"Currency headwinds" was a phrase used in virtually every edition of the IC last year, as easing growth in far-flung economies put pressure on local currencies. With their once-popular exposure to emerging markets, household goods companies Unilever (ULVR), Reckitt Benckiser (RB.), PZ Cussons (PZC) and Tate & Lyle (TATE) were particularly badly hit. Add high raw material costs and slowing growth to the equation and most of these multinationals struggled to increase their profits.
Yet the old bull arguments still ring true. The global population is rising, and consumers in developing countries are growing richer, giving them greater spending power. That means companies in the business of making food and selling household brands have a seemingly guaranteed long-term revenue stream. Expansion into emerging markets - and diversification more generally - therefore remain key to sustainable growth. This was again a major theme last year.
Unilever continued to press ahead with its global expansion plans, while cutting costs to keep margins healthy and shedding some of its non-core food operations. Reckitt finally disposed of its pharmaceuticals business, which was floated as Indivior. It reported good growth in its key health and hygiene operations, which include condom brand Durex and foot specialist Scholl.
Ever-prudent PZ Cussons made a number of bolt-on acquisitions, including a leading Australian organic yoghurt brand. Meanwhile, Rafferty's Garden - the upmarket baby food business it acquired in 2013, also from Australia - is set to be introduced across Southeast Asia. PZ Cussons has also had notable success with its palm-oil joint venture in Africa. These projects helped offset weak trading in Nigeria, the group's biggest African market, where civil unrest in the north is affecting sales growth.
Ingredients giant Tate & Lyle issued two profit warnings following serious supply-chain and operational problems. However, these issues are being addressed: Tate is now working to build a global network that can deal with the increasing complexity of the business.
Diversification was a key theme for other food producers last year. Pork specialist Cranswick (CWK) saw export sales surge thanks to growing demand from China and customer wins in west Africa and Australia. It also branched out into poultry with the acquisition of Benson Park. This company serves the fast-growing food-to-go and restaurant sectors, and thus broadens both Cranswick's protein range and its supplier base. Similarly, Dairy Crest (DCG) teamed up with global dairy producer Fonterra to manufacture high-quality whey from its Cornwall-based creamery. But the bigger news for Dairy Crest was its decision to sell its dairies business to Müller UK & Ireland and focus instead on higher-margin cheese, spreads and whey - a logical but nonetheless dramatic change of tack.
Mercifully, 2015 is shaping up to be a better year for food and household goods producers. Input costs have fallen, consumers are spending more and, anecdotally, senior management figures tell us they are seeing signs - for the first time in years - that the trading environment is improving.
| Name | p | Market value | PER | Dividend yield | 1-year performance (%) | Last IC view |
| Associated British Foods | 2,998 | 23,734 | 28.8 | 1.1 | 6.8 | Hold, 3,205p, 4 Dec 2014 |
| Cranswick | 1,376 | 676 | 15.8 | 2.4 | 11.9 | Hold, 1,400p, 24 Nov 2014 |
| Dairy Crest | 472 | 646 | 11.6 | 4.5 | -12.9 | Buy, 517p, 27 Nov 2014 |
| Greencore Group | 289 | 1,178 | 23.4 | 1.9 | 19.1 | Buy, 267p, 26 Nov 2014 |
| Tate & Lyle | 655 | 3,051 | 16.6 | 4.3 | -17.4 | Hold, 600p, 7 Nov 2014 |
| Reckitt Benckiser Group | 5,425 | 38,943 | 20.2 | 2.5 | 16.8 | Hold, 5,183p, 28 Jul 2014 |
| PZ Cussons | 313 | 1,343 | 17.4 | 2.5 | -19.2 | Buy, 359p, 29 Jul 2014 |
| Unilever | 2,778 | 35,654 | 19.9 | 3.3 | 12.0 | Buy, 2,452p, 29 Oct 2014 |
Favourites:
Greencore's (GNC) investments in the US should pay off this year and next following strong sales growth and a number of customer wins. Dairy Crest's new focus on whey production is also a sensible strategy, and the shares come with a generous yield. Unilever, Reckitt Benckiser and PZ Cussons remain sensible investments for slow but steady long-term growth.
Outsiders:
On valuation grounds we wouldn't recommend Associated British Foods (ABF). The stock is being buoyed by fast-growing retailer Primark, with fairly lacklustre trading elsewhere in the business. Any hint of a slowdown at Primark would put pressure on the multiple on which the shares trade.
