Perspective

Why investors should pay attention to sugar


We’ve known for decades that obesity puts people at greater risk of serious and life-threatening illnesses such as cardiovascular diseases, diabetes and some cancers.

Now experts are adding Covid-19 to that list.

Evidence suggests that carrying excess weight increases the risks associated with Covid-19; it’s more likely that those suffering from obesity will require hospitalisation and intensive care.

In 2016 UK policymakers committed to reducing childhood obesity within the next ten years.  More recently they have introduced a raft of measures aimed at both children and adults (nearly two thirds of adults are overweight or obese) to encourage healthier behaviour. The measures include ending “buy one get one free” deals for unhealthy food and limiting adverts for junk food to certain times of the day.

Sugar plays no small part in the rising prevalence of obesity and related diseases and is an issue we have long identified as potentially problematic for the food and beverage industry.

We spoke to Elly Irving, Head of Engagement at Schroders, about sugar’s role in the obesity crisis and what this means for the food and beverage, and hospitality  industries. 

What have been the main drivers behind the obesity crisis in recent years?

The rise in obesity has been caused by a number of factors, not least of which is an increase in physical inactivity. However, there is also a major link to increasingly poor diets consisting of energy-dense foods. While the role of fat and salt has been long understood, the role of sugar in contributing to energy-dense diets is a major area of emerging concern.

What does this mean for investors in the affected industries?

As investors, we are primarily concerned with the risks and opportunities created by the emerging debate over sugar, obesity and noncommunicable disease. Since 2015 when we published our first research on the issue, it has become increasingly clear that the health concerns faced by the sector have become a material risk. The UK government’s anti-obesity drive will serve to accelerate these risks and opportunities.

We believe that there have been three catalysts that could trigger lower sales, put pressure on margins and potentially expose companies in the industry to expensive legal disputes. We identified these in 2015 and have seen mounting momentum behind all three in the past five years:

Catalyst 1: Increasing awareness amongst consumers and public health bodies

Increasing awareness of the health effects of sugar is leading to volume and price growth declines across the consumer staples sector, partly as a result of tougher regulations. While soft drinks have shouldered the bulk of this burden, food producers have also been heavily impacted.  We now see rising pressure on food retailers and hospitality companies too.

Catalyst 2: Rising healthcare costs

Sugar is adding to governments’ healthcare bills, thanks to the part it plays in the global prevalence of obesity, diabetes and other non-communicable diseases. Covid-19 is only adding to this burden.

Governments around the world have reacted by introducing sugar taxes, raising revenue and making products more expensive for consumers. Those companies that have already reformulated their ranges or have less exposed portfolios should benefit relative to slower peers.  New advertising restrictions will add further constraints on the sector.

Catalyst 3: Increased possibility of large scale litigation

Litigation risk remains material. Despite challenges quantifying and attributing the damages caused by sugar consumption, we estimate the impact could be over 1% of the consumer staples sector’s current earnings. Companies with portfolios which are structurally less exposed to sugar are in the strongest positions.

How is the industry responding?

We’re seeing action on a number of fronts from industry players.

M&A, divestment and the threat from activist investors

Since 2015 we’ve seen the continued rise of smaller challenger brands creating a wide range of M&A opportunities for the food majors. We have also seen the food majors themselves become a target of activism regarding their commitment to R&D into healthier products.  

Reformulation, reducing portion sizes and product innovation

Food and beverage majors are also reformulating existing product portfolios to respond to consumer demand and the threat of sugar taxes. But the results of their efforts have been mixed; reformulation can be costly and can damage the brand if it doesn’t meet consumer expectations.

What steps is Schroders taking to mitigate sugar risk?

We are doing a number of things to drive change in the industry and to ensure we’re accurately assessing the risk sugar poses to client portfolios.

Engaging for better disclosure

We have seen an improvement in corporate disclosure with greater coverage of the issues around sugar since we first began our research in 2015 and since the publication of our Investor Expectations: Sugar, Obesity and Non-communicable Diseases. This research provides a framework for company disclosure and has been distributed to over 40 global food and beverage companies.

Company research and stock recommendations

We're encouraged to see that references to this specific research is evident in a number of our analysts' research and valuations. 

Portfolio construction

That analysis is feeding into portfolio decisions across Schroders with teams adjusting their sector exposure to mitigate potential balance sheet risk faced by the affected sectors. For example, at the corporate level, we have reduced our exposure to several soft drinks companies as a direct result of sugar taxes and slow or unsuccessful reformulation attempts.

What is the outlook for the affected industries?

The majority of the risks identified in our original research piece in 2015 have materialised, and been accelerated by Covid-19. Sugar taxes have become more widespread than we had anticipated. Since 2015, 17 new sugar taxes have been introduced to take the global total to 42. This means more of the global population is covered by a sugar tax than by a carbon tax.  

We believe that government action to promote healthy eating, especially in light of the spread of Covid-19, including the implementation of sugar taxes, regulations regarding advertising and selling practices, and ongoing changes in consumer tastes will continue to create headwinds for the food and beverage industry and increasingly for food retailers and hospitality companies too. There is now greater pressure on these industries to reformulate and innovate to protect future earnings.

Improved corporate disclosure has helped us to more effectively identify industry leaders and laggards but we will continue to engage and monitor emerging best practice.

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. Registered Office at 1 London Wall Place, London EC2Y 5AU. 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. 

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