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U.S. Consumer Goods Sector Overview, Credit Trends & Outlook

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U.S. Consumer Goods Sector Overview, Credit Trends & Outlook U.S. Consumer Goods Sector Overview, Credit Trends & Outlook March 2021 Consumer Products Industry Consumer Products | Industry Themes Growth via innovation, M&A, and E-commerce channel – Large CPGs benefitting from consumer trial and flexible supply chains resulting in strengthening of balance sheets. – Packaged food sector will likely use balance sheet strength to reshape portfolios for faster growth through M&A. – Large CPGs should gain share in e-commerce channel because top-selling products are placed on first page of category searches. We believe they will continue to benefit from participating in this fastest growing channel. Structural shift back to services/experiences from goods – Consumers return to most of their pre-COVID activities assuming wide availability of vaccine. – Out of home activity is supported by consumer saving during the pandemic and record level net worth at year end 2020. – Consumer staples will use innovation and advertising to retain some of the share they gained during the pandemic. Large brands and private label will take share from small and mid-sized brands – Barriers to entry have risen for challenger brands as retailers are favoring large brands because of scale and flexible distribution. – Private label should be the biggest share gainer in the second half of 2021 because of normalized supply chains, retailers using it to boost margins and gain customer loyalty, and price polarization (erosion of mid-price points because of income disparity). 3 Longer Term COVID-19 Impact On Consumer Products Sector Consumer and business behavior changes after every significant event – this crisis is no different It is difficult to predict stickiness of consumer behavior post pandemic. But below are trends we expected to remain: − Work—blend of remote and office − Innovation remains front-and-center − Shop less in stores—lower traffic off-set − Return to repositioning portfolios by bigger basket size − Accelerate digital transformation— − Shop more in e-commerce channel and investment focus: tailored marketing, top use subscription services positions on search pages, mobile apps and websites, and omni-channel presence − Focus on health and wellness Consumer Companies − Increase interest in sustainability COVID-19 Impact − Branded staple companies increased − Rating stability for Consumer Staples— household penetration—gained new financial policy remains key driver of customers and consumers returned to rating changes. familiar brands. Opportunities Ratings − Negative ratings bias for Consumer − Strengthened relationship with retailers-- Discretionaries should decrease quickly changed and adapted manufacturing throughout the year as consumer mobility and distribution. increases as the vaccination roll out accelerates and pandemic driven − Channel disruption will likely continue— negative outlook revisions are revised to branded companies are channel agnostic and stable. accelerating presence in e-commerce. 4 Discretionary Spending Should Improve Spikes In New COVID-19 Cases And Slow Roll Out of Vaccine-- …Room for Savings Rates to Decline Boosts Spending Holding Consumer Spending Down… Total PCE %YoY Savings Rate (Left Side) Household Assets/Liab (Right Side; Inverted) 8% 5.3% 5.4% 6% 4.4% 3.8% 4.0% 4.0% 4.0% 30% 0.0x 4% 1.9% 25% 2.0x 2% 20% 0% 4.0x 15% -2% 6.0x -4% -1.7% 10% -6% 5% 8.0x -8% 0% 10.0x -10% -12% -9.7% Q1 '18 Q2 '18 Q3 '18 Q4 '18 Q1 '19 Q2 '19 Q3 '19 Q4 '19 Q1 '20 Q2 '20 E-commerce Will Continue To Be The Fastest Growing Channel And Post Covid-19, Consumers Will Likely Return To Spending A Companies Are Well Positioned To Participated In That Growth Greater % Of Their Food Dollar In The On-Premise Channel Ecommerce Sales %YoY (Left Side) Ecommerce as a % of Total Retail Sales (Right Side) Food at Home % Sales Food away from Home % Sales 29.7% 60% 30% 30% 25% 25% 55% 20% 16.3% 20% 14.5% 14.9% 14.4% 12.9% 50% 15% 10.9% 10.1% 10.3% 10.4% 15% 7.3% 10% 5.6% 10% 45% 5% 5% 0% 0% 40% Sources: U.S Bureau of Economic Analysis, FRED®, Federal Reserve Bank of St. Louis, Euromonitor, U.S Department of Agriculture. 