Consumer Defensives: Consumer-Valued Innovation Is Crucial to Withstanding Unrelenting Inflation

The Morningstar US Consumer Defensive Index (down 0.9%) underperformed the broader US Equity Index (which posted a 2.4% rise) during the fourth quarter of 2025. Nearly half (48%) of companies within our sector coverage universe trade in 4- or 5-star territory, signaling opportunities for investors. We view the alcoholic beverage and consumer packaged goods industries as particularly attractive, at 28% and 16% discounts to our fair value estimates, respectively. We surmise that the market’s dulled sentiment is a byproduct of ongoing cost and pricing pressures in a strained consumer spending environment. However, we believe that prioritizing innovation aligned with evolving consumer preferences will strengthen brands and support long-term growth.

Input cost inflation (across raw materials, transportation, and labor) has encumbered profitability throughout the consumer defensive sector over the past several years. While pressures around some commodities, like plastic packaging, have tapered off, this retreat hasn’t been broad-based and could reaccelerate due to unfavorable weather, supply disruptions, and tariffs (with pressure persisting across proteins and cocoa).

As such, we expect consumer product firms to pursue multiple avenues to blunt a lasting decline in profitability, including pursuing cost savings, surgically raising prices (often in conjunction with bringing new products to market that boast enhanced features), adjusting price packs, and reducing discretionary spending. However, we don’t posit firms will ratchet back spending on research, development, and marketing, given the risk that doing so could impair their standing with retailers and consumers.

On top of navigating cost pressures, concerns about consumers’ financial health persist. While value offerings are clearly a priority for cash-constrained consumers, demand for convenience hasn’t abated, with food away from home sales taking share from at-home consumption. Against this backdrop, we surmise it is in packaged food firms’ best interests to cater to this growing channel. This should boost sales and drive trial of new products with an accelerated feedback loop before the firms commit to distribution in traditional retail.

Top Consumer Defensive Sector Picks

Campbell’s

• Fair Value Estimate: $60.00
• Morningstar Rating: ★★★★★
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: Medium

Wide-moat Campbell’s CPB looks attractive, trading around a 50% discount to our $60 fair value estimate. Consumers have become more deliberate in their purchasing decisions, and we believe the market underappreciates Campbell’s efforts to align its products with evolving consumer trends while also unlocking $375 million in savings by fiscal 2028—funds that can be reinvested in its brands. However, we surmise Campbell’s aims to more effectively engage with consumers. In this vein, we forecast that continued brand investment (around 5% of sales long term) will be expended to support its competitive edge and reignite revenue growth to a low-single-digit pace.

Kraft Heinz

• Fair Value Estimate: $51.00
• Morningstar Rating: ★★★★★
• Morningstar Economic Moat Rating: Narrow
• Morningstar Uncertainty Rating: Medium

We believe narrow-moat Kraft Heinz KHC is a bargain, trading 50% below our $51 fair value estimate and offering a 6% dividend yield. Despite expected dis-synergies from the planned separation of its sauce, spreads, and seasoning business from its North American grocery brands (slated to commence in the second half of calendar 2026), we anticipate both entities will prioritize pursuing cost efficiencies to fund brand investments. We see this as a prudent course and believe that these initiatives will drive 1%-3% top-line growth and 20%-21% operating margins over the next 10 years.

Mondelez International

• Fair Value Estimate: $73.00
• Morningstar Rating: ★★★★★
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: Low

Trading at a 25% discount to our $73 fair value estimate, wide-moat Mondelez MDLZ presents a compelling investment opportunity. We think the market fails to appreciate Mondelez’s brand strength, which should drive long-term, profitable gains in market share. The firm has worked to extend the distribution of its products, fund brand investments, and increase the speed by which it brings innovation to market. We expect the fruits of these efforts will manifest in 4% annual organic sales growth and operating margins that approach 18% by the end of our explicit forecast period, up from 16.5% on average the past five years.