Consumer Staples

Consumer Staples COVID Factors to Watch – 100 Read-Throughs from Earnings Weeks 1 + 2

Consumer Staples | Industry Primer

We combed through 37 earnings releases/calls—globally—from April 15th to May 1st and

identified 100 read-throughs to our Staples coverage. Presented via our factors to watch

(Emerging Markets (EM), On Premise Shutdown, Production Disruption, Travel Retail, Health &

Hygiene, Pantry Loading, Recession Trade Down, Big Brands Effect). Relevant highlights

from releases in coming pages.

We closely link these factors to our proprietary interactive financial model & accompanying

note Guidance for Investing in a World without Guidance. We suggest investors use

the read-throughs and modeling tool in tandem.

Thematic read-throughs

Pantry loading reversed in April. Across several categories, the off-premise “panic

buying” that ended in March subsequently subsided. Molson Coors, Colgate, Church &

Dwight all citing consumption normalizing in April. Beverage and Food seeing smaller 2nd

and 3rd waves of re-stocking unlike household staples largely reversing in growth trends.

Big Brands back in vogue. Danone called out “putting on hold the small, niche brands

that propelled the food revolution,” in-line with sentiment that multinationals are winning

with retailers and consumers. Whether due to availability of larger pack sizes, better

distribution capabilities, or trusted brand quality, this effect is likely to last through the crisis.

Recession trade down an open-ended question. Companies cannot estimate the

length of this recession, but quick to identify price-points that may be negatively impacted.

Portfolio/price evolution for Procter, Clorox, Church, Keurig possibly more recession proof.

Traditional channels problematic… As COVID-19 intensifies in Latin America, Africa,

and EMEA, focus on large traditional channel (‘mom-and-pop’) resiliency. Unlike big box

retailers, most of this channel shut in lockdowns or more isolated from supply chains. Arca,

Mondelez calling out extended issues which could take 6-9mo to resolve.

…with India & Mexico consistently called out. Strict lockdowns in 5th and 15th largest

global economies exacerbating macroeconomic instability prior to COVID. Manufacturing

shutdowns crippling movement of labor and goods. Colgate, Mondelez, Arca, Procter

expecting negative headwinds in these regions through 2Q.

Read-throughs to Staples Earnings this Week

REYN (Outperform rated): Positive. Keurig, Packaged Foods citing shift to coffee & food-

at-home. Big Brand effect (#1 share in foil, parchment paper) and Pantry Loading.

MNST (Outperform rated): Negative. C-stores weak globally per Arca, Coca Cola Europe.

Possibly impacted by trade-down (energy high price point) but beverages usually resilient.

BRBR (Outperform rated): Mixed. “On-the-go” consumption gone. Possibly benefits from

trade-down vs. high-end shake competitors. Costco SSS March +10% vs. Feb +12%.

5 May 2020

Equity Research

Americas | United States

DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS,

LEGAL ENTITY DISCLOSURE AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business

with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

Research Analysts

Kaumil Gajrawala

212 325 3227

[email protected]

Pallavi Bakshi

212 538 8434

[email protected]

Theo Brito

212 325 4637

[email protected]

5 May 2020

Consumer Staples 2

Factors to Watch as COVID-19 Spreads

We identified factors we think will be key to assessing the impact of COVID-19.

The relative heat map below outlines potential negatives (Emerging Markets, On Premise

Shutdown, Production Disruption, Travel Retail) and potential positives (Health & Hygiene,

Pantry Loading, Big Brands Secular Effect).

We closely link these factors to our proprietary interactive financial model and

accompanying note Guidance for Investing in a World without Guidance. We suggest

investors use these tools in tandem.

While not possibly all encompassing, this map can help guide investors on where they should

focus attention as the situation evolves.

Figure 1: CS COVID Heat Map updated 5/1/2020

Source: Company data, Credit Suisse estimates

Changes to map since 4/24/2020:

Benefit from H&H: No change.

On-Premise Shutdown Closes Bars/Restaurants: No change.

Pantry Loading: No change.

*New* Recession Trade Down: Add Reynolds (positive); Constellation & Boston Beer

(Neutral to Negative)

*New* Secular “Big Brands” Effect: Add global HPC, Monster, Anheuser Busch, Boston

Beer, Molson Coors.

Geographic Exposure: No change.

Supply Chain/ Disruption: No change.

Travel Retail Closed: No change.

Benefits from

Health & Hygiene

On-Premise

ShutdownPantry Loading

*New* Recession

Trade Down

*New* "Big Brands"

Secular Benefit

Geo: Emerging

Markets

Supply Chain/

Production

Travel Retail

Headwind

CHD Church & Dwight

CL Colgate-Palmolive

CLX Clorox

PG Procter & Gamble

REYN Reynolds Consumer

BRBR BellRing Brands

KDP Keurig Dr. Pepper

KO The Coca-Cola Co.

MNST Monster Beverage Co.

PEP PepsiCo

ABI Anheuser-Busch InBev

SAM Boston Beer Co.

STZ Constellation Brands

TAP Molson Coors Beverage

Ho

useh

old

&

Pers

onal C

are

No

n A

lco

ho

lic B

evera

ge

& F

oo

d

Alc

oh

olic

Bevera

ge

5 May 2020

Consumer Staples 3

1. A Boost for Health & Hygiene Providers

While we believe the largest benefit in health & hygiene sales will be a one-time impact, HPC

companies stand to benefit in the medium-term from increased consumer concern.

Factor Read-Throughs 5/1/20

1. Clorox: “With the pandemic expected to have a sustained positive impact on

consumers' disinfecting and hygiene habits, we'll invest further in our brands, turn

incremental usage into loyalty.” (5/1/20 Earnings Call)

2. Colgate Palmolive: “…we're doing a lot of things very, very quickly to adapt to some

of the consumer behavior changes we've seen, particularly around the importance of

health and hygiene and how that plays out with some of our products… But the

efficiency and hygiene nature of liquid hand soap may lend itself to increase brand

penetration. Products like spray cleaners and wipes, we'll see more penetration grow

and we're expanding those as well.” (5/1/20 Earnings Call)

3. Hindustan Unilever (India): “Health, Hygiene & Foods have been resilient given the

nature of the crisis that we have been going through and the nature of the consumers

buying patterns… We believe that the heightened need for hygiene and sanitation is

not going to disappear overnight, It will come down from the peak levels, definitely, but

it's not going to disappear. People will hopefully understand that having the right kind

of behavior with sanitation and hygiene is a proposition which keeps you healthy and

safe… There will be a spike in liquid soaps. There will be a spike in soaps with health

credentials. I'm sure people will be much more conscious about washing their hands

more number of times, whether also using a disinfectant, cleaning surfaces, making

the environment more hygienic. These are some things which will be there for some

time. We are not going to go away. And hopefully, it will translate into some prominent

shift of consumer behavior.” (4/30/20 Earnings Call)

4. Reckitt Benckiser: “The three spaces RB plays in - Hygiene, Health and Nutrition -

fit well together with a very attractive mix of market dynamics, consumer pull, preferred

strong brands, customer relationships and marketplace presence, and new products

that support an attractive earnings growth model… It's a little hard to predict exactly

how much of the penetration and frequency increases, particularly in the Hygiene

categories will sustain. But what is clear is that what we are seeing from customers is

a greater desire to engage on this because we will see a step-up in both penetration

and frequency in the case of Hygiene.” (4/30/20 Earnings Call)

5. Church & Dwight: “As a result of the pandemic, consumers are stocking up on

household staple products, such as laundry detergent, cat litter, bathroom cleaners,

baking soda and personal care products such as vitamins and supplements and nasal

hygiene products.” (4/30/20 Earnings Call)

6. Procter & Gamble: “We will serve what will likely become a forever altered health,

hygiene and cleaning focus for consumers who use our products daily or multiple times

each day. There may be an increased focus on home, more time at home, more meals

at home, more cleaning of homes, with related consumption impact. Share results and

track channels through March showed broad-based growth. Vicks respiratory products

were up more than 4 points. Metamucil and Pepto Bismol up 3 points. Always pads,

Always Discreet, Tampax, Tide, Dawn, Cascade and Gillette blades and razors each

up 1 point or more. Pantene, Head & Shoulders, Old Spice, Native, Secret, Crest, Mr.

