You are what you eat: health, wellness and food innovation
Opinions expressed whether in general or in both on the performance of individual investments and in a wider economic context represent the views of the contributor at the time of preparation.
Executive summary: the number of new annual food and beverage product launches has tripled in the last ten years and could reach close to 300,000 by the end of this decade. Much of this growth is being driven from within the broad category of health and wellness. People are living longer; many want to change their diets and many need to. The market for such products is already worth over $700bn and may exceed $1000bn within the next five years. All the leading producers have already developed a presence in this segment, but speciality ingredients suppliers (such as Kerry Group and Novozymes) look particularly well-placed to benefit.
Eating is one of the most basic and also sociable forms of human behaviour, one of the few things that almost everyone does across the world at least once every day. However, a combination of several significant secular trends as well as notable advancements in nutrition science and food technologies is resulting in a change of what we eat. Put simply, demographics and health imperatives are provoking a seismic shift in the nature of food consumption. More people are becoming middle class and urbanising (70% of the global population will be so by 2050 according to the United Nations) just as we are living longer. Demand for food is therefore likely to increase at the same time as supply is decreasing (UN data also show how the number of people fed per hectare has doubled in the last fifty years and is set to continue rising). Moreover, in the western world, rising healthcare costs and obesity concerns, the increasing intensity of modern lifestyles and also growing pressure for food quality and traceability are all having a significant impact on the nature of this demand. What initially happens here will likely be replicated more globally over time.
Against this background the global food and beverages market for health and wellness products is set to expand in value. By 2017, retail sales in this category could reach $1000bn, up almost 40% from the level of 2012, according to market research consultants Euromonitor, who have produced the most comprehensive information on this topic. This 7.2% compound annual growth rate is well ahead of the 6.0% rate forecast for the overall packaged food industry. Furthermore, to put the size of this market in context, at $1000bn in value, the global health and wellness market would be a more significant category than cigarettes, alcoholic beverages or household and personal care.
With health and wellness inevitably being such a broad term and hence significant market, it is perhaps most appropriate to establish a framework for analysing it. Three major trends or sub-sectors seem to be emerging. First, products grouped around the less-is-more idea, namely those with reduced fat, sugar and salt, no added preservatives and so on, delivering a healthier and more beneficial experience relative to the original version. Next, those emphasising physical wellness such as free-from products for food intolerances or catering to consumer niches such as senior nutrition or sports nutrition, Finally, more holistic wellness offerings that tailored for ethical considerations and/ or convenience will also likely grow in importance. This is by no means an exhaustive list and many of the important drivers characterising each segment are overlapping. Nonetheless, all these trends are likely to dominate (developed world) consumption habits and producer innovation patterns over the coming years.
There is virtually no country where the average daily calorific intake is below the recommended daily allowance of 2,000kcal for women and 2,500kcal for men. In the US, the average daily calorific intake is more than 3,800kcal and in the UK, it is close to 3,500kcal, according to the World Health Organisation (WHO). As a result, the percentage of men who are obese has doubled in the last 30 years, while for women, it has increased by 70%. Life expectancy can be reduced by between six and seven years as a result of obesity (on WHO data), while the International Diabetes Federation expects those suffering from the disease to rise by 200m globally in the next 20 years.
It should therefore come as no surprise that there is increasing pressure from the government and the media (and, to an extent, from consumers) for food producers to cut fat, sugar and salt from their products. In the UK, Action for Sugar, a specialist lobby group made up of prominent academics, is lobbying for the amount of sugar consumed to be cut by 40% over the next five years, while in Denmark, the government is currently trialling a tax on certain high-fat products. As a result, Euromonitor forecasts that at least 10,000 new products a year are currently being launched with low or zero sugar content, while the food producer Tate & Lyle estimates that the global market for low-sodium (salt) products is currently growing at over 20% p.a. on a compound basis, more than three times the rate of the overall food market.
While it is well-understood that salt, sugar and fat (in excess quantities) can have a detrimental impact on human health, food intolerance is a separate – and often unavoidable – trend. Intolerance is generally characterised as an adverse reaction provoked by the body’s inability to absorb certain chemicals or enzymes. Sufferers can often feel unwell and as a result find their working and social lives severely impacted. Up to 10% of the population may be lactose intolerant with a further 50% suffering from some form of sensitivity (according to Genetics Home, a US research body). Meanwhile a separate 1% may be gluten intolerant, and another 7% sensitive (based on data from the National Foundation of Celiac Awareness). The market for dairy, wheat and other forms of intolerance was historically catered for by specialists, typically in the medical or pharma industry, but has become increasingly mainstream. Euromonitor sizes the market at $8.4bn today and most major supermarkets already stock some range of gluten-free cereal or pizza (and even beer) as well as lactose-free dairy products.
