stores to
remain open as a part of “essential services,” the impact from workers staying at home or
shifting impulse purchase dollars to essentials is high.
5 May 2020
Consumer Staples 8
3. Favorable for Pantry Loading
Factor Read-Throughs 5/1/20
27. Molson Coors: “While brand volume benefited from pantry loading towards the end of
March, as discussed below, pantry loading has not continued into April.” (4/30/20
Earnings Call)
28. Colgate Palmolive: “In categories where we saw pantry loading like Oral Care, we've
seen the categories come down in consumption as you would expect, given the pantry
load that was in March and no specific reason why consumers would be brushing their
teeth more… Hill's [Pet Nutrition] growth was led by North America where continued
double-digit growth before the pandemic was augmented by consumer pantry loading
late in the quarter. The e-commerce business was up by more than 50% as we drove
strong growth across all platforms.” (5/1/20 Earnings Call)
29. Reckitt Benckiser: “Improved penetration and usage, particularly for products like
Dettol and Lysol, may well sustain, although we will likely see some unwinding of
‘pantry load’ as we work our way through the crisis… Likely significant pantry-loading
activity makes it difficult to fully assess changes in underlying consumption caused by
COVID-19; lack of clarity makes full year assessment challenging as material de-
stocking could reduce sales should COVID-19 effects pass.” (4/30/20 Trading
Statement)
30. Church & Dwight: “Consumption across our combined brands is slightly positive in
April despite domestic pantry de-loading…. We have seen [pantry loading] in other
countries, particularly if we look at North America, in Canada and Mexico and many
European countries as well. So it is not simply a U.S. phenomenon.” (4/30/20 Press
Release and Shareholder’s Meeting)
31. Altria: “We believe that our preliminary estimates of consumer pantry loading should
be an adjusting factor to reported volumes due to its high likelihood of near-term
volume payback…To estimate the impact of consumer pantry loading, we analyze
shipments to retail and retail sales data and compare them against recent and
historical trends. During the first few weeks of March, we observed stable retail foot
traffic and elevated tobacco expenditures per transaction. However, in late March,
retail foot traffic decreased significantly as stay-in-home orders were enacted, but
tobacco expenditures remained high. As we said before, it's difficult to identify trends
based on short time periods. This is especially true in such a fluid environment.”
(4/30/20 Earnings Call)
32. Becle SAB (Mexico): “I would add that Nielsen does represent only 25%, or maybe
during these times, maybe up to 30% of our depletion business. So when you look at
those weekly Nielsens, there was one spike around March 21 where you saw an
inordinate amount of volume compared to the other weeks that surrounded it. So I
think that might have been your pantry loading. But since then, I think it's really
replenishment. And I think those consumers who were going on-premise and ordering
a different drink week-to-week had to fill their liquor cabinet with maybe some
different spirits. So I think we're enjoying some of that as well as I think it's indexed
very high for us in those stores that are reporting to Nielsen, which tend to be the
more big box retailers, where I think they're picking up a majority of the shopping right
now.” (4/30/20 Earnings Call)
33. Procter & Gamble: “Top line results [in 1Q] obviously benefited from consumer
pantry loading in preparation for in-home quarantining. We're planning for pantry
inventory levels to eventually return to normal. This higher level of consumer demand
will serve with our ramp-up in production levels and the depletion of retailer inventories.
As at-home inventory decreases, we expect to refill the retail inventory pipeline. We
believe the net effect of all of this shifted about 2 points of sales growth on a global
basis from Q4 into Q3.” (4/17/20 Earnings Call)
5 May 2020
Consumer Staples 9
34. Kimberly-Clark: “Volumes were up 8%, including significant shipments to support
consumer stock-up related to the COVID-19 outbreak. That stock-up occurred in all
major geographies and benefited all 3 segments, in particular Consumer Tissue… We
expect most, but not all, of the demand increase from consumer stock-up will reverse
out later in the year. However, with more people at home and also paying closer
attention to personal hygiene, it's likely that Consumer Tissue consumption will be
higher during shelter-in-place periods…I think the consumption effect – largely the
stock-up effect, was largely a developed market phenomenon. So, North America,
Western Europe, Australia, New Zealand and Korea to some extent.” (4/22/20
Earnings Call)
35. Unilever: “Increased in-home consumption and household stocking, particularly the
USA and Europe, contributed to volume-led growth in savory and in dressings. Knorr
saw low single-digit growth, whilst Hellmann's grew by double-digits… First of all,
household stocking in the short-term. This is a pull-forward in demand due to
stockpiling ahead of lockdowns, for example, of dried foods and hygiene products.
This is a change in buying patterns rather than a step up in consumption.” (4/23/20
Trading Statement)
36. Essity: “So, the stocking up or stockpiling that we saw was not only related to
Consumer Tissue or toilet tissue, we also actually saw stockpiling in feminine, in baby
care, and in incontinence care.” (4/23/20 Trading Statement)
37. Danone: “We need to address significant changes in consumers’ buying behaviors,
with unprecedented swings in weekly demand accentuated by stocking patterns in the
first weeks, the shift from out-of-home to at-home food consumption, as well as
shifting preferences to larger pack sizes… A sharp rise in sales in the month of March,
at a high-single-digit rate, boosted by the short-term effects of both a shift to at-home
consumption as well as pantry loading in Europe and North America.” (4/21/20
Trading Statement)
38. Nestlé S.A.: “From a geographic perspective, a majority of markets, but particularly
those in North America and Europe, reported significantly increased growth, partially
supported by consumer stockpiling. It happened essentially in a short time frame,
particularly in March for EMENA and in the later part of March for the Americas… In
terms of product categories, product perceived as everyday necessities saw elevated
demand with culinary products, pet care, coffee and Nestlé Health Science all
reported significant sales increases. By contrast, categories such as confectionery and
ice cream posted sales declines, reflecting reduced impulse buying and lower demand
for seasonal and gift-giving products.” (4/24/20 Earnings Call)
39. Coca-Cola: “In the at-home channels, we've seen some early pantry loading,
particularly in certain developed markets, at the beginning of many of the lockdown
phases. Then, as we get past the initial lockdown, levels normalize. In India, the
severity of the distancing measures has negatively impacted at-home as well, simply
due to the significant reduction in shopping trips. At this stage, it's too early to
determine exactly what level at-home trends will stay like … You see what consumers
deem is essential spikes up and stays up in the at-home channels. Some things like
beverages sell more, but not nearly enough to compensate for the losses in the away-
from-home channels. Some categories and the smaller SKUs are heavily deprioritized.