Clean, Gain, and Bounce, each growing share.” (4/17/20 Earnings Call)

7. Unilever: “Prior to the COVID-19 outbreak, hand sanitizer was a tiny part of our

business, yet over the last two months, we have opened more than 30 new production

lines, including third parties to make hand sanitizers. And in the UK, we converted one

of our plants in just 3 days to support this effort… Our home and hygiene brands,

including Cif surface cleaners and Domestos bleach products, benefited from

increased demand for household cleaning with double-digit underlying sales growth…

5 May 2020

Consumer Staples 4

People are buying more hygiene products for hands and for household surfaces. This

is one of the changes we expect to see continue beyond the immediate crisis.”

(4/23/20 Trading Statement)

8. Kimberly Clark: “Overall we do expect some near-term volume decline in K-C

Professional. However, I will say there's a long-term opportunity to serve a very

important need, as creating healthier workplaces and focus on hygiene becomes more

important going forward.” (4/22/20 Earnings Call)

9. Essity: “In Personal Care, we saw volume growth in all categories except for Medical.

And in Consumer Tissue, we had very high sales growth in Europe, in LATAM and

significantly lower sales in China with Vinda, due to the fact that they are at a different

phase, as you know, of the pandemic. In Professional Hygiene, we had higher sales in

Europe, LATAM, and not least in North America, and for the same reason, lower sales

in China…And in spite of everything that's going on, we focus on innovations and the

long-term importance of hygiene and health.” (4/23/20 Trading Statement)

10. Pental Ltd (Australia): “Experiencing elevated levels of consumer demand for White

King disinfectant cleaning products and Country Life anti-bacterial soaps.” (4/24/20

Trading Statement)

11. Hengan International (China): “Personal and household hygiene products industry

as the daily necessities continue to see firm support from steady growth of China's

economy and national income…growing hygiene awareness of citizens and their

pursuit of better living quality will continue to expand the personal and household

hygiene products market, bring more development opportunities to the industry.”

(4/16/20 Annual Report)

Factor’s Impact on CS Coverage

Clorox: The EPA endorsed Clorox as a product effective in killing the COVID-19 virus,

along with Lysol and Purell. Scanner data for the 4wks ending 4/4/20 shows multipurpose

cleaners up +150%, bathroom cleaners +120%, and bleach up +130%. This excludes

bulk of wipes business skewed to online and club channels. Company reported industry

leading growth in Disinfectants.

o 24% of business in Health & Hygiene with ~8% in disinfectant wipes (42% market

share). CEO commented company is “ramping up production to accommodate higher

demand in US… includes production of Clorox wipes, sprays, and bleach…sales of

product categories such as wipes rose double-digits…” More information on the

impact of COVID-19 and influenza here.

Colgate: Personal Care is 20% of the global business. We estimate soaps (Softsoap and

Protex) are a high single digit percentage of Colgate’s business. Scanner data for the 4wks

ending 4/4/20 shows soaps +130%. This excludes online and club sales. Company

reported strong volume growth in Oral Care and Soaps.

Procter & Gamble: Various categories of exposure from Family Care (Puffs facial tissue),

Home Care (Swiffer and Comet cleaners), and Personal Care (Vicks cough, cold, flu relief

and Safeguard soap). We estimate these various segments are a high-single digit

percentage of Procter’s business. Scanner data for the 4wks ending 4/4/20 shows bath

tissue and kitchen tissue +85% and OTC cold/flu medication +90%. This excludes online

and club sales. Company reported strong volume growth in Home Care and Health.

5 May 2020

Consumer Staples 5

2. “At-Home” Orders Shut On Premise Locations


12. Keurig Dr. Pepper: “We experienced declines in our away-from-home business due

to office closures and the slowdown of hospitality and fountain foodservice.” (4/30/20

10-Q )

13. Coca-Cola Europe: “Overall, we believe that roughly 75% of our away-from-home

channel has been severely impacted by lockdown measures with the widespread

closure of restaurants, bars and leisure facilities. The remaining 25%, to include

independent convenience and petrol stations, while still open for business, also not

been immune to the crisis given less people are on the move. Since the crisis began in

mid-March, we've seen our away-from-home volumes decline anywhere between

45% to 85% across our markets as restrictions widened and lockdown measures

were implemented.” (4/28/20 Earnings Call)

14. Mondelez: “Our world travel retail business dropped significantly, and also away-from-

home was impacted. All this led to reduction in traditional trade and the away-from-

home hit gum and candy, which is sold more often in away-from-home channels.”

(4/28/20 Earnings Call)

15. Molson Coors: “Specifically, we estimate that approximately 23% of our 2019

consolidated net sales resulted from on-premise consumption, with approximately

17% of our North America net sales and approximately 50-55% of our Europe net

sales each coming from this important part of the industry, and in many of our markets

the on-premise business has been reduced to zero.” (4/30/20 Earnings Call)

16. Carlsberg: “The on-trade sector is severely impacted across markets. For the group,

on-trade accounts for around 25% of volume. The on-trade decline impacts our mix

due to lower premium volumes and draft beer. We saw an impact on government

lockdowns already in Q1, and there will be an even larger impact in Q2 as the

lockdowns have extended. H2 will be impacted as well, although it is currently

impossible to predict the magnitude of this.” (4/30/20 Trading Update)

17. Becle SAB (Mexico): “We also began to see the impact of the COVID-19

containment measures across Mexico with nearly all on-premise locations closed

beginning in March which represent approximately between 20% to 25% of our net

sales. We expect the on-premise closures to continue at least through May, mainly

impacting our wholesaler channel… the problem in Mexico is that on-premise is closed,

but also a lot of states are closing -- prohibiting the sale of alcohol. So then it's even

worse than probably any country.” (4/30/20 Earnings Call)

18. Coca-Cola: “The biggest impact has been a sharp decline in the important away-

from-home portion of our business, which includes eating and drinking channels, as

well as on-the-go orientated channels like convenience retail….While our exposure

varies across markets, away-from-home broadly represents 50% of our business,

given our strong share positions. In some markets, like the US, drive-thru operations

and carryout helped offset some of the pressure, but most restaurants are operating

on limited hours and are seeing overall trips decline sharply.” (4/21/20 Earnings Call)

19. Unilever: “Several factors that adversely impacted the quarter were: first, a decline in

our global Food Solutions business, as restaurants, canteens and cafés were closed;

secondly, a decline in out of home ice cream, as many out of home retailers like

leisure sites, travel hubs, beaches and tourist destinations were closed… Out of home

ice cream sales are about €3bn annually, of which nearly 70% is generated in the

second and third quarters. All the markets are different, but we've typically seen out of

home ice cream sales decline by 50% or more when a country moves into

lockdown…We also have a €2.5 billion global food service business, which is also

heavily impacted as cafés, restaurants and canteens close, and we're typically seeing

5 May 2020

Consumer Staples 6

sales declines of around 67% when a lockdown happens in food service channels.”


20. Essity: “Going forward, we do expect lower volumes [in Professional Hygiene] due to

the fact that fewer people are going to restaurants, staying in hotels, and working from

home and not working from offices. This will have a negative impact and we saw that

in China, for instance, in the first quarter where Professional Hygiene had a big drop in

volumes in the first quarter due to lockdowns.” (4/23/20 Trading Statement)

21. Heineken: “Europe beer volume declined 15.3% in March. Third party volume

declined 49.2% in March as on-trade outlets closed impacting our wholesale

operations. In Italy, most of the month of March was under lockdown and beer volume

declined by -33%, with volume to on-trade customers declining -75% and volume to

off-trade customers up low-single digit. In Spain, in March, total volume declined -

25%, with volume to on-trade customers down by -50% and volume to off-trade

customers up in the low-teens. In France, in March, volume declined mid-single digit,

as the decline in volume to on-trade customers of -50% was partially offset by the

high-single digit volume growth to off-trade customers.” (4/21/20 Trading Statement)

22. Boston Beer: “We’ve seen complete devastation of our keg business, it’s down near

zero and it happened very quickly. So it’s hard to – so that’s what we know. The

lockdown in the states where it’s been implemented has meant that our keg business

is a trickle. How much of that will come back, it’s anybody’s guess. I mean, in a

normal year there is a decent amount of turnover in restaurants anyway. They go out

of business, new ones take their place. So there will be a lot that don’t reopen, some

of those will probably going to close during the year anyway. It’s probably beyond my

capacity to predict how much lower the on-premise business will be in the short term

and the long term, other than it’s going to be lower and it’s going to be significantly

lower.” (4/22/20 Earnings Call)

23. Celsius Holdings: “We feel you're going to see some heavy promotions in June and

July [in North America], which we're already talking to many retailers. Retailers are

going to get -- they need to get consumers back into retail. So you're going to see a

lot of interesting promotions, and enticing consumers to get out and get into retail now

that everyone is getting somewhat accustomed to this at pickup and home delivery.”

