When investors focus on consumer staples, their first thought is that income growth is slow but steady, therefore that the stocks have a defensive character.

Then they look for exposure to emerging markets for the possibility of faster growth, and exposure to foreign countries with harder/weaker currencies than the dollar for the possibility of foreign exchange gains/losses.

Finally, they consider the pattern of raw materials prices, for the possibility of margin expansion or contraction, since staples companies can typically only raise prices in line with overall inflation in their markets.

A recent article in the Financial Times suggests that in the current recessionary environment, there’s another big issue to consider–trading down.  The article reports on a two-year study done of supermarket and drug store loyalty card purchase patterns.  Its conclusion?  Over 50% of previously highly loyal customers from 2007 had wholly or partially shifted away from their previously favorite brands in 2008.

The chart attached to the article is particularly instructive.  On the plus side, only 8% of drinkers of Coca Cola and 9% of the munchers of Thomas’ English muffins left the brands.  On the other, 45% of Tylenol takers, 37% of Pine Sol cleaner customers, and 37% of the brushers who used Crest toothpaste had jumped ship.

I’m not particularly interested in defensive stocks as investments at the moment, so I haven’t found out, but these numbers may understate the problem, since Wal-Mart normally doesn’t release data about its customers.  They would, in theory anyway, be among the most price-sensitive consumers–and there are an awful lot of them, as well.

I’ve seen figures like this before, although not in the United States.  They remind me more of what I’ve seen during an economic downturn in an emerging market.  There, consumers tend to trade down to levels way below the “value” brands of the multinational staples companies.

When growth resumes, usage of multinational brands bounces back sharply as consumers trade back up.  Of course, in emerging markets, rebound means resumption of 5%+ trend economic growth.

It will be instructive to see how deep the profit falloff in the US operations of package goods companies will be and how sharp the rebound is.  This study suggests risks are to the downside, though.  And I don’t think Wall Street is expecting this kind of bad news.