It's certainly not the case that e-commerce is offsetting the losses from away-from-
home. Relatively, e-commerce, even though it's doubled in sales for beverage
category, it's still a very small percentage of the total beverage category.”” (4/21/20
Earnings Call)
40. Boston Beer: “We’ve started building the inventory at the beginning of Q1, all the
way into March. Then COVID happens and there was significant pantry loading, as
with many products… [in early April] it’s less pantry load and there’s a bit of an impact
of pantry load that is coming back.” (4/22/20 Earnings Call)
5 May 2020
Consumer Staples 10
41. Arca Continental (Mexico): “During the last weeks of March, our U.S. operations
saw the benefit of pantry loading from our consumers. However, we expect a
[negative] impact of the post pantry loading effect during the second quarter, coupled
with a significant impact in consumer traffic due to increased social distancing and
shelter in place restrictions throughout our franchise territories.” (4/23/20 Earnings
Call)
42. Pernod-Ricard (France): “It's fair to say that in both [U.S. and Europe], just before
the confinement, there was a significant increase [in] pantry load. And those positive
trends have been as well, to a lower extent, but still positive in the days and weeks
after. Suggesting that there's some reordering happening after the pantry load. So this
is something that we'll need obviously to carefully monitor and understand to see how
much this is actually consumed at home. When we look at the consumption data,
especially in the U.S., we know that a significant part of the off-trade sales, I think it's
40%, is related to consumption in groups of 5 people and more, so -- showing that
part of the home consumption could be limited in the current environment where
gathering is not allowed.” (4/23/20 Earnings Call)
Factor’s Impact on CS Coverage
Quarantine, self-isolation, and social distancing orders spurring heavy traffic into grocers as
consumers stock-up. Scanner data for the 4wks ending 4/4/20 shows Packaged Food and
HPC growth acceleration in March with sequential deceleration in early April.
PepsiCo’s Frito Lay: Pantry-loading will benefit the largest snacking company in the US.
Snacks and Staple foods are 43% of the global business. Scanner data for the 4wks
ending 4/4/20 shows potato chips +20% and tortilla chips +30%.
BellRing Brands: Premier Protein over indexed to club channel (Costco and Sam’s Club
60% of sales). Amid coronavirus concerns, warehouse clubs seeing increased traffic.
Procter & Gamble Bounty paper towels and Charmin toilet paper: Consumers
loaded up on paper towel and toilet paper products as they prepared for the possibility of a
pandemic-shutdown. While we expect a lower chance of a sustained surge (vs. cleaning
products), this will be a near-term boost. Scanner data for the 4wks ending 4/4/20, bath
tissue and kitchen tissue +80%. This excludes online and club channel sales.
Colgate toothpaste: We attribute this to pantry loading rather than health & hygiene as
usage seems unlikely to increase. We expect a reversal in the next few quarters. In the
scanner data for the 4wks ending 4/4/20, toothpaste +35%.
Church vitamins: Potentially a mix of H&H and pantry loading, vitamins takeaway for the
4wks ending 4/4/20 was up +100%.
5 May 2020
Consumer Staples 11
4. Recession Trade Down
Factor Read-Throughs 5/1/20
43. Colgate Palmolive: “We typically found not significant trade down in recessions, but
you do get some for sure.” (5/1/20 Earnings Call)
44. Church & Dwight: “It's too early right now to make any predictions with respect to
trade down. Once all the shelves get restocked, that's when we'll be able to tell,
what's attracting consumers to move from premium to mid-tier or to value. I mean,
your question, I'm sure, is more directed towards laundry detergent. It's one of our
biggest categories, and we benefited greatly back in 2009.” (4/30/20 Earnings Call)
45. Clorox: “Moreover, our portfolio has proven to be relatively recession resilient in the
past as major Clorox categories like trash, grilling and food generally benefit from
consumers eating out less as well as water filtration as consumers recognize the
superior value of Brita filtered water when comparing to bottled water.” (5/1/20
Earnings Call)
46. Keurig Dr. Pepper: “As we look to a future in which a recession seems to be a near
certainty, we also see further opportunity for the Keurig system to expand as
consumers shift more of their coffee preparation in home… We also know that CSDs
are remarkably resilient to a recession, and we have a wide range of pricing, pack size
and promotion tactics to ensure our continued relevance, should consumers become
more value sensitive in the future.” (4/27/20 Earnings Call)
47. Estee Lauder: “As I mentioned in my prepared remarks, we are mindful that there
could be a recession, certainly impact, but hoping that by holiday, people are ready to
shop again.” (5/1/20 Earnings Call)
48. Mondelez: “It's difficult to estimate because this is a very particular type of recession.
We don't know how fast and how we're going to get out of it. So we base a little bit
our learnings on past recessions. Our categories are durable, and they are not that
much affected by these recessions we've seen in the past.” (4/28/20 Earnings Call)
49. Procter & Gamble: “In terms of recessionary dynamics as they relate to private label,
we see a number of different behaviors which affect that overall equation. There are
certainly a subset of consumers for whom price becomes a significantly greater portion
of their personal value equation. And that will, in some cases, result in trade-down to
private label. Our job becomes having an alternative for them that allows them to
achieve the same objective within our branded portfolio, and we have many more
rungs in that pricing ladder now than we had during the last recession.” (4/17/20
Earnings Call)
Factor’s Impact on CS Coverage
1Q US GDP declined -5%, marking the start of a likely recession. Experts and companies
cannot agree on the length of the recession, but most agree the depth will be significant in at
least 2Q.