(4/21/20 Update)

24. Danone: “Sales in Waters more impacted by food service channel closure as around

40% of the division’s sales are normally consumed away from home.” (4/21/20

Trading Statement)

25. Arca Continental (Mexico): “The On-Premise channel [in Mexico] has a mix of

maybe less than 10%. In the U.S., On-Premise is larger in terms of mix, it's about

15%. That is the channel that has collapsed in the last few weeks, and that is natural.

It's only a takeout service in most of those outlets. So we're seeing declines that are

not down as 0, but they're significant… In the convenience channel, consumers are

making less trips into the stores, and we're seeing slower growth in immediate

consumption packages. Many of our customers, especially universities and colleges,

the travel and hospitality industry and our foodservice on-premise customers are either

closed or have moved to a pickup delivery mode of operations. As a result, volume

performance in the FSOP and vending channels was down significantly in the last 2

weeks of March.” (4/23/20 Earnings Call)

26. Coca-Cola Amatil (Australia): “The first 2 weeks of April have seen 15% volume

declines compared to the previous period with the On-The-Go channel being the main

contributor as volumes were down around 50% on the prior year. For Alcohol &

Coffee, the first 2 weeks of April saw volumes decline by around 20% with on-

premise outlets being severely impacted by the government restrictions.” (4/17/20

Earnings Call)

5 May 2020

Consumer Staples 7


Multiple countries in lockdown, ranging from “shelter-at-home” to complete restriction of

movement and closure of manufacturing and recreational facilities. In the US, at least 40 states

have closed all restaurants and bars through the end of April. A few are starting limited re-

openings in May. Many workplaces have shifted workers to “work from home” schemes. All

these actions will significantly increase “at-home” consumption in the near-to-medium term.

A shift to at-home entertainment and dining could benefit soft drinks companies (Coca Cola,

Pepsi, Keurig Dr. Pepper), snacking companies (Pepsi’s Frito), and other niche beverages

(Monster, BellRing’s Premier Protein). This would be offset by closures in recreational dining.

Bars & Restaurant (On-Premise) risk:

o The CDC recommends no gatherings of greater than 10 people. Bars and restaurants

are now largely shut, except for takeout. With even fast food and QSRs largely moving

to takeout/ drive thru, we see increased risk to CSD manufacturers.

o Alcohol sales on premise (~16% of total industry) to decline. MillerCoors and

Constellation Brands negatively impacted as they are the #2 and #3 brewers by US

sales on premise.

o Boston Beer Co. 2.5% on premise volume share with no Top-10 brands. On our

estimates, on premise volume is ~10-15% of volume. Fast growing Truly protected

as its predominantly consumed at-home. CEO confirmed no lay-offs yet, with

production capacity actually expanding. Three taprooms shut (we think insignificant to

business). Company reported results, stating, “keg business devastated.”

o Constellation’s Corona and Modelo hold 9% industry volume share and 10% dollar

share. On our estimates, on premise volume is ~14% of total volume.

o MillerCoors’s Miller Lite, Coors Light, and Blue Moon are three of the top ten on

premise brands with 20% industry volume share and 19% dollar share. Per company

on premise volume is ~23% of total MC volume (17% in North America, 50-55% in

Europe).

Risk to CSDs & C-stores:

o Coca-Cola 40% of sales via on premise domestically and internationally (% varies by

markets). U.S. QSR drive-thru is the largest piece (~50%) with a smaller piece at full-

service restaurants and bars/café/cinemas. Internationally, the “hotel-restaurants-café”

channel is important.

o PepsiCo 10% of sales with PBNA at mid-to-high teens with Frito-Lay in low teens,

implying International very low.

o Keurig Dr. Pepper We estimate 20% of sales. Mitigated by at-home coffee brewers

and pods business.

Convenience Stores: Monster is highly exposed to convenience stores. C-stores to

remain open as a part of “essential services,” the impact from workers staying at home or

shifting impulse purchase dollars to essentials is high.

5 May 2020

Consumer Staples 8

3. Favorable for Pantry Loading


27. Molson Coors: “While brand volume benefited from pantry loading towards the end of

March, as discussed below, pantry loading has not continued into April.” (4/30/20

Earnings Call)

28. Colgate Palmolive: “In categories where we saw pantry loading like Oral Care, we've

seen the categories come down in consumption as you would expect, given the pantry

load that was in March and no specific reason why consumers would be brushing their

teeth more… Hill's [Pet Nutrition] growth was led by North America where continued

double-digit growth before the pandemic was augmented by consumer pantry loading

late in the quarter. The e-commerce business was up by more than 50% as we drove

strong growth across all platforms.” (5/1/20 Earnings Call)

29. Reckitt Benckiser: “Improved penetration and usage, particularly for products like

Dettol and Lysol, may well sustain, although we will likely see some unwinding of

‘pantry load’ as we work our way through the crisis… Likely significant pantry-loading

activity makes it difficult to fully assess changes in underlying consumption caused by

COVID-19; lack of clarity makes full year assessment challenging as material de-

stocking could reduce sales should COVID-19 effects pass.” (4/30/20 Trading

Statement)

30. Church & Dwight: “Consumption across our combined brands is slightly positive in

April despite domestic pantry de-loading…. We have seen [pantry loading] in other

countries, particularly if we look at North America, in Canada and Mexico and many

European countries as well. So it is not simply a U.S. phenomenon.” (4/30/20 Press

Release and Shareholder’s Meeting)

31. Altria: “We believe that our preliminary estimates of consumer pantry loading should

be an adjusting factor to reported volumes due to its high likelihood of near-term

volume payback…To estimate the impact of consumer pantry loading, we analyze

shipments to retail and retail sales data and compare them against recent and

historical trends. During the first few weeks of March, we observed stable retail foot

traffic and elevated tobacco expenditures per transaction. However, in late March,

retail foot traffic decreased significantly as stay-in-home orders were enacted, but

tobacco expenditures remained high. As we said before, it's difficult to identify trends

based on short time periods. This is especially true in such a fluid environment.”


32. Becle SAB (Mexico): “I would add that Nielsen does represent only 25%, or maybe

during these times, maybe up to 30% of our depletion business. So when you look at

those weekly Nielsens, there was one spike around March 21 where you saw an

inordinate amount of volume compared to the other weeks that surrounded it. So I

think that might have been your pantry loading. But since then, I think it's really

replenishment. And I think those consumers who were going on-premise and ordering

a different drink week-to-week had to fill their liquor cabinet with maybe some

different spirits. So I think we're enjoying some of that as well as I think it's indexed

very high for us in those stores that are reporting to Nielsen, which tend to be the

more big box retailers, where I think they're picking up a majority of the shopping right

now.” (4/30/20 Earnings Call)

33. Procter & Gamble: “Top line results [in 1Q] obviously benefited from consumer

pantry loading in preparation for in-home quarantining. We're planning for pantry

inventory levels to eventually return to normal. This higher level of consumer demand

will serve with our ramp-up in production levels and the depletion of retailer inventories.

