Sarah Chandler (SC): What role does the consumer goods sector play in a diversified portfolio?

Mark Weber (MW): These are companies that sell products and services to the end consumer. They’re the final step in a long economic journey. If you want to get really deep, however, the consumer basically plays a role in every portfolio holding .

Companies are either selling directly to consumers or they’re selling to companies that sell to companies that sell to consumers. No matter how many steps separate a product or service a company sells and the final consumer, the journey ends with some person purchasing a product or service.

At BBH, we look at every company the same way regardless of sector:

• Is the company financially sound?
• Does it generate attractive margins and returns on capital?
• Will the company continue to produce a growing stream of free cash flow?

The consumer sectors provide diversification with direct access to the end consumer – the foundation layer of the market – while exposing investors to different economic sensitivities that help balance out swings in other sectors.

SC: How do consumer staples companies differ from consumer discretionary businesses, and why does this distinction matter for investors?

MW: Companies in both sectors sell products and services to the end consumer. In the simplest terms, staples companies sell the things consumers need, while discretionary companies sell products and services consumers want.

• Staples include companies that make food for eating at home, personal care products, cleaning supplies, and supermarkets that carry those items.
• Discretionary covers restaurants, hotels, electronics retailers, and luxury goods suppliers.

The two react differently as the economy cycles. In tough times, consumers may cut back on dining out and spend more on food for home consumption, hurting the discretionary restaurant industry but benefiting the packaged food staples companies. Conversely, when times are good, people feel confident their job is safe and spend more on travel, dining, and luxury.

As always, it is a good idea to own a balanced portfolio with excellent businesses that are exposed to different economic factors.

SC: What are your near-term and long-term outlooks for the sector, and how do you balance those perspectives when making investment decisions?

MW: The near-term outlook is cloudy. Many middle- and lower-income consumers have been pulling back on their spending. This seems to be a result of lingering effects of inflation, which raises prices on goods, and tariff-related uncertainty.

Longer term, however, we expect steady growth in consumer spending. Over the decades, consumption has grown consistently in line with population growth, price increases and consumer wealth creation. We expect that to continue, even if near-term softness persists.

Within the sectors, some companies will do better than that and others worse. Our job is to find the former and avoid the latter. So, when it comes to making investment decisions, we look at each company individually and assess their growth drivers and competitive advantages to find those that will create value over the long term.

We don’t make decisions based on what might happen tomorrow. 

It’s often said that in the short run the stock market is a voting machine. In the long run, it’s a weighing machine. We think investors are best served by focusing on the weight—the fundamental long-term value of companies—and not the outcome of the vote on any given day, which is often governed by emotions.

SC: Tariffs remain a headwind for the sector. How are companies adapting to preserve profitability?

MW: The tariff question is still very open. Consumer companies knew that tariffs were coming and filled warehouses with inventory ahead of implementation. As a result, tariffs are just starting to flow through the system. The ultimate impact of tariff increases will be borne by suppliers, retailers, and end consumers. How that impact gets allocated amongst the three remains to be seen.

To preserve profitability, companies are passing on tariffs to customers when they can, shifting production to lower-tariffed jurisdictions, and changing the products they sell. As prices rise generally, consumers may suffer and cut back on purchases across the board. Even so, we believe that our consumer holdings are relatively well positioned to deal with tariffs. In addition, we believe our companies are competitively advantaged, which should enable them to push more of the tariffs on to their suppliers and customers, and bear less of it themselves.

SC: We’ve seen consumers shift toward health-focused lifestyles – buying clean foods and reducing alcohol consumption. Do you view this as a structural shift or a cyclical trend?

In our view, these are structural changes. The healthy-eating trend started more than a decade ago. It’s hard to imagine people discovering the benefits of healthy eating and then deciding as a broad population to return to junk food.

The decline in alcohol consumption is more complex. While alcohol consumption spiked during COVID, we have seen a deceleration over the last few years. On top of that, the rise of GLP-1 weight loss drugs has been an additional headwind.

Human beings have been drinking alcohol for at least 9,000 years. It is hard to be completely bearish about companies serving what is arguably the “first staple.”

SC: Are there any emerging opportunities within the consumer goods sector that you are excited about right now?

MW: AI could have a profound impact on the consumer sector. Large retailers like Walmart and Amazon have collected mountains of data over the years. This data coupled with new AI models could revolutionize how people shop. Retailers are still in the early days of developing AI tools, but if successful, we could see a change in shopping habits as large as the shift to e-commerce three decades ago. It is exciting, and we are paying close attention to it.

SC: What is a key takeaway you’d like to leave readers with?

MW: I started investing professionally in 2003 and started picking stocks with my own money a decade before that. That’s a time period that includes the opening up of Eastern Europe, the earliest days of the Internet, the launch of the Euro, the dotcom bubble and bust, 9/11, China’s entry into the World Trade Organization, the Global Financial Crisis, Covid-19, as well as several other things that seemed like a big deal at the time but that I can’t even remember . Some of these events included gut-wrenching declines in the market. Most of those are now hard to even spot on a long-term chart of the overall stock market. Identifying booms and busts ahead of time is exceedingly difficult and timing them as an investor is arguably impossible. Don’t get caught up in the day-to-day headlines. Focus on the long term and stay invested in great businesses.

SC: Mark, thank you for your time.