Does “Big Food” face a showdown over sugar?
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The UK recently became a surprise convert to the idea that governments can direct their population’s diets when it imposed a tax on sugary drinks. We think this could be just a foretaste of what’s in store for the global food industry as it faces a backlash over unhealthy ingredients. Indeed, our research suggests that “Big Food” could in the medium term face the sort of problems that have hit “Big Tobacco” over the past 25 years or so. The results could be serious for investors.
A key pointer to the risk is the rise in sugar consumption around the world. Central to this risk are a number of health problems, such as diabetes, high blood pressure and obesity (see Figure 1) – collectively known as metabolic syndrome – thought to be linked to excessive consumption of sugar. Several scientific studies are attempting to prove the link between the syndrome and sugar, while governments and consumers are increasingly aware of the mooted relationship. Despite this background, many Big Food companies’ product portfolios are still dominated by such products.
Figure 1: Figure 1: Obesity is on the rise across the world...
Source: OECD Obesity Update, June 2014.
The moves in the UK and elsewhere suggest that tighter regulation may be on the way. An equally important risk is litigation. With tobacco, litigation started to bite in the 1990s. This led, in 1998, to the so-called Master Settlement Agreement between 46 US states and four big tobacco companies. Its main outlines were a minimum payment of $206 billion over 25 years, a ban on certain advertising, and increased education about the risks of tobacco. Not surprisingly, this has had a significant impact on tobacco company costs, reputation and sales.
Most US class action lawsuits relating to food have to date been settled out of court for relatively small sums. We see three catalysts which together could turn such litigation into something akin to that faced by tobacco over the last 25 years:
1. Increased concern from medical and public health organisations, and consumers. Falling sales of fast food and carbonated soft drink suggest consumers are already questioning ingredients and nutritional content.
2. Demographics and rising healthcare costs. It is estimated that obesity alone accounts for 21% of US healthcare spending, while diabetes now accounts for 10% of the National Health Service drugs bill1.
3. New scientific evidence linking sugar consumption with metabolic syndrome. This is what would be needed to prove product liability and potentially leave Big Food open to the sort of claims faced by the tobacco industry.
In summary, we believe that Big Food is nearing the stage that Big Tobacco was just before product liability was proved and the major litigation began. Two of our three catalysts are already in place and the lack of a third is the only thing that may now stand between Big Food and huge legal claims.
The similarities with Big Tobacco and the increasing pressure from consumers, public health bodies and governments is changing the way investors need to think about sector valuations. Forecasts need to reflect slower growth rates and higher research and development spending. Moreover, there is the risk of litigation leading to substantial settlements. Together, these threats could have an impact on Big Food akin to that which has ravaged the tobacco industry.
1 Diabetes uses 10% of NHS drugs bill, BBC, 12th August 2015.