As at-home inventory decreases, we expect to refill the retail inventory pipeline. We

believe the net effect of all of this shifted about 2 points of sales growth on a global

basis from Q4 into Q3.” (4/17/20 Earnings Call)

5 May 2020

Consumer Staples 9

34. Kimberly-Clark: “Volumes were up 8%, including significant shipments to support

consumer stock-up related to the COVID-19 outbreak. That stock-up occurred in all

major geographies and benefited all 3 segments, in particular Consumer Tissue… We

expect most, but not all, of the demand increase from consumer stock-up will reverse

out later in the year. However, with more people at home and also paying closer

attention to personal hygiene, it's likely that Consumer Tissue consumption will be

higher during shelter-in-place periods…I think the consumption effect – largely the

stock-up effect, was largely a developed market phenomenon. So, North America,

Western Europe, Australia, New Zealand and Korea to some extent.” (4/22/20

Earnings Call)

35. Unilever: “Increased in-home consumption and household stocking, particularly the

USA and Europe, contributed to volume-led growth in savory and in dressings. Knorr

saw low single-digit growth, whilst Hellmann's grew by double-digits… First of all,

household stocking in the short-term. This is a pull-forward in demand due to

stockpiling ahead of lockdowns, for example, of dried foods and hygiene products.

This is a change in buying patterns rather than a step up in consumption.” (4/23/20

Trading Statement)

36. Essity: “So, the stocking up or stockpiling that we saw was not only related to

Consumer Tissue or toilet tissue, we also actually saw stockpiling in feminine, in baby

care, and in incontinence care.” (4/23/20 Trading Statement)

37. Danone: “We need to address significant changes in consumers’ buying behaviors,

with unprecedented swings in weekly demand accentuated by stocking patterns in the

first weeks, the shift from out-of-home to at-home food consumption, as well as

shifting preferences to larger pack sizes… A sharp rise in sales in the month of March,

at a high-single-digit rate, boosted by the short-term effects of both a shift to at-home

consumption as well as pantry loading in Europe and North America.” (4/21/20

Trading Statement)

38. Nestlé S.A.: “From a geographic perspective, a majority of markets, but particularly

those in North America and Europe, reported significantly increased growth, partially

supported by consumer stockpiling. It happened essentially in a short time frame,

particularly in March for EMENA and in the later part of March for the Americas… In

terms of product categories, product perceived as everyday necessities saw elevated

demand with culinary products, pet care, coffee and Nestlé Health Science all

reported significant sales increases. By contrast, categories such as confectionery and

ice cream posted sales declines, reflecting reduced impulse buying and lower demand

for seasonal and gift-giving products.” (4/24/20 Earnings Call)

39. Coca-Cola: “In the at-home channels, we've seen some early pantry loading,

particularly in certain developed markets, at the beginning of many of the lockdown

phases. Then, as we get past the initial lockdown, levels normalize. In India, the

severity of the distancing measures has negatively impacted at-home as well, simply

due to the significant reduction in shopping trips. At this stage, it's too early to

determine exactly what level at-home trends will stay like … You see what consumers

deem is essential spikes up and stays up in the at-home channels. Some things like

beverages sell more, but not nearly enough to compensate for the losses in the away-

from-home channels. Some categories and the smaller SKUs are heavily deprioritized.

It's certainly not the case that e-commerce is offsetting the losses from away-from-

home. Relatively, e-commerce, even though it's doubled in sales for beverage

category, it's still a very small percentage of the total beverage category.”” (4/21/20

Earnings Call)

40. Boston Beer: “We’ve started building the inventory at the beginning of Q1, all the

way into March. Then COVID happens and there was significant pantry loading, as

with many products… [in early April] it’s less pantry load and there’s a bit of an impact

of pantry load that is coming back.” (4/22/20 Earnings Call)

5 May 2020

Consumer Staples 10

41. Arca Continental (Mexico): “During the last weeks of March, our U.S. operations

saw the benefit of pantry loading from our consumers. However, we expect a

[negative] impact of the post pantry loading effect during the second quarter, coupled

with a significant impact in consumer traffic due to increased social distancing and

shelter in place restrictions throughout our franchise territories.” (4/23/20 Earnings

Call)

42. Pernod-Ricard (France): “It's fair to say that in both [U.S. and Europe], just before

the confinement, there was a significant increase [in] pantry load. And those positive

trends have been as well, to a lower extent, but still positive in the days and weeks

after. Suggesting that there's some reordering happening after the pantry load. So this

is something that we'll need obviously to carefully monitor and understand to see how

much this is actually consumed at home. When we look at the consumption data,

especially in the U.S., we know that a significant part of the off-trade sales, I think it's

40%, is related to consumption in groups of 5 people and more, so -- showing that

part of the home consumption could be limited in the current environment where

gathering is not allowed.” (4/23/20 Earnings Call)


Quarantine, self-isolation, and social distancing orders spurring heavy traffic into grocers as

consumers stock-up. Scanner data for the 4wks ending 4/4/20 shows Packaged Food and

HPC growth acceleration in March with sequential deceleration in early April.

PepsiCo’s Frito Lay: Pantry-loading will benefit the largest snacking company in the US.

Snacks and Staple foods are 43% of the global business. Scanner data for the 4wks

ending 4/4/20 shows potato chips +20% and tortilla chips +30%.

BellRing Brands: Premier Protein over indexed to club channel (Costco and Sam’s Club

60% of sales). Amid coronavirus concerns, warehouse clubs seeing increased traffic.

Procter & Gamble Bounty paper towels and Charmin toilet paper: Consumers

loaded up on paper towel and toilet paper products as they prepared for the possibility of a

pandemic-shutdown. While we expect a lower chance of a sustained surge (vs. cleaning

products), this will be a near-term boost. Scanner data for the 4wks ending 4/4/20, bath

tissue and kitchen tissue +80%. This excludes online and club channel sales.

Colgate toothpaste: We attribute this to pantry loading rather than health & hygiene as

usage seems unlikely to increase. We expect a reversal in the next few quarters. In the

scanner data for the 4wks ending 4/4/20, toothpaste +35%.

Church vitamins: Potentially a mix of H&H and pantry loading, vitamins takeaway for the

4wks ending 4/4/20 was up +100%.

5 May 2020

Consumer Staples 11

4. Recession Trade Down


43. Colgate Palmolive: “We typically found not significant trade down in recessions, but

you do get some for sure.” (5/1/20 Earnings Call)

44. Church & Dwight: “It's too early right now to make any predictions with respect to

trade down. Once all the shelves get restocked, that's when we'll be able to tell,

what's attracting consumers to move from premium to mid-tier or to value. I mean,

your question, I'm sure, is more directed towards laundry detergent. It's one of our

biggest categories, and we benefited greatly back in 2009.” (4/30/20 Earnings Call)

45. Clorox: “Moreover, our portfolio has proven to be relatively recession resilient in the

past as major Clorox categories like trash, grilling and food generally benefit from

consumers eating out less as well as water filtration as consumers recognize the

superior value of Brita filtered water when comparing to bottled water.” (5/1/20

Earnings Call)

46. Keurig Dr. Pepper: “As we look to a future in which a recession seems to be a near

certainty, we also see further opportunity for the Keurig system to expand as

consumers shift more of their coffee preparation in home… We also know that CSDs

are remarkably resilient to a recession, and we have a wide range of pricing, pack size

and promotion tactics to ensure our continued relevance, should consumers become

more value sensitive in the future.” (4/27/20 Earnings Call)

47. Estee Lauder: “As I mentioned in my prepared remarks, we are mindful that there

could be a recession, certainly impact, but hoping that by holiday, people are ready to

shop again.” (5/1/20 Earnings Call)

48. Mondelez: “It's difficult to estimate because this is a very particular type of recession.

We don't know how fast and how we're going to get out of it. So we base a little bit

our learnings on past recessions. Our categories are durable, and they are not that

much affected by these recessions we've seen in the past.” (4/28/20 Earnings Call)

49. Procter & Gamble: “In terms of recessionary dynamics as they relate to private label,

we see a number of different behaviors which affect that overall equation. There are

certainly a subset of consumers for whom price becomes a significantly greater portion

of their personal value equation. And that will, in some cases, result in trade-down to

private label. Our job becomes having an alternative for them that allows them to

achieve the same objective within our branded portfolio, and we have many more

rungs in that pricing ladder now than we had during the last recession.” (4/17/20

Earnings Call)


1Q US GDP declined -5%, marking the start of a likely recession. Experts and companies

cannot agree on the length of the recession, but most agree the depth will be significant in at

least 2Q.

