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Article | Executive Pay Memo North America

Consumer staples stands strong amid the chaos caused by COVID-19

Executive Compensation
COVID 19 Coronavirus

By Jamie Teo and Lea Musuamba Ciowela | July 2, 2020

The pandemic has strained manufacturing and sales operations in the consumer staples sector as companies work hard to meet demand safely.

Having navigated the initial crisis, companies are now in a phase of restoring stability with businesses and workplaces reopening. The COVID-19 pandemic created unprecedented challenges in the first and second quarters of 2020, pushing companies to implement a host of measures to mitigate its impact on manufacturing and sales operations and their ability to meet consumer demand safely.

Consumer staples companies were typically classified as “essential” and faced different challenges from other sectors:

  • Meeting soaring demand while operating safe, socially distanced manufacturing facilities
  • Securing sufficient personal protective equipment for employees and ensuring their safety in the workplace
  • Operating disrupted global supply chains as the pandemic affected countries in different ways

Some of the actions companies have taken in response to COVID-19 include providing additional pay to employees who were physically present in the workplace, enhancing paid leave programs, changing shift patterns, reducing manufacturing capacity, and temporarily shutting down and furloughing employees in categories or segments where demand fell.

When companies have time to pause and look to the future, questions about remote work models for non-manufacturing staff, the role of automation and the nature of jobs themselves will likely be high areas of focus.

This article sheds light on the performance of the consumer staples sector during this tumultuous time. The sector includes 72 companies in the following industry groups:

  • Food, beverage and tobacco – 61%
  • Household and personal products – 21%
  • Food and staples retailing – 18%

Figure 1 tracks year-to-date shareholder returns for the sector overall and for its industry groups through June 15. Overall, the sector is down 6%, slightly below the 5% drop of the S&P 1500.

Figure 1. 2020 total shareholder return through June 15, 2020
Figure 1. 2020 total shareholder return through June 15, 2020

Source: S&P Capital IQ database

As the extent of COVID-19’s impact becomes increasingly evident, analysts are revising their revenue and earnings before interest and taxes (EBIT) estimates. While revisions are relatively modest in contrast with other sectors, the outlook for the remainder of 2020 is less promising than at the start of the year, acknowledging the challenges businesses will have to grapple with to restore stability.

Figure 2 illustrates the change in 2020 expectations from January through mid-June. Analysts have modestly adjusted revenue expectations, with an overall decrease of 2% for the sector. EBIT expectations for the sector, however, varied by industry group. The analyst projections provide an indication of how cost containment and profitability challenges vary by industry group and the sector overall, with a 5% downward adjustment to EBIT for the food and staples retailing industry group and an 8% downward adjustment for the food, beverage and tobacco industry group.

YTD change in estimated 2020 revenues
Sector/Industry group Revenue EBIT
Consumer staples (sector) – 2% – 7%
Food beverage and tobacco – 2% – 8%
Household and personal products – 2% – 5%
Food and staples retailing – 3% – 5%
Figure 2. Year-to-date change in estimated 2020 financials as of June 15, 2020

Source: S&P's Capital IQ database

The consumer staples sector is widely known as “defensive” in that it fares well during economic downturns. The sector is living up to its reputation during the pandemic as demand for products remains steady, following initial spikes in the first and second quarters. Nonetheless, uncertainty remains regarding a potential second wave and the full extent of the financial repercussions of the pandemic.

Looking at incentives, consumer staples companies are operating their short- and long-term incentive plans much as they have in prior years, with the most common difference being a delay in setting goals as companies try to understand the longer-term impact of the pandemic. Specific to long-term incentives, some companies have changed or are considering making changes to their equity mix for upcoming grants. With the understanding that the payouts of in-cycle incentive plans will be negatively impacted at year-end, some consumer staples companies are considering providing supplemental long-term incentives targeted at retaining key employees during this time of uncertainty.

As the sector continues to grapple with the challenges presented by the pandemic, companies will monitor the business impact and implications on year-end results and planning for 2021.

Authors

Director, Talent and Rewards (New York)

Associate, Executive Compensation (Philadelphia)

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