Reynolds Consumer Products: Benefits from at-home dining as market share leader in
aluminum foil (65% branded share) and #2 player in trash bags and disposable tableware.
A defensive company given 95% household penetration and no international presence.
Above Premium Beer (Constellation, Boston): Both companies 100% premium
products. Constellation’s Corona and Modelo brands particularly exposed due to pricing
disparity with mainstream and value brands.
5 May 2020
Consumer Staples 12
5. Big Brands Secular Effect
Factor Read-Throughs 5/1/20
50. Estee Lauder: “Beloved heroes like Estée Lauder's Advanced Night Repair, La Mer,
Crème de la Mer Treatment Lotion and Concentrate and Clinique's Moisture Surge
has been seeing strong global demand online since the outbreak, demonstrating the
dynamics of big brands.” (5/1/20 Earnings Call)
51. Colgate Palmolive: “And as I mentioned earlier, I think big brands are going to win in
this environment, whether it's in Asia or anywhere around the world. The proven
efficacy positioning the scientific knowledge that we have and how we communicate
that in our brand purpose, particularly around our core businesses, will bode well
moving forward. (5/1/20 Earnings Call)
52. Molson Coors: “We have also focused investments against our best-known brands to
stay top of mind. With significant economic uncertainty, consumers are turning to big
brands they trust.” (4/30/20 Earnings Call)
53. Kraft Heinz: “And I think that the consumers are coming back to big brands. As a
result, our leading iconic brands are growing household penetration in almost every
market, especially the developed markets like U.S., like Canada, like U.K.” (4/30/20
Earnings Call)
54. L’Oreal: “Big brands are definitely favored in times like these ones because
consumers go back to the brand they know they trust, and this is definitely what we
see. As you know, it was already a trend for our brands because in the past 2, 3 years,
our big brands got more powerful than ever. But I think that in this period of crisis, it
will be even more, number one.” (4/16/20 Earnings Call)
55. Danone: “This is a time for big brands if we act properly. The simplification of SKU
assortments and ranges in the trade is very significant. They need reliable partners.
They need partners that can act at scale. This is where large brands, large companies
can operate in an advantage. And maybe for the first time, the food revolution that
propelled all these small, nice brands on the shelves maybe put on hold for some time
or may transform actually in the coming periods.” (4/21/20 Earnings Call)
Factor’s Impact on CS Coverage
Global CPG is the most likely beneficiary of the “Big Brands” effect. We will be watching to see
how much of this impact lingers in 2Q after the initial wave of pantry loading.
Beer Experts: Demand for Big brands related to pack size: Experts warn it is too
early to read into sudden positive inflections for Bud Light and Miller Lite. Neither believes
the improvement is structural. The mainstream light category is still losing share as rate of
sales lags the industry. The demand spike is likely due to supply as established brands
more reliably sell large pack sizes (24/30 counts), a tailwind as consumers weigh extended
at-home consumption and value.
5 May 2020
Consumer Staples 13
6. Geographic Exposure: Emerging Markets
Factor Read-Throughs 5/1/20
China
56. Estee Lauder: “Towards the end of the quarter, Asia/Pacific began to show signs of
recovery and some markets in the region, including mainland China and Taiwan, ended
the fiscal 2020 third quarter with net sales growth… our business in Mainland China is
further improving as retail stores began to reopen with shortened hours in March. By
mid-April, virtually every door had reopened. We are encouraged by China efforts in
containing the virus and the initial signs of recovery. We expect to return to double-
digit sales growth in Mainland China in the fourth quarter.” (5/1/20 10-Q, Press
Release)
57. Colgate Palmolive: “In China, we have begun to see the country open back up and
trends are improving in Q2, but we caution that the country still is not back to pre-
crisis levels.” (5/1/20 Earnings Call)
58. Becle SAB (Mexico): “What we're already seeing from China is that, where the on-
trade has been open now for a good 4 weeks, the uptake in the on-trade is still
relatively low, perhaps penetration levels are only around 30%.” (4/30/20 Earnings
Call)
59. Carlsberg: “What we see in China with regards to the recovery is that the demand is
picking up. Outlets are opening, so more than 60% of the dining is open; for the off-
trade is for more than 90% open; the traditional trading is around 90% open. The only
thing that really still impacts us is the night entertainment outlets because they remain
closed. We see good growth in our modern off-trade and e-commerce, and it seems
as home consumption remains at a high level. However, we see here also that
consumers remain hesitant to visit the restaurants, and they did not rush back to
restaurants to celebrate. And in general, we can say that we have changed from crisis
mode to recovery and rebound.” (4/30/20 Earnings Call)
60. Procter & Gamble: “At CAGNY, we were internally expecting organic sales in
Greater China to be down as much as 20%. We did much better than we were
expecting in China, down only 8% ex-travel retail. We saw a strong lift in our
categories in e-commerce to make up a portion of sales lost in closed physical stores.
