In The infinite shelf (published today), we argue that e-commerce in the global Staples sector is likely to continue to take share from store-based retailing and this will drive SKU proliferation and market fragmentation for Consumer Staples companies. Consumer Staples categories are 18% more fragmented in US e-commerce than in store-based channels and we estimate margins are 300 bp lower as a result.
Direct to consumer offers limited upside for European Staples
Direct to consumer (DTC) is viable for high-value, low-volume, shelf-stable products, but we estimate the breakeven price is US$28 for products typically sold in grocery stores. EBIT per item can be 2-5x higher for products retailing for US$70-100 but, within our European coverage, we believe only L’Oreal is likely to benefit.
A long-term challenge to add to medium-term concerns
We see the rise of e-commerce as a long-term headwind on top of the medium-term challenges faced by European Staples including slower EM growth, no benefit from DM recovery, deflationary pricing, increased competition from local EM companies, and greater earnings volatility.
Valuation at peak despite structural challenges
Despite these challenges, European Consumer Staples trades on a 12mfwd P/E of 21.2x, a 39% premium to the 25-year average and only 3% lower than the 25-year peak. Versus the STOXX Europe 600, the sector trades at a 37% premium; broadly in line with the 3- and 5-year averages, but well above the average premium over the last 25 years (7%). We continue to expect the sector to de-rate as US rates rise. Our average target P/E of 17x
implies a 20% de-rating for the sector overall.
Sell Food and Homecare; buy Beer, Tobacco and soft drinks
We downgrade Unilever to Sell from Neutral and Reckitt Benckiser to Neutral from Buy. We remove L’Oreal from the Conviction List and remain Buy rated. We lower our price targets for Danone (CL-Sell) and Nestle (Sell) by 2% and 6%, largely due to lower organic growth. Our top picks in European Staples are ABInBev, Imperial Tobacco and Britvic (all CL Buy), as they offer relative insulation from headwinds created by the infinite shelf.
e-commerce growth to lower barriers to entry