Reynolds Consumer Products: Benefits from at-home dining as market share leader in

aluminum foil (65% branded share) and #2 player in trash bags and disposable tableware.

A defensive company given 95% household penetration and no international presence.

Above Premium Beer (Constellation, Boston): Both companies 100% premium

products. Constellation’s Corona and Modelo brands particularly exposed due to pricing

disparity with mainstream and value brands.

5 May 2020

Consumer Staples 12

5. Big Brands Secular Effect


50. Estee Lauder: “Beloved heroes like Estée Lauder's Advanced Night Repair, La Mer,

Crème de la Mer Treatment Lotion and Concentrate and Clinique's Moisture Surge

has been seeing strong global demand online since the outbreak, demonstrating the

dynamics of big brands.” (5/1/20 Earnings Call)

51. Colgate Palmolive: “And as I mentioned earlier, I think big brands are going to win in

this environment, whether it's in Asia or anywhere around the world. The proven

efficacy positioning the scientific knowledge that we have and how we communicate

that in our brand purpose, particularly around our core businesses, will bode well

moving forward. (5/1/20 Earnings Call)

52. Molson Coors: “We have also focused investments against our best-known brands to

stay top of mind. With significant economic uncertainty, consumers are turning to big

brands they trust.” (4/30/20 Earnings Call)

53. Kraft Heinz: “And I think that the consumers are coming back to big brands. As a

result, our leading iconic brands are growing household penetration in almost every

market, especially the developed markets like U.S., like Canada, like U.K.” (4/30/20

Earnings Call)

54. L’Oreal: “Big brands are definitely favored in times like these ones because

consumers go back to the brand they know they trust, and this is definitely what we

see. As you know, it was already a trend for our brands because in the past 2, 3 years,

our big brands got more powerful than ever. But I think that in this period of crisis, it

will be even more, number one.” (4/16/20 Earnings Call)

55. Danone: “This is a time for big brands if we act properly. The simplification of SKU

assortments and ranges in the trade is very significant. They need reliable partners.

They need partners that can act at scale. This is where large brands, large companies

can operate in an advantage. And maybe for the first time, the food revolution that

propelled all these small, nice brands on the shelves maybe put on hold for some time

or may transform actually in the coming periods.” (4/21/20 Earnings Call)


Global CPG is the most likely beneficiary of the “Big Brands” effect. We will be watching to see

how much of this impact lingers in 2Q after the initial wave of pantry loading.

Beer Experts: Demand for Big brands related to pack size: Experts warn it is too

early to read into sudden positive inflections for Bud Light and Miller Lite. Neither believes

the improvement is structural. The mainstream light category is still losing share as rate of

sales lags the industry. The demand spike is likely due to supply as established brands

more reliably sell large pack sizes (24/30 counts), a tailwind as consumers weigh extended

at-home consumption and value.

5 May 2020

Consumer Staples 13

6. Geographic Exposure: Emerging Markets


China

56. Estee Lauder: “Towards the end of the quarter, Asia/Pacific began to show signs of

recovery and some markets in the region, including mainland China and Taiwan, ended

the fiscal 2020 third quarter with net sales growth… our business in Mainland China is

further improving as retail stores began to reopen with shortened hours in March. By

mid-April, virtually every door had reopened. We are encouraged by China efforts in

containing the virus and the initial signs of recovery. We expect to return to double-

digit sales growth in Mainland China in the fourth quarter.” (5/1/20 10-Q, Press

Release)

57. Colgate Palmolive: “In China, we have begun to see the country open back up and

trends are improving in Q2, but we caution that the country still is not back to pre-

crisis levels.” (5/1/20 Earnings Call)

58. Becle SAB (Mexico): “What we're already seeing from China is that, where the on-

trade has been open now for a good 4 weeks, the uptake in the on-trade is still

relatively low, perhaps penetration levels are only around 30%.” (4/30/20 Earnings

Call)

59. Carlsberg: “What we see in China with regards to the recovery is that the demand is

picking up. Outlets are opening, so more than 60% of the dining is open; for the off-

trade is for more than 90% open; the traditional trading is around 90% open. The only

thing that really still impacts us is the night entertainment outlets because they remain

closed. We see good growth in our modern off-trade and e-commerce, and it seems

as home consumption remains at a high level. However, we see here also that

consumers remain hesitant to visit the restaurants, and they did not rush back to

restaurants to celebrate. And in general, we can say that we have changed from crisis

mode to recovery and rebound.” (4/30/20 Earnings Call)

60. Procter & Gamble: “At CAGNY, we were internally expecting organic sales in

Greater China to be down as much as 20%. We did much better than we were

expecting in China, down only 8% ex-travel retail. We saw a strong lift in our

categories in e-commerce to make up a portion of sales lost in closed physical stores.

We quickly restored production capability, built share as a result, and are now

operating at very close to full strength… Our business there is rebounding nicely, both

from an operations standpoint and from a consumption standpoint. We are seeing

continued significant demand in our categories and the supply and retail inventories are

being steadily rebuilt.” (4/17/20 Earnings Call)

61. Coca-Cola: “We can look to China for some early learnings about the various phases.

I'm happy to say that our plants there are all operating, and employees have returned

to the company offices in Shanghai. We're seeing encouraging signs of increased

consumption as outlets reopen, resulting in sequential improvement in China. However,

the consumption is still lower than prior year and we expect a full recovery to take time,

especially as there are still limits on crowd sizes.” (4/21/20 Earnings Call)

62. Unilever: “Restrictions in China began to be eased at the end of March, and although

some restrictions have now been reintroduced in selected big cities, Chinese

consumers are not yet going back to how things were before. There's a new normal

emerging such as the attitude of consumers to return to out of home dining. Although

the restaurant opening rate continues to increase and is currently sitting at around

about 60%, the capacity utilization is cut somewhere between 50% and 70% to

ensure that physical distancing is maintained in those restaurants.” (4/23/20 Trading

Statement)

5 May 2020

Consumer Staples 14

63. Nestlé SA: “China posted a sharp sales decline due to movement restrictions in place

for almost a full quarter, limited consumer stockpiling as well as a relatively higher

exposure to out-of-home channels. In addition, we also had to manage some supply

chain challenges post Chinese New Year, but we were able to gradually restore

production and logistics to level close to normal by the end of March.” (4/24/20

Earnings Call)

64. L’Oreal: “China is already seeing an encouraging recovery in beauty product

consumption. The example of China has shown the current situation does not call into

question consumers’ strong appetite for beauty products, which remains intact. The

market should recover quickly as soon as measures to close sales outlets are lifted.”


65. Celsius Holdings: “When we look at China, they saw heavy loading Celsius into key

retailers before the Chinese New Year in December, early January. And then with the

closures and the controls that were put in, retail has been affected. So right now,

everything is getting back to normal, and you're starting to see a lot of heavy

promotions, to get consumers back into retail.” (4/21/20 Update)

Latin America

66. Mondelez: “And then Mexico, we think that we have a macro environment that's soft,

but the operations are continuing to run well. They're related to the crisis and we see a

deeper contraction.” (4/28/20 Earnings Call)

67. Coca Cola FEMSA: “Brazil was the first country in Latin America with a confirmed

COVID case, on February 26. As of April 16, certain states started to transition to

partial lockdowns. Shortly after Brazil, Mexico confirmed its first case of COVID-19 on

February 28. By March 30, the government announced the suspension of all

nonessential activities for the month of April, which was later extended for the month

of May. Countries like Argentina, Colombia and Panama, took more strict measures,

starting March 15. We had seen channel, category and package mix shifts driven by

consumers adopting the behaviors to comply with the new social distancing realities.

