While we are witnessing signs of economic recovery in the U.S. there is still much uncertainty surrounding the Consumer Staples sector. In Europe too, though signs of improvement are visible, overall economic conditions remain challenging.

Despite favorable weather conditions, increased consumer confidence and lower fuel prices, there are many consumer staple stocks which are suffering from continued pressure in the face of limited consumer spending, foreign exchange headwinds and declining unit volumes. Not only this, but the continued weakness in results has led many consumer staple companies to provide a weak outlook.

For example, consumer product company Unilever plc ( UL ) is still witnessing weakness in the developed markets with little sign of recovery in North America or Europe. The Coca-Cola Company (KO) also remains apprehensive of broader economic challenges. Management even warned that earnings growth could miss long-term targets for both 2014 and 2015.

We note that Coca-Cola Enterprises, Inc. ( CCE ) lowered its full-year 2014 sales and profit outlook twice due to ongoing macro and competitive pressures in Europe. Management expects the ongoing economic softness and operating challenges to persist in 2015, thereby limiting revenue growth.

Hence, investors should be careful while investing in consumers staple stocks in the near term. Below are certain headwinds that are likely to prevail in the coming months:

1. Slowdown in Emerging Markets and Unfavorable Foreign Exchange

Consumer staple companies are also witnessing sluggish growth in the developed economies. Emerging markets have become increasingly volatile due to fluctuating currencies and other structural issues. The Middle East, Russia and Ukraine are witnessing continued political and civil unrest resulting in challenging operating conditions. Developing countries like China, Brazil and Mexico are also facing economic slowdown.

Owing to a significant presence in the emerging markets, the companies’ profits are being affected by currency headwinds, given the recent weakening of many emerging market currencies against the U.S. dollar. In particular, the recent currency fluctuations in Venezuela, Argentina and Turkey are a major concern.

Foreign exchange is a major headwind for companies like Estee Lauder Companies, Inc. ( EL ), Kimberly-Clark Corp. ( KMB ), Unilever, PepsiCo Inc. ( PEP ), which have significant business outside the U.S. Venezuelan currency issues is also hurting Nu Skin Enterprises, Inc.’s ( NUS ) earnings significantly.

Kimberly-Clark expects foreign currency exchange to adversely impact sales by 8% to 9% in 2015. Coca-Cola Enterprises also expects currency translation to be a headwind in 2015 as against being a tailwind in 2014.

Specialty coffee retailer Keurig Green Mountain Inc. ( GMCR ) recently lowered its fiscal 2015 guidance as it expects foreign currency headwinds to continue to impact earnings for the rest of the fiscal 2015. Sales of food company Mondelez International, Inc. ( MDLZ ) have also been dismal due to volatility in the emerging market and slower global category growth.

Companies like Procter & Gamble and Kellogg Co. ( K ) are also struggling with decelerating growth in developing markets and currency headwinds. U.K.-based brewer Diageo Plc ( DEO ) also faces macroeconomic headwinds and tough retail conditions in emerging markets.

2. High Commodity Costs Hurting Margins

Though food costs have stabilized, there are still many consumer staple food companies that are being pressurized with significant increases in commodity costs. Rising costs are hurting margins of these stocks despite revenue growth. In 2015, the overall cost environment for food commodities is expected to be under pressure for companies like Procter & Gamble, Kellogg, PepsiCo. and Kimberly-Clark.

3. Declining Volumes of Beverages

Global brewer Molson Coors Brewing Co. ( TAP ) has been witnessing negative beer volumes in the U.S. and Canada for quite some time. In the U.S. the volume declines can be partially attributed to relatively weak economic conditions, while in Canada, the premium beer segment has been gradually losing volume since 2001 to the above premium and value segments, mainly due to an aging population and sluggish economy.

The loss of the Modelo brands in Canada due to the termination of the joint venture at the end of Feb 2014 will also lead to volume declines in the near term.

Beverage companies like Dr Pepper Snapple Group Inc. ( DPS ), Coca-Cola and PepsiCo have also been continuously posting sluggish results in the North American beverage business due to dwindling carbonated soft drinks volume, which is the biggest category of these beverage companies. The rise in health and wellness consciousness among consumers is the main reason for this weakness. Muted volume trend will also remain a concern going forward.

Bottom Line

We note that the consumer staples companies are fundamentally strong and with the recovery in the economic scenario and increased consumer confidence, earnings should improve soon. However, these companies need to work to survive these headwinds as these may pull back profits.

As is evident, there are plenty of concerns in the consumer staples industry. However, as regards investing in the space right now, are there opportunities for short-term investors?

Check out our latest Consumer Staples Outlook here for more on the current state of affairs in this market from an earnings perspective and the trend in this important sector of the economy.

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