We quickly restored production capability, built share as a result, and are now
operating at very close to full strength… Our business there is rebounding nicely, both
from an operations standpoint and from a consumption standpoint. We are seeing
continued significant demand in our categories and the supply and retail inventories are
being steadily rebuilt.” (4/17/20 Earnings Call)
61. Coca-Cola: “We can look to China for some early learnings about the various phases.
I'm happy to say that our plants there are all operating, and employees have returned
to the company offices in Shanghai. We're seeing encouraging signs of increased
consumption as outlets reopen, resulting in sequential improvement in China. However,
the consumption is still lower than prior year and we expect a full recovery to take time,
especially as there are still limits on crowd sizes.” (4/21/20 Earnings Call)
62. Unilever: “Restrictions in China began to be eased at the end of March, and although
some restrictions have now been reintroduced in selected big cities, Chinese
consumers are not yet going back to how things were before. There's a new normal
emerging such as the attitude of consumers to return to out of home dining. Although
the restaurant opening rate continues to increase and is currently sitting at around
about 60%, the capacity utilization is cut somewhere between 50% and 70% to
ensure that physical distancing is maintained in those restaurants.” (4/23/20 Trading
Statement)
5 May 2020
Consumer Staples 14
63. Nestlé SA: “China posted a sharp sales decline due to movement restrictions in place
for almost a full quarter, limited consumer stockpiling as well as a relatively higher
exposure to out-of-home channels. In addition, we also had to manage some supply
chain challenges post Chinese New Year, but we were able to gradually restore
production and logistics to level close to normal by the end of March.” (4/24/20
Earnings Call)
64. L’Oreal: “China is already seeing an encouraging recovery in beauty product
consumption. The example of China has shown the current situation does not call into
question consumers’ strong appetite for beauty products, which remains intact. The
market should recover quickly as soon as measures to close sales outlets are lifted.”
(4/20/20 Trading Statement)
65. Celsius Holdings: “When we look at China, they saw heavy loading Celsius into key
retailers before the Chinese New Year in December, early January. And then with the
closures and the controls that were put in, retail has been affected. So right now,
everything is getting back to normal, and you're starting to see a lot of heavy
promotions, to get consumers back into retail.” (4/21/20 Update)
Latin America
66. Mondelez: “And then Mexico, we think that we have a macro environment that's soft,
but the operations are continuing to run well. They're related to the crisis and we see a
deeper contraction.” (4/28/20 Earnings Call)
67. Coca Cola FEMSA: “Brazil was the first country in Latin America with a confirmed
COVID case, on February 26. As of April 16, certain states started to transition to
partial lockdowns. Shortly after Brazil, Mexico confirmed its first case of COVID-19 on
February 28. By March 30, the government announced the suspension of all
nonessential activities for the month of April, which was later extended for the month
of May. Countries like Argentina, Colombia and Panama, took more strict measures,
starting March 15. We had seen channel, category and package mix shifts driven by
consumers adopting the behaviors to comply with the new social distancing realities.
Consequently, we have seen declines in our on-premise channel partially offset by
increases in the modern trade and home delivery channels. The traditional trade
channel comprises mainly of mom-and-pop stores and has proved relatively resilient,
offering convenient proximity for consumers across our markets. Since most of our
volumes are distributed through the traditional trade channel, our exposure to the on-
premise channel is relatively low, representing approximately 50% of our consolidated
volumes.” (4/29/20 Earnings Call)
68. Colgate Palmolive: “And we can't predict exactly where it's going to happen.
Obviously, we've seen things creep up in terms of the number of incidences in Brazil.
So what happens there going forward...So again, it's the unpredictability of what we're
seeing all around the world.” (5/1/20 Earnings Call)
69. Unilever: “Across [Latin America], there was relatively limited impact in the quarter
from COVID-19, with a small positive impact from household stocking in late March
and a negative impact from out of home ice cream. We believe that much of Latin
America is in the early phase of the COVID-19 cycle. Conditions in the region
generally remained challenging with volatile currencies, particularly the devaluation in
the Brazilian real.” (4/23/20 Trading Statement)
70. Heineken: “In Brazil, beer volume declined mid-single digit. Our premium and
mainstream portfolios grew double digit. The economy portfolio declined in the mid-
twenties. In March, beer volume declined in the mid-twenties. In Mexico, beer volume
increased low-single digit. Following government orders, our breweries were
suspended for the month of April. At that moment we estimate customers held 2 to 3
wks inventory.” (4/21/20 Trading Statement)
5 May 2020
Consumer Staples 15
71. L’Oreal: “Brazil, Chile and Uruguay remained positive for the quarter. Mexico had
mixed results. Columbia and Peru were heavily impacted by the closure of beauty
stores and perfumeries.” (4/20/20 Trading Statement)
72. Arca Continental (Mexico): “What we can say is the Peru and Ecuador are the
hardest hit. Mexico and Southwest seem better so far…On March 16, the Peruvian
government declared a nationwide lockdown… These restrictions stopped movement
of people by 90% and 1/3 of our customers in the traditional channel remain totally or
partially closed. It's important to mention the national curfew begins at 6pm. So the
window available for the sale and distribution of our products has been reduced
considerably.” (4/23/20 Earnings Call)
Emerging Markets
73. Marico (India): “In India, while the macroeconomic situation prior to the COVID
outbreak was particularly challenging, the disruption leading to and during the national
lockdown over the last fortnight of March, brought it to a near standstill. Bangladesh
