What Tariff Volatility Means for the Consumer Defensive Sector

Margaret Giles: The announcement of country-specific tariffs sent US stocks reeling, but some sectors like energy, tech, and industrials were hit particularly hard. As we sat down to record this video on Wednesday afternoon, President Trump announced a 90-day pause to all country tariffs except those on China, but a level of uncertainty remains. Thanks in part to limited import and export exposure, the consumer defensive sector looks to be an island of stability. Joining me to discuss how some companies in this sector can navigate troubled macroeconomic waters is Erin Lash. She’s the sector director of consumer equity research for Morningstar Research Services. Thanks for being here today, Erin.

Erin Lash: Thanks for having me.

Why US Consumer Defensive Stocks Fell Less Than Other Sectors After the Tariff Announcement

Giles: All right. So after the tariff announcement, US consumer defensive stocks fell less than any other sector. Why is that?

Lash: So as you mentioned, they’re less dependent on imports for supplies and exports for sales. But beyond that, these are companies that have proven to be fairly resilient throughout economic cycles. They produce stable cash flows and profitability. And beyond that, they operate with healthy balance sheets that affords them the opportunity to invest in their businesses while also returning excess cash to shareholders.

Why Packaged Goods and Tobacco Were More Resilient Than Other Consumer Defensive Subsectors

Giles: Absolutely. So, are there certain subsectors within that overall sector that look more resilient than others?

Lash: Absolutely. So packaged food would be one. Obviously dependent on very short supply chains, fresh food and ingredients is key. So they would prove to be definitely more resilient. In addition, tobacco. Tobacco is a more addictive space within the category, and so from our vantage point, those are two subsectors that are likely to prove more resilient regardless of what we see from a tariff perspective.

Giles: That makes sense. People aren’t going to totally upend their habits. Right?

Lash: Right.

How Consumer Defensive Firms Can Protect Themselves Under Trump’s Tariffs

Giles: So what actions can consumer defensive firms take to offset any potential hit to profitability from tariffs?

Lash: Absolutely. So there’s a few things that they’ve been doing. For the last several years, even predating the first Trump administration, firms had been moving their manufacturing facilities closer to where they were selling. And so there was less of an impact from tariffs, from foreign-exchange-rate volatility. We’ve also seen firms continue to invest in cost-efficiency efforts. So whether that be automation, increases in activities that make them more agile and efficient, have also taken top billing. Pricing is on the table. Obviously the inflationary period that we’re just getting out of did result in significant pricing actions taken, not those which covered the entirety of the inflationary hit that firms were seeing, but did offset some of that impact. And so we think that that could be on the table if tariffs are a factor for a longer duration of time.

How Consumer Defensive Companies Could Respond to Slowing Consumer Spending

Giles: Absolutely. How can consumer defensive companies respond to consumers potentially tightening their belts amid recession fears?

Lash: Yep, absolutely. So consumers are facing pressures across the board. And so even if they might not sacrifice as it relates to their need for consumer packaged goods, they might need to take other options. So what we expect will happen is that firms will continue to invest in innovation. We’ve seen through time that consumers will pay up for a product if they see the added value. Single-dose laundry was a great example of that just more than a decade ago, and that’s a product that appealed to dollar-store consumers and college students—so those on a fixed budget.

Beyond innovation as it relates to the particular product, we think that firms will continue to invest in adjusting the pack size. So smaller pack sizes that appeal to a consumer that’s maybe on a more limited daily budget, or weekly budget. We’ve also heard firms continuously talk about the increased packaging for multipacks, so more options that cater to a greater number of people in a particular household. So they’re not spending as much either. So those are options that we think firms will look to take to inhibit trade down to lower-price private label, and keep consumers within their brand families.

Consumer Defensive Stock Picks During Market Volatility

Giles: So overall, it seems that consumer defensive is a little more insulated from some of these uncertainties. Are there still pockets of value to be found in the sector? And are there any companies that investors should consider?

Lash: Yeah, I would name two in particular that we think are interesting at this point. Kraft Heinz KHC being one. Kraft Heinz is a narrow-moat company. They generate about 75% to 80% of their sales in the US already, and they’ve stepped up their efforts to invest in innovation and marketing. They’ve sold off some of their more commoditized brands and businesses like natural cheeses and planters, and they’ve cleaned up their balance sheet. And so we think that they look particularly attractive.

Clorox CLX is another name that we think is attractive. Eight-five percent of their sales come from the US. They have a wide moat. A number of the categories in which they play their primary competition is private label. But they have an outsize focus on innovation and making sure to justify the price premium that they’re charging, while also continuing to invest in that digital automation and that efficiency efforts that we talked about earlier.

Giles: All right. So two to keep in mind. Erin, I appreciate your insights. Thanks for being here.

Lash: Thanks for having me.

Giles: I’m Margaret Giles for Morningstar. Thanks for watching.

Watch Trump’s Tariffs Upend Global Markets: Here’s What Investors Should Know for more tariff coverage from Margaret Giles and Preston Caldwell.