Staples refer to a set of essential products used by consumers. But what products make up this sector category? Products such as food and beverages, household goods and hygiene products, along with alcohol and tobacco.

Essentially, the products that everyone needs along with products people can’t do without, regardless of the macro-economic situation.

In a primary investigation using reports from McKinsey, IBIS and trading economics, we compared the performance of major industry sectors across the following two-year period downturns - 1973 – 1975, 1980 – 1982, 1989 – 1991 and 2000 – 2002. We found that the Consumer Staples Sector outperformed all others during this period.

This sector also outperformed the S&P500 during the last three recessionary periods.

Despite our business Tapestry not being defined as a staples business, we have positioned ourselves in the staple sector within information technology. Supermarkets and grocers have strong exposure to the staple marketplace. These industries, supermarkets and grocers supply an average of the following product categories:

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NAME OF INDUSTRY OF OPERATING INTEREST                                                                             

All Supermarkets and Grocers = 95%                                                                      

SMEs (independent groups and small business), Supermarkets and Grocers Australia = 88%                                                                      

All Convenience Stores = 82%

                                                                                                                                       During financially hard times, we also expect people will substitute high-cost goods for lower-cost goods. For instance, customers will substitute meat products for cheaper meat items or processed meats, spreads and breads, fruit and vegetables and processed foods. All of these substitutes occur within the Supermarket and Grocers category, regardless of the substitution affect which is made for categories which are disputably not staples.

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CONSUMER BEHAVIOUR

There are multiple consumer behaviour changes which happen when aggregate demand shifts left, due to inflation or discretionary spending changes. However, these sales will still occur in the industry sector which we are exposed.

For example:

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• Recessions can increase the inclination for people to become smokers, however the number of cigarettes per day consumed by people who already smoke declines marginally.
• Recessions also lead to increased levels of heavy drinking and frequency and after work alcohol use by middle-aged employed men.

• Recessions also lead to reduced consumption of calories in high income countries, with decreases in fruit and vegetable intake. There are also reductions in take-away, sugar products and soft drink. (They think this is due to substitutions toward higher calorie dense foods, such as bread and rice).

• Indeed, this substitution does occur. People purchase more bread products. During 2008 in the US, the bread category, which was forecast to increase by 2.1 per cent, increased by a massive 7 per cent.
• Cooking at home also increases during recessions, which require shopping at supermarkets, grocers and markets. Along with an increase is coffee bean consumption at home.

CONCLUSION

Despite being in a high-risk sector ourselves (information technology), our customer base is in the least affected business sector during economic hardships. Overtime, the volatility in the consumer staples share price has declined, and is a safe haven for investment. As consumer behaviour changes when aggregate demand falls, which economically haven’t yet fully swung into affect, the supermarket and grocers who are highly exposed to staples are not affected greatly.