An evolving set of mega trends make investing in food far more complex than many stockpickers might think. Within food itself, there is the insatiable appetite for protein by the world’s growing middle class and a growing body of health conscious consumers in the west is putting pressure on products packed with salt, sugar and fat.
Expanding the future of food theme, a power shift is under way in the food retail sector where the dominant forces in supermarkets are being challenged and technology is playing an increasingly prominent role in our consumption habits. Who doesn’t enjoy seeing the preparation stages of their pizza on a mobile app?
Taking a bite
Just chucking some volatile soft commodities or a well-known fast food brand into your portfolio in the same way you would a loaf of bread into your basket when wandering around the supermarket might be a simple way to access the food theme but it does not do justice to a wave of change in terms of what, where and how we eat and which companies are involved in these changes.
Henry Boucher, a food and agriculture fund manager at Sarasin & Partners, notes diet change propels the food economy, which opens up investment opportunities.
“You need to look right through the food chain,” he said. “Investing in food is not just about land but processing and consumption, as well as eating out. Agriculture is a pretty low value-add, high risk business. It is very fragmented and weather dependent too. It is not something I would put a high rating on.”
Meat-eoric rise
As populations get richer they inevitably want to spend more on various items, including food. The National Bureau of Statistics of China says the average wage in urban areas rose from 5,348 RMB in 1995 to 51,483 RMB in 2013. Other emerging economies have also been getting richer and this corresponds with the rise in meat consumption in developing economies. The Food and Agriculture Organisation (FAO) of the United Nations shows developing economies consumed 10.2kg of meat per capita in 1964 and this is set to hit 36.7kg in 2030 – a 260 per cent rise while industrial countries are set to have experienced a 63 per cent rise in meat consumption to 100kg per capita by 2030.
An interesting play for UK investors could be Cranswick (CWK) which is predominantly focused on pork products but last year acquired poultry business Benson Park. The company highlighted export sales to the Far East were up 17 per cent in its recent results and the business accounts for more than 50 per cent of all pig meat exports from the UK to that region. At present it focuses on the ‘fifth quarter’ products western consumers find unpalatable and so it has the potential to benefit from demand for westernised items such as bacon and sausages further down the line. And that demand is likely to be there if sausage casing maker Devro's (DVO) restructuring plan is anything to go by. Chief executive Peter Page said its “most modern and efficient plant” would be in China in the next few years.
Mr Boucher holds Cranswick but highlighted it as a way of leveraging the changing eating habits of consumers – that of eating away from the home (see chart). Cranswick noted this theme itself, saying the Benson Park acquisition gave it access to the “fast growing” food to go sector. Mr Boucher also highlighted US stock Middleby (US:MIDD) as a way to play this theme as it provides hotsides to the food industry meaning it is not reliant on individual food fads.
While demand for meat remains high globally, a World Health Organisation report recently suggested processed meat could cause cancer and that red meat was “probably” a carcinogen. The outcome of the report is likely to have greater ramifications on western diets and Mr Boucher said his two largest investments were in Norwegian salmon companies Marine Harvest (No:MHG) and Lerøy Seafood Group (No:LSG). He added the fact supply cannot keep up with demand – even before significant emerging market interest – also attracted him.
Sour taste
Away from protein, investors need to digest the assault sugar is under. Even the global behemoth that is Coca-Cola has seen its sales growth fall and on occasion turn negative in the past few years, according to data from Quest. It has been active in developing a wide variety of other ranges – proven by the fact it is the largest still beverage company in the world, according to Business Insider. Elly Irving, environmental, social and governance analyst at Schroders, said while the market was aware 'bad sugar PR' could hit the valuations of relevant stocks, 'the risk was not fully understood'.
“In our view, stock valuations fail to fully address not only the obesity epidemic, but the broader impact of metabolic syndrome [diabetes/ high blood pressure/obesity] too,” she said.
“When accounting for potential litigation costs, lower sales growth and increased research and development (R&D) investment, the impact on financials over the medium-term could be material.”
Ms Irving suggests those companies looking to develop healthier products are “better placed to increase market share”. She cited WhiteWave (US:WWAV), a US-listed company producing plant-based food products was the “fastest growing company in the US food and beverage sector over a four-year period”.
