Is sugar turning Big Food into the next Big Tobacco?
This note assesses the emerging trends that we think will create headwinds for the food and beverage sector. We believe that sugar consumption and its contribution to a wide range of health problems, such as diabetes, high blood pressure and obesity (which collectively are known as metabolic syndrome), are central to this risk. Our research suggests that there are a number of similarities between major food and beverage companies (“Big Food”) and major tobacco companies (“Big Tobacco”). We believe there are three catalysts that could result in Big Food becoming the next Big Tobacco, potentially resulting in lower sales growth, higher costs and large scale litigation.
Introduction: Financial impact of metabolic syndrome could be material
The prevalence of obesity and other diet-related diseases is at an all time high. Major food and beverage companies face potential risks linked to this health phenomenon including increasing regulation, public policy changes, lower workforce productivity, changing consumer trends and litigation that could transform the industry into the “new tobacco”. Investors are increasingly looking for “healthier” investments in healthcare companies, leisure and fitness firms and “nutriceuticals” (specialist food products that provide additional health benefits). Forward-thinking food and beverage companies can adapt product portfolios and increase market share with healthier product offerings. While the risk to consumer companies of not adapting to these trends is accepted as a headwind by the market, we believe the risk is not fully understood. In our view, stock valuations fail to fully address not only the obesity epidemic, but the broader impact of metabolic syndrome too. 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. This note explores both the risks and opportunities as well as looking at the probability of Big Food becoming the new tobacco, and the subsequent impact on company valuations. Metabolic syndrome: diet-related diseases
Metabolic syndrome is believed to be caused by excessive sugar intake. The diseases that can be classed under metabolic syndrome include type 2 diabetes, hypertension, coronary heart disease, lipid abnormalities, cardiovascular disease, non-alcoholic fatty liver disease, polycystic ovarian disease, cancer and dementia. Because the range of diseases is broader than just obesity, it affects a greater proportion of the world’s population at a rapidly increasing rate. Figure 1 below demonstrates the growth rate of just one type of metabolic syndrome: obesity.
Figure 1: Obesity trends over time
Source: OEDC Obesity Update, June 2014.
The impact of metabolic syndrome can also be seen at the macroeconomic level, with studies suggesting that more sick days, higher absenteeism and lower productivity will negatively impact the global economy. A study from Morgan Stanley, suggests obesity and sugar consumption-related diseases will reduce global GDP growth from 2.3% to 1.8%.
Health and wellness trend: increasing awareness
There are an increasing number of scientific studies attempting to prove the link between sugar and metabolic syndrome and the relationship is garnering increased awareness amongst governments and consumers. As a result, sales of processed food and sugary carbonated soft drinks (CSD) are in decline (see Figure 2). In response to this trend, companies are rebranding themselves under the banner of “nutrition” or “health and wellness”, reviewing portfolios and starting to develop healthier products.
Figure 2: The decline of processed foods in the US
Source: Nestlé, 2015.
Contents of the full article
- Introduction: Financial impact of metabolic syndrome could be material
- Risks and opportunities
- Catalysts for Big Food becoming the next Big Tobacco
- A review of the similarities between Big Food and Big Tobacco
- Company valuations: What are the potential outcomes if these risks materialise?
- Case study: Carbonated soft drinks: declining sales and increasing costs
- Conclusion: Valuations should reflect rising risks
- Investor toolkit
The opinions contained herein are those of the author and do not necessarily represent the house view. This document is intended to be for information purposes only. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations. Information herein is believed to be reliable but Cazenove Capital does not warrant its completeness or accuracy. No responsibility can be accepted for errors of fact or opinion. This does not exclude or restrict any duty or liability that Cazenove Capital has to its customers under the Financial Services and Markets Act 2000 (as amended from time to time) or any other regulatory system. Cazenove Capital is part of the Schroder Group and a trading name of Schroder & Co. Limited 12 Moorgate, London, EC2R 6DA. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. For your security, communications may be taped and monitored.