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Quarter-End Insights

Consumer Defensive: Retailer Consolidation Sparks Concerns, but Opportunities Exist

Although growth has been hard to come by, we think worries related to heightened competitive intensity are creating pockets of value.

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  • Consumer defensive valuations generally remain inflated, with the sector trading at about a 6% premium to our fair value estimates, generally in line with the 5% premium in the previous quarter.
  • From our vantage point, the tie-up between  Amazon (AMZN) and  Whole Foods Market (WFM) stands to further elevate an already-competitive landscape across the retail defensive category.
  • However, we fail to see how the pending deal will constrain consumer product operators, and we believe the combination could actually prove advantageous for manufacturers.
  • Although firms throughout the space remain laser-focused on driving further efficiencies, these efforts to extract costs have failed to offset languishing top-line trends, prompting management teams to pursue more sweeping changes.

Erin Lash has a position in the following securities mentioned above: AMZN. Find out about Morningstar’s editorial policies.