Consumer Defensives: As Cost Pressures Persist, Targeted Innovation Becomes More Critical

The Morningstar US Consumer Defensive Index underperformed the broader market’s gain in the third quarter. Across our coverage, the median stock trades at a 5% discount to our intrinsic value estimates, though roughly 47% of companies carry 4- or 5-star ratings, pointing to attractive long-term return potential.

The most compelling opportunities remain concentrated in alcoholic beverages and consumer packaged goods, which trade at 24% and 20% discounts to our fair value estimates, respectively. We believe consumers remain under pressure in a challenging macroeconomic environment and are increasingly gravitating toward value. Against this backdrop, companies best positioned to succeed are those that effectively incorporate evolving consumer insights into product development.

Rising input costs have remained a headwind, particularly as freight and logistics expenses trend higher. Since October 2025, long-distance freight trucking and warehousing costs have increased 9% and 4%, respectively, following the escalation of the Middle East conflict, with little sign of easing. To protect profitability, companies are taking a more targeted approach to pricing. US Bureau of Labor Statistics data shows food-at-home prices rose roughly 33.0% between 2019 and June 2026, but only 2.2% over the past year. We think this moderation reflects greater caution after years of significant price hikes, as consumers increasingly trade down or reduce consumption when products lack compelling differentiation. Even so, we believe firms can still earn the right to raise prices through investments that strengthen brand relevance. This helps preserve margins while funding further brand-building initiatives to deliver value through differentiated products, varied pack sizes, and engaging brand collaborations.

Volume weakness across our consumer packaged goods coverage suggests consumers have become more resistant to higher prices, helping explain why firms are taking a measured approach to pricing. Average quarterly organic volumes have fallen 0.2% since the first quarter of 2023, compared with nearly 2% growth from 2018 through the end of 2021. However, even amid strained consumer spending, we have begun to see volume pressures ease. We expect this trend to continue as long as firms offer products that consumers value.

Top Consumer Defensive Sector Picks

Kraft Heinz KHC

• Fair Value Estimate: $41.00
• Morningstar Rating: ★★★★★
• Morningstar Economic Moat Rating: Narrow
• Morningstar Uncertainty Rating: Medium

Kraft trades at a 40% discount to our $41 fair value estimate and offers a nearly 7% dividend yield. Earlier in 2026, it abandoned plans to split the company and instead committed an additional $700 million to its brands. We view this pivot favorably, as these investments are already showing results (70% of the sauces line is gaining share). Investor skepticism appears tied to volume pressures from cost inflation, tariffs, softer consumer spending, and heightened competition. However, we think these concerns are overstated, as management is prioritizing brand investment to strengthen its competitive position.

Clorox CLX

• Fair Value Estimate: $154.00
• Morningstar Rating: ★★★★★
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: Medium

Trading at a 45% discount to our $154 fair value estimate, Clorox presents an attractive long-term opportunity. Despite inflationary pressures, we expect the firm to continue funding brand investments. Recent efforts have driven share gains for Hidden Valley Ranch and Glad trash bags, which together account for roughly 20% of sales. While we believe the market is hesitant to buy in given the noise in recent results, we posit Clorox’s ongoing focus on operational efficiencies should support continued brand investment, reinforcing its competitive position and long-term growth prospects.

Hershey HSY

• Fair Value Estimate: $230.00
• Morningstar Rating: ★★★★
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: Low

Wide-moat Hershey trades at a 30% discount to our $230 fair value estimate, offering an attractive entry point. We expect the firm’s continued investments in consumer-valued innovation and marketing to support its leading market share despite geopolitical uncertainty and subdued consumer spending. Despite investor concerns about volume pressure from shifting preferences toward healthier fare and softer demand for discretionary confectionery products, we think Hershey’s strong brand investments will preserve its dominant market position and bolster long-term growth.