Consequently, we have seen declines in our on-premise channel partially offset by

increases in the modern trade and home delivery channels. The traditional trade

channel comprises mainly of mom-and-pop stores and has proved relatively resilient,

offering convenient proximity for consumers across our markets. Since most of our

volumes are distributed through the traditional trade channel, our exposure to the on-

premise channel is relatively low, representing approximately 50% of our consolidated

volumes.” (4/29/20 Earnings Call)

68. Colgate Palmolive: “And we can't predict exactly where it's going to happen.

Obviously, we've seen things creep up in terms of the number of incidences in Brazil.

So what happens there going forward...So again, it's the unpredictability of what we're

seeing all around the world.” (5/1/20 Earnings Call)

69. Unilever: “Across [Latin America], there was relatively limited impact in the quarter

from COVID-19, with a small positive impact from household stocking in late March

and a negative impact from out of home ice cream. We believe that much of Latin

America is in the early phase of the COVID-19 cycle. Conditions in the region

generally remained challenging with volatile currencies, particularly the devaluation in

the Brazilian real.” (4/23/20 Trading Statement)

70. Heineken: “In Brazil, beer volume declined mid-single digit. Our premium and

mainstream portfolios grew double digit. The economy portfolio declined in the mid-

twenties. In March, beer volume declined in the mid-twenties. In Mexico, beer volume

increased low-single digit. Following government orders, our breweries were

suspended for the month of April. At that moment we estimate customers held 2 to 3

wks inventory.” (4/21/20 Trading Statement)

5 May 2020

Consumer Staples 15

71. L’Oreal: “Brazil, Chile and Uruguay remained positive for the quarter. Mexico had

mixed results. Columbia and Peru were heavily impacted by the closure of beauty

stores and perfumeries.” (4/20/20 Trading Statement)

72. Arca Continental (Mexico): “What we can say is the Peru and Ecuador are the

hardest hit. Mexico and Southwest seem better so far…On March 16, the Peruvian

government declared a nationwide lockdown… These restrictions stopped movement

of people by 90% and 1/3 of our customers in the traditional channel remain totally or

partially closed. It's important to mention the national curfew begins at 6pm. So the

window available for the sale and distribution of our products has been reduced

considerably.” (4/23/20 Earnings Call)

Emerging Markets

73. Marico (India): “In India, while the macroeconomic situation prior to the COVID

outbreak was particularly challenging, the disruption leading to and during the national

lockdown over the last fortnight of March, brought it to a near standstill. Bangladesh

and Southeast Asia were relatively less impacted due to restricted lockdowns imposed

in the last few days of the quarter.” (5/4/20 Earnings Call)

74. Colgate Palmolive: “In India, we are still experiencing disruptions to both our supply

chain and our retail network, consistent with what you have heard from other

companies. Trends have started to improve, and our plans are beginning to ramp back

up. We still expect an impact from the crisis in the second quarter. In Africa/Eurasia,

our strong net sales and organic sales growth was driven by volume growth across

every hub. Our focus on faster-growth channels continues to pay dividends,

particularly in terms of discounters in Russia and Turkey. We saw a continued

improvement in our South African business.” (5/1/20 Earnings Call)

75. Reckitt Benckiser: “So overall developing markets, we had mid-single-digit growth in

emerging markets overall. It's 40% of our business. What you're seeing here is clear

demand for products like Veja, in Brazil; Dettol across Africa; Dettol in India, which

actually had a mid-single-digit performance; as well as if you look at some of the

businesses in Southeast Asia and China where you see very strong performance of

brands like Dettol.” (4/30/20 Earnings Call)

76. Mondelez: “India is 10% of our emerging markets. Significant closures of the

traditional trade at the moment, which is about 75% of our revenues. There is clear

some short-term impact, but we expect a sequential easing of restrictions. We have a

very strong distribution system. So I think the return there will be fast. Southeast Asia,

is really into a similar position as India. China is already kind of back, and India and

Southeast Asia will go fast… A second cluster is Eastern and Central Europe, not that

heavily affected in the first quarter. There will be more lockdown restrictions in the first

half of April. Overall, traditional trade is only about 20% of revenues there. This part

will not be as heavily affected, and we will be back to normal quite strongly… I would

say 2/3 of our emerging markets, we feel pretty good about. And then the others,

that's where we have much stronger traditional trade. I'm talking about Argentina,

Brazil, Middle East and Africa... I think those will take a little bit more time. There is a

dynamic of traditional trade that is closed with some devaluation, so there will need to

be some pricing. It's only 1/3 of our emerging markets, but that really remains

somewhat challenged, and it will probably take us 6 to 9 months to return here.”


77. Pepsi: “Our businesses delivered strong organic revenue growth as developing and

emerging markets led the way with a double-digit increase in organic revenue in

Mexico, India, Egypt, Turkey, Pakistan, Saudi Arabia and South Africa. High single-

digit growth in Colombia and mid-single-digit increase in Brazil, Russia and Poland.”


5 May 2020

Consumer Staples 16

78. Procter & Gamble: “Right now in emerging markets, we're operating and thinking

rightly or wrongly day by day, because the situation changes dramatically. India is a

good example. That market is effectively shut, and will be at least through the end of

April. We're working with governments as I mentioned in my prepared remarks to

establish the essential nature of our product categories for their citizens, and therefore

gain the ability to operate, which we largely have. That's been a significant focus area

over the last five weeks and it's a daily endeavor.” (4/17/20 Earnings Call)

79. Kimberly- Clark: “…Central and Eastern Europe was up high-teens. Brazil was up, I

think, low double-digits as well. So, we're seeing very good performance across our

D&E markets. Notably, I also would tell you there was much less stock-up behavior in

the D&E markets. The China team would say there was none in our categories. I do

think in Brazil, we saw a little bit in Consumer Tissue.” (4/22/20 Earnings Call)

80. Essity: “We did see a sort of a stockpiling also in Latin America, which then explains

the high-growth numbers that we saw there and also in some other what we define as

emerging markets like in Eastern Europe and Russia, while that was completely offset

by the very negative growth in China.” (4/23/20 Trading Statement)

81. Heineken: “In Nigeria, beer volume declined high-single digit in March, following a

price increase in February and the ban on distribution of alcoholic beverages late

March. The alcohol ban is applicable in some states where we continue to sell non-

alcoholic malt drinks. In South Africa, a ban on sales, production and distribution of

alcoholic beverages starting the last week of March. Total consolidated volume

declined in the mid-twenties in March. In Egypt, beer volume declined by 50% in

March following a drop in tourism.” (4/21/20 Trading Statement)

82. L’Oreal: “After a good start of the year, March was impacted by lockdowns and store

closures in many countries of Central Europe, as well as Israel, whilst countries such

as Russia or Turkey have gone through partial shutdown. The Zone experienced a

drop in sales as of mid-March. Turkey, Czech Republic, Romania and Ukraine remain

positive. Food stores, pharmacies, convenience stores and hard discounters have

remained open in many countries, however drug chains, perfumeries, luxury retail and

hair salons have come to a stop. Middle Eastern and North African countries were hit

by lockdown measures in early March. The major malls in the Middle East have closed,

but foodstores and pharmacies remain open. Saudi Arabia, Egypt and Pakistan posted

strong growth. South Africa reacted with a complete shutdown in the last week of

March, which has had an immediate and important impact on sales.” (4/20/20

Trading Statement)


No company will escape geographic impact, negatively or positively, as over 200 countries now report cases. The duration of this crisis, region by region, will greatly influence other factors.

Western Europe (43% of cases): Colgate (17% of sales); Procter & Gamble (17%);

Coca Cola (15%); Molson Coors (12%); Monster (11%).

North America (34% of cases): Constellation (100% of sales); Reynolds (100%);

Boston Beer (100%); Keurig Dr. Pepper (100%); BellRing (97%); Church & Dwight

(89%); Clorox (85%); Molson Coors (80%); Monster (74%); Pepsi (61%).

Asia Pacific (16% of cases): Coca-Cola (25% of sales); Colgate (20%); Procter (19%).

Latin America (3% of cases): Colgate (26% of sales); Pepsi (11%); Coca-Cola (11%).