This perhaps explains the strategies of companies such as PureCircle (PURE) and Tate & Lyle (TATE), which are both focusing on alternatives to sugar. Stevia, a focus for the former, is now estimated to be in 86 cola products globally compared to just four in 2010 and authorities in India have just given permission for its use in consumer products there. Meanwhile Tate recently announced a product which uses allulose, a rare sugar with 90 per cent less calorie content than conventional sugar. It will be worth watching how these products perform in coming years, especially as Ms Irving compares the sugary food and beverage industry to that of tobacco one fraught with lower sales growth, higher costs and large scale litigation.
Mexico’s sugar tax is a case in point. This move by the Latin American government followed similar legislation in Hungary and France while there is a groundswell in the UK for the implementation of such a levy, with a committee of MPs this month claiming there was compelling evidence it would help tackle the rise of childhood obesity.
Health kick
Sugar is the latest bit between the teeth of several governments but policymakers’ interest in food is only growing. Gertjan Van Der Geer, an agriculture fund manager at Pictet, said the biggest trends were often caused by “governments trying to steer consumption patterns”, either via different tax treatments on food items or the push for clearer labelling of products. The latter point might be partly why consumers are increasingly aware of what is in their food and are only likely to become more so. This has supported what Mr Van Der Geer calls a “bifurcation of demand” – that of the desire for low fat/sugar/calorie products which offer a ‘health’ boost and, on the flip side, natural, indulgent products.
Specialist ingredients company Glanbia (GLB) could be well-placed to benefit from the health and wellbeing trend. It recently announced a restructure of its global ingredients division, which includes dairy and non-dairy nutritional solutions and micronutrient premixes, such as protein powders. It also recently expanded into areas including high protein Greek yoghurt smoothies and bought US-focused business thinkThin, which manufactures protein bars.
But Mr Van Der Geer says the indulgence side of the food market is still performing well, too.
“We’re okay with eating something if we know it is bad for us, if it is a treat, but we want to eat healthily,” he said.
He added there is a desire for “simple recipes, less additives and more natural ingredients”.
“That’s one of the reasons why natural and organic products are growing nicely because of the trust element,” he said.
This was a factor noted recently by Dairy Crest (DCG), which said it is working on its spreads proposition to make sure it serves the shift in consumer tastes towards butter, which is felt to be more natural than margarine. SSP Group (SSPG), owner of eateries at railways and airports around the world, said it too had also sought to simplify its recipes in a bid to suit consumer demand.
And just as their tastes are changing, where and how they eat is shifting, too.
What makes a supermarket successful?
The demise of the ‘middle-market’ supermarkets is well-documented at this point, and the latest data from research body Kantar Worldpanel suggests discount chains are still stealing market share away from the traditional market dominators. But this isn’t the only change to industry dynamics. The growth of digital grocery shopping, the popularity of healthy and organic produce and the proliferation of convenience chains are all playing out and changing the industry for good.
Changes in food retailing aren’t limited to the UK either. This is happening globally. In the US, a report from Chicago-based consultancy Willard Bishop said e-commerce food sales showed double-digit growth while what they refer to as “fresh format” stores – specialising in healthy and natural foods – grew sales by nearly 14 per cent last year. Those kinds of stores also recorded the largest increase in new openings in 2014 compared to other, more traditional formats.
Back in the UK, the latest data from information and research company Nielsen shows revenue weakness remains – in the words of Shore Capital analysts – “the order of the day”. Any sales momentum only seems to lie with German discounters Aldi and Lidl, whose joint market share is as high as 12 per cent according to Kantar Worldpanel. Most of this comes down to heavy discounting and targeted price cuts, something consumers have demanded from the big four and has become a mainstay in the sector as the German discounters undercut the competition. Both Sainsbury’s (SBRY) and Tesco (TSCO) have altered their longstanding reward programmes as they claim customers demand individual promotions over loyalty points or bonuses. In April Sainsbury’s cut its Nectar points scheme in half from two points for every £1 spent to just one. From the beginning of December, Tesco has limited where people can use the chain’s once popular clubcards.
Food online
Grocery retail is going digital in the UK too. Reports are mixed, but data suggests consumers are placing large, bulk orders online while the spread of convenience outlets allows people to “top up” their food shopping, rather than doing large family shops once a week. This is often evident in reduced basket values at the major supermarkets, forcing them into managing larger and more complex property portfolios (which can come with onerous leases) as the popularity of convenience shopping grows. This is only set to get worse as Aldi announced plans back in September to take its brand online, so it can compete both physically and digitally with the big four chains.
