A combination of brisk emerging markets growth, commitment to health and wellness in mature markets and strong innovation programmes should sustain major food manufacturers' organic sales growth in 2011. We envisage growth rates in the 5pc to 7pc range. Given the industry's ongoing underlying margin expansion, abundant free cash-flow and across-the-board undemanding valuations, relative performance should be driven by individual companies' organic sales performances.
Danone enjoys the strongest combination of sizable emerging markets business and sustainable growth in mature markets. The company may further raise annual sales growth guidance. We envisage 7pc in 2011.
Danone's emerging markets grew 10pc to 20pc organically in the past 10 years. Mature markets benefit from overriding health benefits associated with both yoghurt, not least its role as a low calorie breakfast food - and bottled water - again, calorie free. Moreover, the nutrition businesses demonstrate an ability to grow at around 10pc.
Nestle's growth potential is restrained by its much smaller portion of business in emerging markets (35 per cent) than either Danone (43 per cent) or Unilever (52 per cent). However, the company benefits from a heavy bias towards drinks - coffee and other powdered hot beverages and bottled water. In addition, pet food enjoys significant volume growth in developed countries, but overall growth will probably be slower than Danone at around 6 per cent.
Unilever's strength in emerging markets is offset by some exposure to slower growth categories, notably in food, and we envisage 5pc organic growth in 2011. Moreover, the company's clear stated ambition to double in size requires greater clarity in terms of implications for its acqusition strategy. Unilever (€40bn sales) will struggle to close its overall size deficit relative to Nestle (€70bn sales) and Procter & Gamble (€60bn sales) without a substantial acquisition or two. That brings an element of risk.
After 10 years of underperformance relative to the alcoholic drinks and tobacco sectors, the major food manufacturers' shares have potential to play an element of catch up. Danone looks particularly attractive.