5 May 2020

Consumer Staples 17

7. Localized Supply Chains & Production


83. Clorox: “Demand has been clearly unprecedented, and we're in uncharted territory for

our supply chain, in particular, in disinfecting products. Typically, if you think about

supply chains, they're built to be in the sweet spot of quality, safety, efficiency, cost,

effectiveness required to produce the necessary output for the long term. But when

you have situations like we faced where, in March, we saw demand spikes for some of

our disinfecting products of 500-plus percent, I think it's evident to everybody that

despite heroic efforts, you have out of stocks.” (5/1/20 Earnings Call)

84. Colgate Palmolive: “As the crisis hit, we mobilized our supply chain teams to offset

lost production in China to increase manufacturing elsewhere. We established strict

safety procedures in China, which allowed us to reopen our factories in a safe and

efficient manner. Now we are operating at over 100% of our expected capacity in

many of our Chinese plants, which is helping alleviate pressure in countries where

COVID is still a developing problem.” (5/1/20 Earnings Call)

85. Church & Dwight: “We have some suppliers of both raw and package materials and

co-packers that have had temporary shutdowns, generally for 1 or 2 days because of

COVID in order to sanitize their plants. We've had one in particular that has been shut

down for a couple of weeks, and now has come back online. For our part, in one of

our plants, we've reduced our production and outsource some of the production to co-

packers in order to make sure that the employees in that plant could be kept safe.”

(4/30/20 Annual Shareholder’s Meeting)

86. Mondelez: “We also incurred higher costs to keep clients supplied. The mix changed

due to higher demand for larger family packs, for instance. Our supply chain cost also

rose because we had to hire temporary workers. We had to increase compensation

and saw costs for distribution increase, and we did see some currency impacts in

emerging markets.” (4/28/20 Earnings Call)

87. Spectrum Brands: “Operationally, our second quarter results also demonstrated a

disciplined approach to supply chain disruptions that were experienced in China. While

this delayed some shipments and hurt our sales during the second quarter, by the end

of the quarter, our factories were at or near full capacity and our external supply chain

from China is in a similar position. At this point, we expect some shortages in supply in

the first half of the third quarter, but if our situation holds, we believe we'll be in a

position of recovery by the end of the current quarter.” (4/30/20 Earnings Call)

88. Procter & Gamble: “We may see months of sporadic production suspension due to

local quarantines or raw material supply. It's not just our operations that matter here.

It's those of our suppliers, of contractors and of our transportation partners. A lot must

go right in a challenging environment and not all of it will.” (4/17/20 Earnings Call)

89. Kimberly-Clark: “We're working with raw material suppliers and distribution partners

to ensure continuity and maximize deliveries. In some cases, we are incurring

additional costs to keep the supply chain rolling. We have experienced some disruption,

including temporary manufacturing slowdowns and shutdowns, but none have had

material impact to date. The supply chain environment is dynamic, and we expect

ongoing challenges in the near term.” (4/22/20 Earnings Call)

90. Coca-Cola: “We're clearly focused on adapting the supply chain. There is sourcing

the ingredients that we use in the concentrate and in the bottling plant, our own

concentrate manufacturing or fountain manufacturing, the bottling plants, and then

distribution. There have been challenges... There's been pressure at the borders,

whether it's the province borders or country-to-country borders, moving ingredients

that are shipped around the world…And so, the local supply chain is then able to work

as part of the food system, to allow to run the production systems and distribution. So

we've had some issues on timing of ingredients. Those are much better than they

5 May 2020

Consumer Staples 18

were a few weeks ago… Production facilities are largely running. Just a couple of

places that we see some plant shutdown. And distribution, we've largely kept up and

running everywhere. And there are issues in odd countries here and there, but

generally speaking, we've been able to adapt and it's a strength of having a local

supply chain in each country.” (4/21/20 Earnings Call)

91. Unilever: “There have been times where our factories have had to close but none for

more than few days. And as of today, we're running at an average of around 85% of

normal output across our 221 sites.” (4/23/20 Trading Statement)

92. Nestlé SA: “We also had to manage some supply chain challenges post Chinese New

Year, but we were able to gradually restore production and logistics to level close to

normal by the end of March.” (4/24/20 Earnings Call)

93. Boston Beer: “With our production system, we are fairly close to self-sufficient in

CO2. So, we’re very confident about our CO2 supply. We don’t need that much. We

have looked at other items, malt and hops are not an issue. And flavors we’re fine with.

So, in general, we don’t see issues in sort of our first-tier suppliers. … The thing that

we have worked very hard on is making sure we have adequate supply of cans even to

cover our upside forecasts, particularly sleek cans, and we’ve been assured from our

can suppliers that they are ready to supply the projections that we’ve given them.”



According to the American Association of Port Authorities (AAPA), the port of Los Angeles had

a -19% decrease in TEUs in 1Q, with March TEUs down -31%. According to the AAPA, “the

demand just isn’t there… ‘People aren’t buying patio furniture for their backyards and things

like that, so there is just softening demand,’ … Port officials said production in China is

beginning to recover.” China is key to manufacturing and imports, where orders are still down.

Most Staples companies engage in majority-localized manufacturing, a relative benefit

compared to sectors with majority-outsourced production. That said some companies called out

risk from Southeast Asia-based suppliers for U.S. product (Monster, Coca-Cola). We believe

there are many indirect risks, such as wholesale artificial sweetener production, that may

present additional risks we are not considering.

We highlight a few exceptions:

Church & Dwight: Water flossing “Power Brand” Waterpik manufactured in China.

Keurig Dr. Pepper: Brewers historically manufactured in China. In response to last year’s

tariffs, supply chain “geodiversified” away from the country. Additionally, with peak selling

season around the holidays, seasonally lower demand offers some protection.

Constellation: Imported beer brands Corona and Modelo brewed in three facilities across

Mexico, accounting for 80%+ of company volume. Mexico production shutdown

temporarily restricting manufacturing.

5 May 2020

Consumer Staples 19

8. Travel/Travel Retail Shutdown


94. Coca Cola Europe: “Tourism is a big part of the economy in France and Spain and

particularly Spain. So we're factoring that into what we're seeing at the moment. And

clearly, that starts quite early. So even in Easter. We've got a very high proportion of

the away-from-home business, predominantly tourism. So we'd expect that to be

impacted as we move through, particularly the second quarter. And then we're looking

to see what will happen with restrictions and potentially people taking the opportunity

to take holidays in Q3 and beyond.” (4/28/20 Earnings Call)

95. Remy Cointreau: “In global Travel Retail trends we can say that these trends have

been weak since last August, mostly due to the sharp decline of Chinese travelers

going to Hong Kong with protests. And this weakness clearly deteriorated further in

the fourth quarter with COVID-19 taking its toll on air traffic… Travel retail, as far as

we speak, is an empty channel. Nobody is traveling, operators are under pressure. So

Travel Retail is really in a bad shape. This will be the first one to recover once things

will be back to normal. But to do that, the flight situation should be better. So the real

negative element, I repeat, is Travel Retail.” (4/29/20 Earnings Call)

96. Estee Lauder: “In travel retail, the most successful products all over the world tend to

be what we call our hero products, so the products which have high loyalty, a high

repurchase rate because both as a gift and as for personal consumption, which are the

2 drivers of travel retail, people really want to buy products that they are pretty sure will

either replenish their habits or create exciting gifts. In that sense, there is the

possibility to recover at least part of the travel retail sales in the country of origins. And

we are working on this in every country, many emerging markets, in China, in U.S., in

Europe. However, in this moment, to be very clear, travel retail in Europe and U.S. is

basically closed.” (5/1/20 Earnings Call)

97. Pernod-Ricard: “Travel Retail, very interesting data in terms of very significant drop in

passenger numbers. And for instance, I believe the global forecast for the traffic in

April is -81%, so very consistent with the assumption we took for Travel Retail. And on

top of that, since end of March, there've been as well some very visible measures

taken by airports, for instance, to really reduce dramatically their cost with a

consolidation of operations in terminals, for instance, in Heathrow, the Changi Airport

announcing that they're going to shut the terminal for 18 months. So our view, to be

fair, that this channel will be durably affected. And our assumption for the weeks to

come is probably quite realistic.” (4/23/20 Earnings Call)