and Southeast Asia were relatively less impacted due to restricted lockdowns imposed
in the last few days of the quarter.” (5/4/20 Earnings Call)
74. Colgate Palmolive: “In India, we are still experiencing disruptions to both our supply
chain and our retail network, consistent with what you have heard from other
companies. Trends have started to improve, and our plans are beginning to ramp back
up. We still expect an impact from the crisis in the second quarter. In Africa/Eurasia,
our strong net sales and organic sales growth was driven by volume growth across
every hub. Our focus on faster-growth channels continues to pay dividends,
particularly in terms of discounters in Russia and Turkey. We saw a continued
improvement in our South African business.” (5/1/20 Earnings Call)
75. Reckitt Benckiser: “So overall developing markets, we had mid-single-digit growth in
emerging markets overall. It's 40% of our business. What you're seeing here is clear
demand for products like Veja, in Brazil; Dettol across Africa; Dettol in India, which
actually had a mid-single-digit performance; as well as if you look at some of the
businesses in Southeast Asia and China where you see very strong performance of
brands like Dettol.” (4/30/20 Earnings Call)
76. Mondelez: “India is 10% of our emerging markets. Significant closures of the
traditional trade at the moment, which is about 75% of our revenues. There is clear
some short-term impact, but we expect a sequential easing of restrictions. We have a
very strong distribution system. So I think the return there will be fast. Southeast Asia,
is really into a similar position as India. China is already kind of back, and India and
Southeast Asia will go fast… A second cluster is Eastern and Central Europe, not that
heavily affected in the first quarter. There will be more lockdown restrictions in the first
half of April. Overall, traditional trade is only about 20% of revenues there. This part
will not be as heavily affected, and we will be back to normal quite strongly… I would
say 2/3 of our emerging markets, we feel pretty good about. And then the others,
that's where we have much stronger traditional trade. I'm talking about Argentina,
Brazil, Middle East and Africa... I think those will take a little bit more time. There is a
dynamic of traditional trade that is closed with some devaluation, so there will need to
be some pricing. It's only 1/3 of our emerging markets, but that really remains
somewhat challenged, and it will probably take us 6 to 9 months to return here.”
(4/28/20 Earnings Call)
77. Pepsi: “Our businesses delivered strong organic revenue growth as developing and
emerging markets led the way with a double-digit increase in organic revenue in
Mexico, India, Egypt, Turkey, Pakistan, Saudi Arabia and South Africa. High single-
digit growth in Colombia and mid-single-digit increase in Brazil, Russia and Poland.”
(4/28/20 Earnings Call)
5 May 2020
Consumer Staples 16
78. Procter & Gamble: “Right now in emerging markets, we're operating and thinking
rightly or wrongly day by day, because the situation changes dramatically. India is a
good example. That market is effectively shut, and will be at least through the end of
April. We're working with governments as I mentioned in my prepared remarks to
establish the essential nature of our product categories for their citizens, and therefore
gain the ability to operate, which we largely have. That's been a significant focus area
over the last five weeks and it's a daily endeavor.” (4/17/20 Earnings Call)
79. Kimberly- Clark: “…Central and Eastern Europe was up high-teens. Brazil was up, I
think, low double-digits as well. So, we're seeing very good performance across our
D&E markets. Notably, I also would tell you there was much less stock-up behavior in
the D&E markets. The China team would say there was none in our categories. I do
think in Brazil, we saw a little bit in Consumer Tissue.” (4/22/20 Earnings Call)
80. Essity: “We did see a sort of a stockpiling also in Latin America, which then explains
the high-growth numbers that we saw there and also in some other what we define as
emerging markets like in Eastern Europe and Russia, while that was completely offset
by the very negative growth in China.” (4/23/20 Trading Statement)
81. Heineken: “In Nigeria, beer volume declined high-single digit in March, following a
price increase in February and the ban on distribution of alcoholic beverages late
March. The alcohol ban is applicable in some states where we continue to sell non-
alcoholic malt drinks. In South Africa, a ban on sales, production and distribution of
alcoholic beverages starting the last week of March. Total consolidated volume
declined in the mid-twenties in March. In Egypt, beer volume declined by 50% in
March following a drop in tourism.” (4/21/20 Trading Statement)
82. L’Oreal: “After a good start of the year, March was impacted by lockdowns and store
closures in many countries of Central Europe, as well as Israel, whilst countries such
as Russia or Turkey have gone through partial shutdown. The Zone experienced a
drop in sales as of mid-March. Turkey, Czech Republic, Romania and Ukraine remain
positive. Food stores, pharmacies, convenience stores and hard discounters have
remained open in many countries, however drug chains, perfumeries, luxury retail and
hair salons have come to a stop. Middle Eastern and North African countries were hit
by lockdown measures in early March. The major malls in the Middle East have closed,
but foodstores and pharmacies remain open. Saudi Arabia, Egypt and Pakistan posted
strong growth. South Africa reacted with a complete shutdown in the last week of
March, which has had an immediate and important impact on sales.” (4/20/20
Trading Statement)
Factor’s Impact on CS Coverage
No company will escape geographic impact, negatively or positively, as over 200 countries now report cases. The duration of this crisis, region by region, will greatly influence other factors.
Western Europe (43% of cases): Colgate (17% of sales); Procter & Gamble (17%);
Coca Cola (15%); Molson Coors (12%); Monster (11%).
North America (34% of cases): Constellation (100% of sales); Reynolds (100%);
Boston Beer (100%); Keurig Dr. Pepper (100%); BellRing (97%); Church & Dwight
(89%); Clorox (85%); Molson Coors (80%); Monster (74%); Pepsi (61%).
Asia Pacific (16% of cases): Coca-Cola (25% of sales); Colgate (20%); Procter (19%).
