What are the unique factors lying ahead for end consumers?
The consumer staples sector is gearing up for a challenging year in 2025, with unique factors affecting end consumers from a diverse set of companies and industries around the world to expectations of continued volatility and fundamental pressures. The Trump administration's presence is anticipated to heighten uncertainty due to potential policy changes that could affect processed foods and beverages, introduce tariffs, and create geopolitical tensions. Similar to 2024, it is largely believed that volume/unit growth (or related KPI's for specific industries) will be the single biggest driver on relative stock outperformance. Organic growth will be more reliant on volume next year as inflation/ pricing ability fades and promotional spend ramps due to a difficult consumer environment.
Election and regulatory policy implications
With the U.S. election now behind us, focus has shifted to the policy implications of a second Trump administration. While it is ultimately difficult to frame the impact given the lack of details and timing, the number one regulatory concern from analysts is the implication of tariffs. Companies are looking at cost mitigation efforts accelerated productivity and potential pricing, but cost challenges would likely be passed on to the consumer, weigh on growth and be disruptive and inflationary. Donald Trump has floated an additional ~10% tariff on China imported goods and a ~25% tariff on all imports from Mexico & Canada. We see incremental China tariffs as probable but are currently operating under the assumption that the Mexico/Canada tariffs threats are being used as a negotiating tool to enhance border control and ultimately won't come to fruition. That said, incremental tariffs in any capacity create inflation risk, which would further pressure top-line and dampen the rate cut outlook.
Profitability has been a key focus given a volatile operating environment during and coming out of the pandemic. 2025 will be another year of balancing margin dynamics including moderating demand, muted volumes, slowing pricing benefit, FX, rising and declining commodity costs, increased promotional environment, a need in increased marketing spend, and normalizing elasticities.
Geopolitical dynamics and emerging markets
We see a host of geopolitical factors at play including ongoing weakness in China, Middle East, and potentially slower growth in Europe & Latin America specifically with Mexico and Brazil. Additionally, FX appears likely to remain a wild card in 2025 as global economies diverge and tariff and trade dynamics remain fluid. While difficult to predict, what has been a strong USD continues to be the largest expected driver of exchange rate headwinds and tailwinds.
While China has dealt with challenging trends for several years now, consumer sentiment remains sluggish and trends have lagged expectations, particularly in the back half of 2024. Categories growth trajectories in the region remain underwhelming and we expect sequential improvement, but it will take time before the region becomes a meaningful growth driver and we have yet to see government stimulus materially impact spending.
M&A potential
With volume growth harder to come by, we believe that M&A could play a larger role in 2025, particularly as valuations have become more reasonable and 2H may set up a potentially more favorable rates environment. We also see potential for a more favorable regulatory environment which could spur more M&A activity. M&A has been an ongoing theme in the sector since the pandemic, with a polarization in performance resulting in the stronger players in the space acquiring struggling businesses at good prices. We see potential for M&A to accelerate in 2025 driven by more political stability in the UK and US, relatively stable interest rates and some pent up demand for owners looking to monetize their assets.
Nik Modi and Richard Chamberlain authored “Global Consumer Outlook” published on December 29, 2024. For more information on the full report, please contact your RBC representative.