98. L’Oreal: “The Travel Retail market has fallen in all geographic Zones following the

progressive closure of airports and stores, and the standstill in air traffic… It should be

stressed the progressive reopening of stores in Northern Asia in particular. Note that

the importance of our major fragrances has been confirmed, as well as skincare –

especially dermocosmetics – in airport outlets. L’Oréal, in collaboration with duty free

operators, is preparing for a gradual recovery by geographic Zone.” (4/20/20 Trading

Statement)

99. Procter & Gamble: “The travel retail business specifically is round numbers $1bn

business. That's gone because there is no travel. Having said that, the products that

were bought in travel retail were consumed in markets, and our job needs to be to

make up for that travel retail loss in the near-term by serving those markets. And we

are seeing significant uptick already on SK-II consumption purchase in mainland China

which was one of the big sources of the travel retail demand.” (4/17/20 Earnings

Call)

100. Phillip Morris: “Government travel restrictions and related reductions in

passenger travel are having a significant impact on the company's duty-free business,

which contributed approximately 4% of total net revenues in 2019 and has relatively

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Consumer Staples 20

high unit margins reflecting its skew to premium brands. As a result of this premium

skew, only a portion of the COVID-linked duty-free volume decline is expected to be

recovered by the company's in local markets, and generally at lower margins.”

(4/21/20 Earnings Release)


International travel deteriorated quickly as countries closed borders and many limiting domestic

travel. The IATA reports worldwide flights were -70% at the start of April (ranging from North

America -45% to Europe -80%), resulting in a significant hit to the global tourism and duty-free

industry. 180mn Chinese nationals hold passports (vs. 147mn Americans) for whom nearly all

travel is halted.

Procter & Gamble: At its last investor day, the company stated SK-II is a ~$2bn brand

and that Olay is heavily skewed to China and the US (together 80% of sales). Prestige

beauty sales, are down from the expected slowdown in travel retail, although company

notes some offset from eCommerce. For example, SK-II opened its first travel “smart”

store in Singapore’s Changi Airport last year where Mainland Chinese visitors comprised

16% of total visitors in ‘19.

Beer: Closure of tourism regions a negative.

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Companies Mentioned (Price as of 04-May-2020) Altria Group, Inc. (MO.N, $38.01) Arca Continental (AC.MX, MXN92.04) BellRing Brands (BRBR.N, $17.11) Carlsberg (CARLb.CO, Dkr822.6) Church & Dwight Co, Inc. (CHD.N, $71.93) Coca Cola European Partners (CCEP.AS, €35.25) Coca Cola European Partners (CCEP.N, $38.77) Colgate-Palmolive Company (CL.N, $69.48) Constellation Brands (STZ.N, $163.75) Danone (DANO.PA, €61.5) Essity (ESSITYb.ST, Skr309.2) Femsa (FEMSAUBD.MX, MXN151.84) Heineken (HEIN.AS, €73.62) Hengan International (1044.HK, HK$66.5) Hindustan Unilever Ltd (HLL.BO, Rs2082.3) Jose Cuervo (CUERVO.MX, MXN35.95) Keurig Dr Pepper Inc. (KDP.N, $26.02) Kimberly-Clark Corporation (KMB.N, $135.73) L'Oreal (OREP.PA, €250.2) Molson Coors (TAPa.N, $63.53) Molson Coors Beverage Company (TAP.N, $38.19) Mondelez (MDLZ.OQ, $50.06) Monster Beverage Corporation (MNST.OQ, $59.21) Nestle (NESN.S, SFr99.81) Pental (PTL.AX, A$0.365) PepsiCo (PEP.OQ, $130.92) Pernod-Ricard (PERP.PA, €136.2) Philip Morris International (PM.N, $73.31) Procter & Gamble (PG.N, $115.77) Reckitt Benckiser (RB.L, 6620.0p) Remy Cointreau (RCOP.PA, €98.65) The Boston Beer Company (SAM.N, $469.64) The Clorox Company (CLX.N, $199.27) The Coca-Cola Company (KO.N, $45.14) The Estee Lauder Companies Inc. (EL.N, $174.38) The Kraft Heinz Company (KHC.OQ, $28.93) Unilever (UNA.AS, €44.36) Unilever (ULVR.L, 4054.0p)

Disclosure Appendix

Analyst Certification

I, Kaumil Gajrawala, certify that (1) the views expressed in this report accurately reflect my personal views about all of the subject companies and securities and (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.

As of December 10, 2012 Analysts’ stock rating are defined as follows:

Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark* over the next 12 months. Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months. Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months. *Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most att ractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as Europea n (excluding Turkey) ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin America, Turkey and Asia (excluding Japan and Australia), stock ratings are based on a stock’s total return relative to the average total r eturn of the relevant country or regional benchmark (India - S&P BSE Sensex Index); prior to 2nd October 2012 U.S. and Canadian rat ings were based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiveness of a stock’s total return potential within an analys t’s coverage universe. For Australian and New Zealand stocks, the expected total return (ETR) calculation includes 12-month rolling dividend yield. An Outperform rating is assigned where an ETR is greater than or equal to 7.5%; Underperform where an ETR less than or equal to 5%. A Neutral may be assigned where the ETR is between -5% and 15%. The overlapping rating range allows analysts to assign a rating that puts ETR in the context of associated risks. Prior to 18 May 2015, ETR ranges for Outperform and Underperform ratings did not overlap with Neutral thresholds between 15% and 7.5%, which was in operation from 7 July 2011. Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances. Not Rated (NR) : Credit Suisse Equity Research does not have an investment rating or view on the stock or any other securities related to the company at this time. Not Covered (NC) : Credit Suisse Equity Research does not provide ongoing coverage of the company or offer an investment rating or investment view on the equity security of the company or related products.

Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward.

Analysts’ sector weightings are distinct from analysts’ stock ratings and are based on the analyst’s expectations for the fundamentals and/or valuation of the sector* relative to the group’s historic fundamentals and/or valuation:

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Overweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is favorable over the next 12 months. Market Weight : The analyst’s expectation for the sector’s fundamentals and/or valuation is neutral over the next 12 months. Underweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is cautious over the next 12 months. *An analyst’s coverage sector consists of all companies covered by the analyst within the relevant sector. An analyst may cov er multiple sectors.

Credit Suisse's distribution of stock ratings (and banking clients) is:

Global Ratings Distribution

Rating Versus universe (%) Of which banking clients (%) Outperform/Buy* 49% (32% banking clients)

Neutral/Hold* 38% (26% banking clients)

Underperform/Sell* 12% (22% banking clients)

Restricted 1%

*For purposes of the NYSE and FINRA ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, and Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdin gs, and other individual factors.

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For date and time of production, dissemination and history of recommendation for the subject company(ies) featured in this report, disseminated within the past 12 months, please refer to the link: https://rave.credit-suisse.com/disclosures/view/report?i=515314&v=2439gdwf61awcnip0f6qwlzpb .

Important Regional Disclosures

Singapore recipients should contact Credit Suisse AG, Singapore Branch for any matters arising from this research report. The analyst(s) involved in the preparation of this report may participate in events hosted by the subject company, including site visits. Credit Suisse does not accept or permit analysts to accept payment or reimbursement for travel expenses associated with these events. For Credit Suisse Securities (Canada), Inc.'s policies and procedures regarding the dissemination of equity research, please visit https://www.credit-suisse.com/sites/disclaimers-ib/en/canada-research-policy.html. Investors should note that income from such securities and other financial instruments, if any, may fluctuate and that price or value of such securities and instruments may rise or fall and, in some cases, investors may lose their entire principal investment.

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This research report is authored by: Credit Suisse Securities (USA) LLC .................................................................. Kaumil Gajrawala ; Pallavi Bakshi ; Theo Brito

Important disclosures regarding companies that are the subject of this report are available by calling +1 (877) 291-2683. The same important disclosures, with the exception of valuation methodology and risk discussions, are also available on Credit Suisse’s disclosure website at https://rave.credit-suisse.com/disclosures . For valuation methodology and risks associated with any recommendation, price target, or rating referenced in this report, please refer to the disclosures section of the most recent report regarding the subject company.

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Consumer Staples 24

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