Latin America (3% of cases): Colgate (26% of sales); Pepsi (11%); Coca-Cola (11%).
5 May 2020
Consumer Staples 17
7. Localized Supply Chains & Production
Factor Read-Throughs 5/1/20
83. Clorox: “Demand has been clearly unprecedented, and we're in uncharted territory for
our supply chain, in particular, in disinfecting products. Typically, if you think about
supply chains, they're built to be in the sweet spot of quality, safety, efficiency, cost,
effectiveness required to produce the necessary output for the long term. But when
you have situations like we faced where, in March, we saw demand spikes for some of
our disinfecting products of 500-plus percent, I think it's evident to everybody that
despite heroic efforts, you have out of stocks.” (5/1/20 Earnings Call)
84. Colgate Palmolive: “As the crisis hit, we mobilized our supply chain teams to offset
lost production in China to increase manufacturing elsewhere. We established strict
safety procedures in China, which allowed us to reopen our factories in a safe and
efficient manner. Now we are operating at over 100% of our expected capacity in
many of our Chinese plants, which is helping alleviate pressure in countries where
COVID is still a developing problem.” (5/1/20 Earnings Call)
85. Church & Dwight: “We have some suppliers of both raw and package materials and
co-packers that have had temporary shutdowns, generally for 1 or 2 days because of
COVID in order to sanitize their plants. We've had one in particular that has been shut
down for a couple of weeks, and now has come back online. For our part, in one of
our plants, we've reduced our production and outsource some of the production to co-
packers in order to make sure that the employees in that plant could be kept safe.”
(4/30/20 Annual Shareholder’s Meeting)
86. Mondelez: “We also incurred higher costs to keep clients supplied. The mix changed
due to higher demand for larger family packs, for instance. Our supply chain cost also
rose because we had to hire temporary workers. We had to increase compensation
and saw costs for distribution increase, and we did see some currency impacts in
emerging markets.” (4/28/20 Earnings Call)
87. Spectrum Brands: “Operationally, our second quarter results also demonstrated a
disciplined approach to supply chain disruptions that were experienced in China. While
this delayed some shipments and hurt our sales during the second quarter, by the end
of the quarter, our factories were at or near full capacity and our external supply chain
from China is in a similar position. At this point, we expect some shortages in supply in
the first half of the third quarter, but if our situation holds, we believe we'll be in a
position of recovery by the end of the current quarter.” (4/30/20 Earnings Call)
88. Procter & Gamble: “We may see months of sporadic production suspension due to
local quarantines or raw material supply. It's not just our operations that matter here.
It's those of our suppliers, of contractors and of our transportation partners. A lot must
go right in a challenging environment and not all of it will.” (4/17/20 Earnings Call)
89. Kimberly-Clark: “We're working with raw material suppliers and distribution partners
to ensure continuity and maximize deliveries. In some cases, we are incurring
additional costs to keep the supply chain rolling. We have experienced some disruption,
including temporary manufacturing slowdowns and shutdowns, but none have had
material impact to date. The supply chain environment is dynamic, and we expect
ongoing challenges in the near term.” (4/22/20 Earnings Call)
90. Coca-Cola: “We're clearly focused on adapting the supply chain. There is sourcing
the ingredients that we use in the concentrate and in the bottling plant, our own
concentrate manufacturing or fountain manufacturing, the bottling plants, and then
distribution. There have been challenges... There's been pressure at the borders,
whether it's the province borders or country-to-country borders, moving ingredients
that are shipped around the world…And so, the local supply chain is then able to work
as part of the food system, to allow to run the production systems and distribution. So
we've had some issues on timing of ingredients. Those are much better than they
5 May 2020
Consumer Staples 18
were a few weeks ago… Production facilities are largely running. Just a couple of
places that we see some plant shutdown. And distribution, we've largely kept up and
running everywhere. And there are issues in odd countries here and there, but
generally speaking, we've been able to adapt and it's a strength of having a local
supply chain in each country.” (4/21/20 Earnings Call)
91. Unilever: “There have been times where our factories have had to close but none for
more than few days. And as of today, we're running at an average of around 85% of
normal output across our 221 sites.” (4/23/20 Trading Statement)
92. Nestlé SA: “We also had to manage some supply chain challenges post Chinese New
Year, but we were able to gradually restore production and logistics to level close to
normal by the end of March.” (4/24/20 Earnings Call)
93. Boston Beer: “With our production system, we are fairly close to self-sufficient in
CO2. So, we’re very confident about our CO2 supply. We don’t need that much. We
have looked at other items, malt and hops are not an issue. And flavors we’re fine with.
So, in general, we don’t see issues in sort of our first-tier suppliers. … The thing that
we have worked very hard on is making sure we have adequate supply of cans even to
cover our upside forecasts, particularly sleek cans, and we’ve been assured from our
can suppliers that they are ready to supply the projections that we’ve given them.”
(4/22/20 Earnings Call)
Factor’s Impact on CS Coverage
According to the American Association of Port Authorities (AAPA), the port of Los Angeles had
a -19% decrease in TEUs in 1Q, with March TEUs down -31%. According to the AAPA, “the
demand just isn’t there… ‘People aren’t buying patio furniture for their backyards and things
like that, so there is just softening demand,’ … Port officials said production in China is
beginning to recover.” China is key to manufacturing and imports, where orders are still down.
Most Staples companies engage in majority-localized manufacturing, a relative benefit
compared to sectors with majority-outsourced production. That said some companies called out
risk from Southeast Asia-based suppliers for U.S. product (Monster, Coca-Cola). We believe
there are many indirect risks, such as wholesale artificial sweetener production, that may
present additional risks we are not considering.