Convenience, convenience, convenience
It’s fair to say some supermarkets are handling the switch to convenience shopping better than others. Only three months ago Wm Morrison (MRW) finally admitted defeat at this end of the market. The lossmaking supermarket confirmed it would sell almost all of its "M local" convenience stores to a team backed by Greybull Capital, which has a history of bailing out troubled companies. That includes culling a not-insignificant 140 stores, but only equates to a £25m cash windfall for the group’s bank balance. It will only hold on to five remaining outlets, all of which are located on petrol forecourts or on sites which could be converted into larger superstores. The decision was made after bosses said the M Local concept would require “significant further investment in new sites”, “additional capital expenditure” and "lease commitments" to turn profitable.
The change in customers’ shopping trends are best illustrated by figures from a body that represents the way food suppliers and retailers carry out their business – The Institute of Grocery Distribution (IGD). According to the IGD, during the 5 years to April 2015 all channels in the British food retail market showed positive growth. Superstores and Hypermarkets showed modest growth of 4.2 per cent, while convenience stores grew sales 27.3 per cent, the discounters by 106.9 per cent and online by 116.7 per cent.
Quality meets value
While Aldi goes online, its main rival Lidl is deciding to take on another end of the market – namely, the premium end. Analysts at the IGD say smart marketing by Lidl has enticed more affluent shoppers to trade down after Lidl claimed to focus on matching quality with value. It’s thought the company plans to invest £1.5bn in its UK estate by revamping 150 stores, and by expanding into key areas such as London. It has plans to open over 280 stores within M25. The idea is to give customers who are loyal to brands such as M&S Food or Waitrose fewer and fewer reasons not to shop at Lidl.
Finally, although not listed here, growing demand for organic and healthy produce led to a 171 per cent increase in Whole Foods (US:WFM) share price in the US between 2001 and the start of 2014. The brand has also proved popular in London, where a number of large branches now exist. However, slowing sales growth and a strong of PR scandals including overcharging customers for foods which are priced by weight has led to the stock suffering a sharp derating over the past two years. The shares’ trajectory supports the argument that customers, while prioritising health and fresh produce, are still fiercely loyal to the concept of value for money. If this proves to be true, Lidl’s plans to converge the two principles as closely as possible could prove the most successful strategy of all.
That said, all grocery retailers are going to have to adapt to a rising generation of customers who prefer shopping for everything, groceries included, not just online but via mobiles and tablets. It’s also thought millennials aren’t as interested in home cooking as previous generations either, leading to soaring demand for online takeaways and new dynamics in food delivery.
Slicing up the profit pie
Widespread availability of high-speed internet and rapid adoption of smartphones and tablets has made it easier than ever to order both groceries and takeaway meals online. Disruptive technology companies are either joining or jostling with supermarkets and restaurants to grab a share of this fast-growing, lucrative industry. For instance, US e-commerce titan Amazon (US:AMZN) recently took aim at UK grocers by rolling out Pantry, a nationwide delivery service for household goods and groceries. Subscribers can order from a range of more than 4,000 items including Kellogg's cereals, Pantene hair products and Nescafé coffee. Fresh food delivery won't be far off; the group's delivery service, Amazon Fresh, already operates in three US cities. Meanwhile, ride-hailing service Uber has selected food delivery as its second major market. It has already partnered with a few restaurants in five cities including Chicago and Barcelona to deliver meals directly to customers' doors.
These new entrants are turning up the heat on not only Tesco and Sainsbury's, but also Ocado (OCDO). Yet despite tepid trading and fierce competition in the 12 weeks to 9 August, the online grocer posted a 17 per cent rise in gross sales as average orders per week climbed 17 per cent to 190,000. The group, which operates Morrisons' online delivery service and carries Waitrose products, also grew its active customer base by 19 per cent to 471,000 in the six months to 17 May.
Other UK tech companies have seats at the dining table. For instance, Just Eat (JE) continues to cash in on consumers' growing appetites for takeaway pizzas, curries and burgers. The online takeaway platform, which has over 11m active users, posted a 47 per cent rise in like-for-like orders in the nine months to 30 September. Just Eat is also augmenting strong organic growth with overseas acquisitions: it recently bought Menulog in Australasia, Nifty Nosh in Ireland and Orderit.ca in Canada. The upshot is that management expects to increase revenues by more than half to over £240m in 2015.
One concern for Just Eat investors may be its vetting procedures. US peer GrubHub (US:GRUB), which operates in more than 900 US cities, was recently grilled over the significant number of "ghost kitchens" - people cooking food in their homes and unsanitary restaurants masquerading as cleaner peers - on its website. The rise of online platforms has made it harder for health inspectors and regulators to ensure quality control. But we consider that a minor issue given the industry's rich growth potential.
