FTSE 350 Review: Which consumer stocks will come out on top?

This could be a pivotal year for food producers and consumer staples companies. Some will attempt to prove their turnaround plans are finally starting to deliver the goods; others are looking to build on recent momentum. And the whole sector will be hoping that a better macroeconomic environment provides the opportunity to build margins at the same time as maintaining sales volumes.

Staples giants such as Unilever (ULVR) were initially able to show their pricing power by pushing through double-digit price increases without much effect on volumes when inflation first spiked. But market share has started to slip back in recent quarters, and 2024 revenues will become more reliant on shoring up these positions now that inflation is fading. Unilever has decided to focus on 30 core brands and is shedding assets such as Dollar Shave Club and Eliba Beauty, but that alone won't be enough. More marketing spend will likely be in order – for all the big players – and more promotional activity pressed upon them by retailers. 

Barclays analysts are not too worried about this prospect: they note producers' insistence that promotions in fact have a "very high ROI [return on investment]", adding: "we see little reason to believe companies won't continue to promote rationally and in a way that balances both top- and bottom-line growth".

Still, bulls are looking for margin improvements at both Unilever and Reckitt Benckiser (RKT) this year as costs fall. But full-year results next month will see the companies' new chief executives (Hein Schumacher and Kris Licht, respectively) set out the next stage of their plans, and at least one may opt to temper expectations. This is a greater risk for Reckitt given the artificial boost its nutrition business received last year after competitors temporarily pulled products.

The company does at least have the advantage of trading at a 20 per cent discount to its historic multiple, RBC analysts noted in December. The shares have ticked up since then, but neither Reckitt nor Unilever particularly benefited from the equity market rally of the past quarter.

That privilege has gone to mid-cap food producers Premier Foods (PFD), Cranswick (CWK) and Hilton Food Group (HFG). It helps that all three have good operational momentum, too. Hilton has recovered well from 2022's profit warnings and allayed fears that its 2021 deal for salmon producer Foppen had hurt its pricing power. It continues to trade on a discount to pork and chicken producer Cranswick, but the latter's envious track record of strong organic sales growth, dividend growth and returns on invested capital – in the face of pressures from Covid-19 and changing consumption habits – means this is only fair. All three companies look well set this year, particularly if cost-conscious consumers seek to eat in more.

For the ingredients businesses, volume growth was firmly negative in 2023 as customer destocking took hold. That meant a tough year for Tate & Lyle (TATE) and Associated British Foods' (ABF) ingredients arm, albeit the latter represents just 11 per cent of revenues. Tate & Lyle is still unsure as to whether this process has fully played out, and restocking is likely to be even further away. ABF can take heart from improvements in its sugar and retail businesses, and the sight of Primark rebuilding margins should support the investment case this year.

Lastly, there is Haleon (HLN). Here the story is slightly different from other large-cap staples. Consumer health businesses may be vulnerable to short-term volatility depending on the strength of the annual flu season, but Bernstein analysts say strong margins and the relative lack of consumers trading down make the company "the safest of safe havens". Last week's sale of the Chapstick brand for $430mn (£340mn) will also help with Haleon's debt pile. But there is still work to do on this front before the anticipated arrival of buybacks and dividend growth.