We highlight a few exceptions:
Church & Dwight: Water flossing “Power Brand” Waterpik manufactured in China.
Keurig Dr. Pepper: Brewers historically manufactured in China. In response to last year’s
tariffs, supply chain “geodiversified” away from the country. Additionally, with peak selling
season around the holidays, seasonally lower demand offers some protection.
Constellation: Imported beer brands Corona and Modelo brewed in three facilities across
Mexico, accounting for 80%+ of company volume. Mexico production shutdown
temporarily restricting manufacturing.
5 May 2020
Consumer Staples 19
8. Travel/Travel Retail Shutdown
Factor Read-Throughs 5/1/20
94. Coca Cola Europe: “Tourism is a big part of the economy in France and Spain and
particularly Spain. So we're factoring that into what we're seeing at the moment. And
clearly, that starts quite early. So even in Easter. We've got a very high proportion of
the away-from-home business, predominantly tourism. So we'd expect that to be
impacted as we move through, particularly the second quarter. And then we're looking
to see what will happen with restrictions and potentially people taking the opportunity
to take holidays in Q3 and beyond.” (4/28/20 Earnings Call)
95. Remy Cointreau: “In global Travel Retail trends we can say that these trends have
been weak since last August, mostly due to the sharp decline of Chinese travelers
going to Hong Kong with protests. And this weakness clearly deteriorated further in
the fourth quarter with COVID-19 taking its toll on air traffic… Travel retail, as far as
we speak, is an empty channel. Nobody is traveling, operators are under pressure. So
Travel Retail is really in a bad shape. This will be the first one to recover once things
will be back to normal. But to do that, the flight situation should be better. So the real
negative element, I repeat, is Travel Retail.” (4/29/20 Earnings Call)
96. Estee Lauder: “In travel retail, the most successful products all over the world tend to
be what we call our hero products, so the products which have high loyalty, a high
repurchase rate because both as a gift and as for personal consumption, which are the
2 drivers of travel retail, people really want to buy products that they are pretty sure will
either replenish their habits or create exciting gifts. In that sense, there is the
possibility to recover at least part of the travel retail sales in the country of origins. And
we are working on this in every country, many emerging markets, in China, in U.S., in
Europe. However, in this moment, to be very clear, travel retail in Europe and U.S. is
basically closed.” (5/1/20 Earnings Call)
97. Pernod-Ricard: “Travel Retail, very interesting data in terms of very significant drop in
passenger numbers. And for instance, I believe the global forecast for the traffic in
April is -81%, so very consistent with the assumption we took for Travel Retail. And on
top of that, since end of March, there've been as well some very visible measures
taken by airports, for instance, to really reduce dramatically their cost with a
consolidation of operations in terminals, for instance, in Heathrow, the Changi Airport
announcing that they're going to shut the terminal for 18 months. So our view, to be
fair, that this channel will be durably affected. And our assumption for the weeks to
come is probably quite realistic.” (4/23/20 Earnings Call)
98. L’Oreal: “The Travel Retail market has fallen in all geographic Zones following the
progressive closure of airports and stores, and the standstill in air traffic… It should be
stressed the progressive reopening of stores in Northern Asia in particular. Note that
the importance of our major fragrances has been confirmed, as well as skincare –
especially dermocosmetics – in airport outlets. L’Oréal, in collaboration with duty free
operators, is preparing for a gradual recovery by geographic Zone.” (4/20/20 Trading
Statement)
99. Procter & Gamble: “The travel retail business specifically is round numbers $1bn
business. That's gone because there is no travel. Having said that, the products that
were bought in travel retail were consumed in markets, and our job needs to be to
make up for that travel retail loss in the near-term by serving those markets. And we
are seeing significant uptick already on SK-II consumption purchase in mainland China
which was one of the big sources of the travel retail demand.” (4/17/20 Earnings
Call)
100. Phillip Morris: “Government travel restrictions and related reductions in
passenger travel are having a significant impact on the company's duty-free business,
which contributed approximately 4% of total net revenues in 2019 and has relatively
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high unit margins reflecting its skew to premium brands. As a result of this premium
skew, only a portion of the COVID-linked duty-free volume decline is expected to be
recovered by the company's in local markets, and generally at lower margins.”
(4/21/20 Earnings Release)
Factor’s Impact on CS Coverage
International travel deteriorated quickly as countries closed borders and many limiting domestic
travel. The IATA reports worldwide flights were -70% at the start of April (ranging from North
America -45% to Europe -80%), resulting in a significant hit to the global tourism and duty-free
industry. 180mn Chinese nationals hold passports (vs. 147mn Americans) for whom nearly all
travel is halted.
Procter & Gamble: At its last investor day, the company stated SK-II is a ~$2bn brand
and that Olay is heavily skewed to China and the US (together 80% of sales). Prestige
beauty sales, are down from the expected slowdown in travel retail, although company
notes some offset from eCommerce. For example, SK-II opened its first travel “smart”
store in Singapore’s Changi Airport last year where Mainland Chinese visitors comprised
16% of total visitors in ‘19.
Beer: Closure of tourism regions a negative.