5 Tailwinds Could Outpace Headwinds In 2021 – Sustainable SG&A – Lower volumes reductions—travel, entertainment and occupancy Tailwinds – Deflationary pressures— promotions return – SKU consolidation – Rising freight & commodities – Marketing efficiencies and (packaging, corn, flour & productivity prorgrams wheat) – Lower COVID-19 related – Shift in wallet (Staples) costs—materially less hazard pay and supply chain disruption – Pressure from private label Headwinds – Higher margin off-premise – Weakening negotiating power sales return 6 COVID-19 Impact On Global GDP S&P GDP Growth Forecasts As of Jan. 21, 2021 2020 2021 2022 Source: S&P Global Ratings | “Global Global (3.7%) 5.0% 3.9% Economic Outlook: Limping Into A Brighter 2021”, Dec 3, 2020; “Credit Conditions Europe: Waiting For Relief”, US (3.9%) 4.2% 3.0% Dec 3, 2020; “Credit Conditions Asia- Pacific: The Rebound Has Begun”, Dec Eurozone (7.2%) 4.8% 3.9% 3, 2020; “Staying Home For The Holidays”, Dec 2, 2020; “Latin America’s Economic Recovery From the Pandemic China 2.1% 7.0% 5.0% Will Be Highly Vulnverable To Setbacks”, Dec 1, 2020. UK (11.0%) 6.0% 5.0% LATAM (7.4%) 4.1% 3.2% A new surge in COVID-19 cases has led to re-imposition of lockdowns in parts of the U.S. and Europe, slowing pace of recovery. East Asia has been relatively unscathed. Activity remains uneven. With momentum fading, we are forecasting a weaker start to 2021 for discretionaries. The risks to our baseline are on the downside. Vaccine timing remains an upside. The U.S. economy, which has recouped two-thirds of the economic losses from the COVID-19 recession, is now showing signs of weakness in the midst of climbing COVID-19 infection rates. Recent (and US planned) stimulus will help prop up consumer spending, which has begun to improve. Infection rates are still high and govt’s are tightening restrictions, so the road to recovery will remain bumpy until a vaccine becomes widely available. The economic fallout of national lockdowns and EU potential corporate insolvencies remain a concern, as well as risks related to global trade, uncertainty around consumer spending, and failure of the U.K. and EU to reach a free-trade agreement. China is set to be an early exiter from the COVID-19 downturn, however, recovery has been state-led, fueled by infrastructure and property, with household spending lagging. Selective support for weak China state-owned enterprises could mean defaults to come. While further escalation of tensions with the U.S. seems unlikely, negative bipartisan views point to a strenuous relationship ahead. Latin American economies are expected to have the slowest recovery out of the emerging markets due to damage the virus caused to investment and inefficient government support to labor markets. LATAM These problems were exacerbated by economic weakness that preceded the pandemic. Limited ability to implement additional stimulus means economic recovery in the region will remain fragile. 7 Macro Trends GDP Growth—Expect Stimulus Programs Bring GDP Back To Pre- Unemployment Rate Remains Elevated, But Significantly Below Crisis Levels In 2Q 2021 The Last Recession Unemployment Rate % Real GDP %YoY 5% 15% 3% 10% 1% -1% 5% -3% -5% 0% Consumer Confidence Weak--Consumers Wary About The Future Food Inflation Is A Potential Headwind: CPI For All Urban Of The Virus & Economy Customers University of Michigan Consumer Confidence % YoY Food at Home % YoY Food Away from Home %YoY 40% 10% 30% 20% 5% 10% 0% -10% 0% -20% -30% -40% -5% Sources: U.S Bureau of Economic Analysis, FRED®, Federal Reserve Bank of St. Louis . 8 Discretionary | Industry Level Retail Sales 2019-2024 Food service category likely will take the longest to recover Apparel and Footwear Market Size $600,000 17% 30% 8% 4% 3% $400,000 2% 10% Sales Level (Millions) $200,000 -23% -10% YoY % Sales Growth $- -30% 2019 2020 2021 2022 2023 2024 Beauty and Personal Care Market Size $115,000 30% $110,000 -1% 1% 2% 3% 3% 10% Sales Level (Millions) $105,000 2% -10% YoY % Sales Growth $100,000 $95,000 -30% 2019 2020 2021 2022 2023 2024 Consumer Appliances Market Size $120,000 30% $110,000 4% 4% 5% 5% -1% 10% Sales Level (Millions) $100,000 0% -10% YoY % Sales Growth $90,000 $80,000 -30% 2019 2020 2021 2022 2023 2024 Consumer Food Service Market Size $800,000 30% $600,000 12% 8% 6% 4% 10% $400,000 1% Sales Level (Millions) -10% $200,000 -24% YoY % Sales Growth $- -30% 2019 2020 2021 2022 2023 2024 Source: Euromonitor. 9 Staples | Industry Level Retail Sales 2019-2024 Retain some share gained during the pandemic—Beverages should be the fastest growing categories ’20-’24 Packaged Food Market Size 550,000.0 30% 12% 500,000.0 2% 3% 3% 10% 2% -4% Sales Level (Millions) 450,000.0 -10% YoY % Sales Growth 400,000.0 -30% 2019 2020 2021 2022 2023 2024 Alcoholic Drink Market Size 170,000.0 30% 160,000.0 8% 4% 10% 150,000.0 4% 0% 2% 4% Sales Level (Millions) 140,000.0 -10% YoY % Sales Growth 130,000.0 120,000.0 -30% 2019 2020 2021 2022 2023 2024 Soft Drink Market Size 160,000.0 30% 150,000.0 4% 4% 4% 10% 140,000.0 4% 3% 3% Sales Level (Millions) 130,000.0 -10% YoY % Sales Growth 120,000.0 110,000.0 -30% 2019 2020 2021 2022 2023 2024 Tobacco Market Size 170,000.0 30% 160,000.0 4% 4% 4% 10% Sales Level (Millions) 150,000.0 2% -2% 3% 140,000.0 -10% YoY % Sales Growth 130,000.0 120,000.0 -30% 2019 2020 2021 2022 2023 2024 Source: Euromonitor.
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