What Are Consumer Staples? Definition and Importance for GDP

What Are Consumer Staples?

Consumer staples refer to essential products such as foods, beverages, and hygiene items required in daily life. These goods are non-cyclical, meaning they remain in demand regardless of economic fluctuations. Spending on consumer staples accounts for a significant portion of the economy, influencing overall growth and stability. Explore the pivotal role the consumer staples sector plays in the economy and its resilience during financial downturns.

Understanding the Role of Consumer Staples in the Economy

Comprising nearly 70% of the nation’s gross national product (GNP), consumer spending holds a lot of sway over the economy. Economic growth and decline are typically led by consumer spending, which is cyclical. Cyclical means there are ebbs and flows, or times when the consumer spends more and periods when they have more conservative spending habits.

However, spending on goods produced and sold by the consumer staples sector tends to be far less cyclical due to the lessened price elasticity of demand. Price elasticity is an economic concept that describes the change in consumer quantity demand as prices change. The demand for consumer staples goods remains fairly constant regardless of the state of the economy or the cost of the product.

Key Industries in the Consumer Staples Sector

Companies that sell pharmaceutical drugs, like drugstores, are included in the sector, as are companies that produce and grow crops. Within the S&P 500 Index, consumer staples are broken down into six industries:

• Beverages
• Food and staples retailing
• Food products
• Household products
• Personal products
• Tobacco

While there are no substitutes for consumer staples, people can choose budget-friendly options. That makes the competition among suppliers very challenging in an environment where commodity prices are rising. To compete on price, consumer staples producers must be able to keep their costs down by adopting new technologies and processes, or they must differentiate by introducing innovative products.

Financial Stability and Performance of Consumer Staples

Since 1962, only one other sector has surpassed consumer staples. According to the S&P Dow Jones Indices, for most of the 10 years ending April 26, 2021, the consumer staples sector returned 8.20% annually. Compare this to the 11.86% return of the S&P 500 over the same period. But the two generally move in line with one another.

More importantly, the consumer staples sector has outperformed the S&P 500 during the last three recessionary periods—or periods of negative growth in the gross domestic product (GDP). Consumer staples stocks, known for low volatility, are key in defensive strategies.

How to Invest in Consumer Staples Safely

Buoyed by the persistent demand for their products, consumer staples companies generate consistent revenues, even in recessionary periods. As a result, consumer staples stocks decline far less during bear markets than stocks in other sectors. Demand for products like food, alcohol, and tobacco can increase during downturns.

The consumer staples sector also often lures investors with its components’ rich dividend yields, which tend to be larger than those generated in other sectors. Because of their slow and steady nature, consumer staples stocks can not only continue to pay dividends through recessionary periods but often continue to increase their payouts. According to “Dividend.com,” the annual dividend rate increased 8% over the 20 years ending in 2015.

When stock prices rise without dividend increases, yields decline. Conversely, if stock prices drop but dividends remain the same, yields increase. For example, when stock prices fell dramatically in the wake of the 2020 economic crisis and lockdown, the yield for State Street’s Consumer Staples sector index ETF (XLP) rose from 2.74% to 3.00%, due primarily to the lower priced shares producing the same dividend amount.

Also, consumer staples help diversify portfolios. Also, because these stocks tend to perform in a way counter to the consumer discretionary sector in market recessions, they can help bring balance to a portfolio. They tend to bring in consistent earnings that support their dividend yields unlike the boom and bust cycles of riskier high-growth stocks, though more growth is available for consumer staples as they expand globally. 

Consumer staples stocks can be a good option for investors seeking steady growth, solid dividends, and low volatility. One can invest in consumer staples by purchasing the stocks of the individual consumer staples companies—industry leaders include Procter & Gamble (P&G), B&G Foods (BGS), Kimberly-Clark (KMB), and Phillip Morris (PM)—or by purchasing mutual funds or exchange-traded funds (ETFs) that specialize in the sector.

Investment Options in Consumer Staples

Consumer staples encompass essential products like food, beverages, and household goods that remain in demand regardless of economic conditions. This sector provides a stable investment opportunity with consistent growth, solid dividends, and low volatility, especially appealing during economic downturns.

Although consumer staples offer slow growth, they act as a safe haven with steady returns that support dividend yields. Investors can explore opportunities in this sector through well-established companies such as Procter & Gamble or through ETFs and mutual funds that focus on consumer staples.

The Bottom Line

Consumer staples encompass essential products like food, beverages, and household goods that remain in demand regardless of economic conditions. This sector provides a stable investment opportunity with consistent growth, solid dividends, and low volatility, especially appealing during economic downturns.

Although consumer staples offer slow growth, they act as a safe haven with steady returns that support dividend yields. Investors can explore opportunities in this sector through well-established companies such as Procter & Gamble or through ETFs and mutual funds that focus on consumer staples.