Consumer Staples Definition

Consumer staples are essential products, such as food, beverages, tobacco, and household items. Consumer staples are goods that people are unable or unwilling to cut out of their budgets regardless of their financial situation. Consumer staples are considered to be non-cyclical, meaning that they are always in demand, no matter how well the economy is (or is not) performing—they are impervious to business cycles. People tend to demand consumer staples at a relatively constant level, regardless of their price.

Comprising nearly 70% of the nation’s gross national product, consumer spending holds a lot of sway over the economy. Economic growth and decline are typically led by consumer spending, which is cyclical in nature. However, spending on goods produced and sold by the consumer staples sector tends to be far less cyclical due to the low price elasticity of demand. The demand for consumer staples goods remains fairly constant regardless of the state of the economy.

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

Companies that sell pharmaceutical drugs (like drugstores) are included in the sector as well.

Although there are no substitutes for consumer staples goods, consumers have a lot of options when shopping for the cheapest products. That makes the competition among suppliers very challenging in an environment in which 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.

Consumer stapes are products that people can't do without, such as food and personal items.

The consumer staples sector has outperformed all but one sector since 1962. According to the S&P Dow Jones Indices, for most of the 10 years ended April 2019, the consumer staples sector has returned 12.97% annually, vs. the 15.53% return of the S&P 500 over the same period of time (a gap that has occurred mainly in the last two years; usually the two move pretty much in lockstep). More importantly, the consumer staples sector has outperformed the S&P 500 during the last three recessionary periods. Due to their low volatility, consumer staples stocks are considered to play a key role in defensive strategies.

Buoyed by the persistent demand of 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. With some products, such as food, alcohol, and tobacco, demand sometimes actually increases during economic 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 also not only continue to pay dividends through recessionary periods but often continue to increase their payouts. The annual dividend rate increase over the 20-year period ended in 2015 is 8%, according to Dividend.com, though as of 2018, the sector as a whole was yielding 2.01%.

Further, consumer staples are important for diversification. Because these stocks tend to perform in a counter way to consumer discretionary stocks 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 consumer staples companies—industry leaders include Procter & Gamble, B&G Foods, Kimberly-Clark, and Phillip Morris—or by purchasing mutual funds or exchange-traded funds (ETFs) that specialize in the sector.

Many of the major investment companies offer some sort of consumer staples play. Vanguard, for example, offers the Consumer Staples ETF and the Consumer Staples Index mutual fund; PowerShares has a Dynamic Food & Beverage ETF, along with a more general S&P SmallCap Consumer Staples ETF; Guggenheim sponsors the S&P 500 Equal Weight Consumer Staples ETF. And you want to try investing internationally—after all, people need staples the world over—the WisdomTree Emerging Markets Consumer Growth ETF and the iShares Global Consumer Staples ETF are two options.