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What's Not to Like in Consumer Products
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At first blush, it might seem a company that has racked up a century-old track record, survived industry consolidation, and can look forward to steady (albeit relatively slow) growth would be a good investment choice. However, investors should also carefully consider some of the potential risks that consumer goods companies face before jumping into a stock.

Increasing Power of Retailers

As Wal-Mart has increasingly come to dominate the U.S. retail landscape, consumer goods manufacturers have lost much of the pricing power they used to enjoy. Everybody wants their products in Wal-Mart's stores, which means that Wal-Mart is able to dictate many of the terms under which it will sell these products, including price. Other retailers have also been squeezed. They've had to improve their cost structures to compete with Wal-Mart, but haven't been able to pass along price increases to consumers.

Litigation Risk

This risk mainly concerns tobacco companies, but it's a big one. After successfully defending itself in court for years, Big Tobacco has suffered a number of legal setbacks, which raise the specter of a bankrupting settlement down the road. The industry has lost a handful of lawsuits filed by individual smokers and been ordered to pay amounts it can easily afford; the fear is that such outcomes will unleash a torrent of costly new lawsuits.

Foreign Currency Exchange Risk

As mentioned earlier, many consumer goods companies conduct a considerable portion of their businesses internationally. For these multinational firms, a strong American dollar can depress overseas sales. American goods become relatively more expensive in foreign markets, and foreign currencies are translated back into fewer dollars for the same number of euros, pesos, or yen (because it takes more foreign currency to buy a strong dollar). On the other hand, when the American dollar weakens, the process works in reverse, and these companies can benefit from an earnings tailwind.

Expensive Stocks

Strong brands and reliable financial performance mean that well-known con­sumer goods stocks often sell at premium valuations. Especially during periods of weak economic growth, consumer goods shares may be bid up to levels that imply unrealistic growth rates. Remember that growth will always be a challenge for these mature companies, and approach them with the same valuation discipline that you would any other stock.

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