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Companies Mentioned (Price as of 04-May-2020) Altria Group, Inc. (MO.N, $38.01) Arca Continental (AC.MX, MXN92.04) BellRing Brands (BRBR.N, $17.11) Carlsberg (CARLb.CO, Dkr822.6) Church & Dwight Co, Inc. (CHD.N, $71.93) Coca Cola European Partners (CCEP.AS, €35.25) Coca Cola European Partners (CCEP.N, $38.77) Colgate-Palmolive Company (CL.N, $69.48) Constellation Brands (STZ.N, $163.75) Danone (DANO.PA, €61.5) Essity (ESSITYb.ST, Skr309.2) Femsa (FEMSAUBD.MX, MXN151.84) Heineken (HEIN.AS, €73.62) Hengan International (1044.HK, HK$66.5) Hindustan Unilever Ltd (HLL.BO, Rs2082.3) Jose Cuervo (CUERVO.MX, MXN35.95) Keurig Dr Pepper Inc. (KDP.N, $26.02) Kimberly-Clark Corporation (KMB.N, $135.73) L'Oreal (OREP.PA, €250.2) Molson Coors (TAPa.N, $63.53) Molson Coors Beverage Company (TAP.N, $38.19) Mondelez (MDLZ.OQ, $50.06) Monster Beverage Corporation (MNST.OQ, $59.21) Nestle (NESN.S, SFr99.81) Pental (PTL.AX, A$0.365) PepsiCo (PEP.OQ, $130.92) Pernod-Ricard (PERP.PA, €136.2) Philip Morris International (PM.N, $73.31) Procter & Gamble (PG.N, $115.77) Reckitt Benckiser (RB.L, 6620.0p) Remy Cointreau (RCOP.PA, €98.65) The Boston Beer Company (SAM.N, $469.64) The Clorox Company (CLX.N, $199.27) The Coca-Cola Company (KO.N, $45.14) The Estee Lauder Companies Inc. (EL.N, $174.38) The Kraft Heinz Company (KHC.OQ, $28.93) Unilever (UNA.AS, €44.36) Unilever (ULVR.L, 4054.0p)
Disclosure Appendix
Analyst Certification
I, Kaumil Gajrawala, certify that (1) the views expressed in this report accurately reflect my personal views about all of the subject companies and securities and (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.
As of December 10, 2012 Analysts’ stock rating are defined as follows:
Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark* over the next 12 months. Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months. Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months. *Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most att ractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as Europea n (excluding Turkey) ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin America, Turkey and Asia (excluding Japan and Australia), stock ratings are based on a stock’s total return relative to the average total r eturn of the relevant country or regional benchmark (India - S&P BSE Sensex Index); prior to 2nd October 2012 U.S. and Canadian rat ings were based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiveness of a stock’s total return potential within an analys t’s coverage universe. For Australian and New Zealand stocks, the expected total return (ETR) calculation includes 12-month rolling dividend yield. An Outperform rating is assigned where an ETR is greater than or equal to 7.5%; Underperform where an ETR less than or equal to 5%. A Neutral may be assigned where the ETR is between -5% and 15%. The overlapping rating range allows analysts to assign a rating that puts ETR in the context of associated risks. Prior to 18 May 2015, ETR ranges for Outperform and Underperform ratings did not overlap with Neutral thresholds between 15% and 7.5%, which was in operation from 7 July 2011. Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances. Not Rated (NR) : Credit Suisse Equity Research does not have an investment rating or view on the stock or any other securities related to the company at this time. Not Covered (NC) : Credit Suisse Equity Research does not provide ongoing coverage of the company or offer an investment rating or investment view on the equity security of the company or related products.
Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward.
Analysts’ sector weightings are distinct from analysts’ stock ratings and are based on the analyst’s expectations for the fundamentals and/or valuation of the sector* relative to the group’s historic fundamentals and/or valuation:
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Overweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is favorable over the next 12 months. Market Weight : The analyst’s expectation for the sector’s fundamentals and/or valuation is neutral over the next 12 months. Underweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is cautious over the next 12 months. *An analyst’s coverage sector consists of all companies covered by the analyst within the relevant sector. An analyst may cov er multiple sectors.
Credit Suisse's distribution of stock ratings (and banking clients) is:
Global Ratings Distribution
Rating Versus universe (%) Of which banking clients (%) Outperform/Buy* 49% (32% banking clients)
Neutral/Hold* 38% (26% banking clients)
Underperform/Sell* 12% (22% banking clients)
Restricted 1%
*For purposes of the NYSE and FINRA ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, and Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdin gs, and other individual factors.
Important Global Disclosures
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For date and time of production, dissemination and history of recommendation for the subject company(ies) featured in this report, disseminated within the past 12 months, please refer to the link: https://rave.credit-suisse.com/disclosures/view/report?i=515314&v=2439gdwf61awcnip0f6qwlzpb .
Important Regional Disclosures
Singapore recipients should contact Credit Suisse AG, Singapore Branch for any matters arising from this research report. The analyst(s) involved in the preparation of this report may participate in events hosted by the subject company, including site visits. Credit Suisse does not accept or permit analysts to accept payment or reimbursement for travel expenses associated with these events. For Credit Suisse Securities (Canada), Inc.'s policies and procedures regarding the dissemination of equity research, please visit https://www.credit-suisse.com/sites/disclaimers-ib/en/canada-research-policy.html. Investors should note that income from such securities and other financial instruments, if any, may fluctuate and that price or value of such securities and instruments may rise or fall and, in some cases, investors may lose their entire principal investment.
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This research report is authored by: Credit Suisse Securities (USA) LLC .................................................................. Kaumil Gajrawala ; Pallavi Bakshi ; Theo Brito
Important disclosures regarding companies that are the subject of this report are available by calling +1 (877) 291-2683. The same important disclosures, with the exception of valuation methodology and risk discussions, are also available on Credit Suisse’s disclosure website at https://rave.credit-suisse.com/disclosures . For valuation methodology and risks associated with any recommendation, price target, or rating referenced in this report, please refer to the disclosures section of the most recent report regarding the subject company.
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