People of all ages may either eat unhealthily or be susceptible to certain intolerances, but older people will also likely have additional needs for certain specific products. An ageing population may represent a cost to society as a whole (in terms of pension and healthcare spend), but is good for the food ingredients category. Given changing demographics, the baby boomer generation is already responsible for c50% of all food purchases. With the percentage of the population over 60 years-old set to quadruple between now and 2050, their significance for food producers is set to grow. Of particular importance may be products containing, for example, omega-3 (whose presence is correlated with cognitive and heart benefits) or vitamin E (an antioxidant). At $5.7bn in value today, the healthy ageing market is already of notable size.
Consumers and producers, however, will need to proceed with some caution. All products that bear a claim relating to a perceived health benefit need to be approved by a domestic regulator (the Food & Drug Administration in the US or the European Food Safety Authority, and so on). Meanwhile some terms such as ‘natural’ (which appears on many products) currently bears no legal status in any major geography. Even with a regulatory stamp of approval, some academics have also questioned the benefit of certain so-called healthier food and beverage products. A detailed 2012 study by Stanford University found that fewer than 25% of products labelled as ‘organic’ delivered clear health benefits. Elsewhere, a recent report in Nature, a well-respected scientific journal, suggests that some sugar substitutes (such as aspartame) may actually cause obesity. Other studies have suggested some alternative food/ drink products may impact reproductive, cardiovascular and renal systems detrimentally. Separately, the typical premium pricing of many health and wellness products may limit uptake among some consumers – often those that may require such items the most.
Notwithstanding these potential concerns, the number of new product launches from food and beverage producers is increasingly rapidly. While only 60,000 products were launched in 2003, last year this figure had tripled to 180,000 (according to Mintel, another consultancy). On current growth projections, by the end of the decade there may be close to 300,000 annual launches. Owing simply to their size and presence within the low-calorie soda segment (which falls into the Euromonitor classification of health and wellness), Coca Cola, Nestlé, Pepsi, Danone and Kraft currently dominate the market and also typically lead with new product launches.
While this should come as little surprise, from an investment point of view, it is potentially more interesting to consider the role that suppliers play with regard to product innovation. Most global food producers spend less than 2% of their revenues on internal research and development (admittedly still a large figure; over $900m at Coke, for example) and are increasingly forming strategic relationships with core suppliers. The logic for doing so is enhanced by three other factors. These relate to shrinking timeframes for new product launches (driven by more demanding consumers), an increasing need for internal cost management and, the requirement for manufacturers to have control over and visibility into their supply chain. Ultimately, the cost of a product recall and damage to an overall brand is not worth the potential risk of working with a (slightly) lower cost/ quality supplier.
Speciality ingredients providers therefore appear to be particularly well-placed. Such ingredients typically account for less than 5% of the cost of producing the end-product, but account for a large part of the ‘value’ of the product, being critical to flavour and texture, but also to its market positioning. Close to 90% of consumers cite ‘taste’ as being the main reason for purchasing a food/ beverage, ahead of price (71%) and also health benefits (64%), according to a recent study by the International Food Information Council, a non-profit industry body.
The industry has typically been dominated by European players and businesses that look particularly well-positioned to benefit include Kerry Group, Novozymes, Christian Hansen, DSM, Glanbia and Tate & Lyle. Kerry is ranked number-one in global taste and ingredient solutions, with a c10% market share (of a fragmented market), supplying over 15,000 products in more than 140 countries. Meanwhile, Novozymes is the market leader in global enzymes, with a 45%+ share, supplying a range of major food and beverage businesses. Five-year annualised returns at both of these businesses have been over 20%, notably ahead of the market.
Alexander Gunz, Fund Manager
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Opinions expressed whether in general or in both on the performance of individual investments and in a wider economic context represent the views of the contributor at the time of preparation. Executive Summary: Thematic investing is a core part of our investment process at Heptagon. Since 2011, we have published 50 dedicated pieces of thematic […]
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