Does “Big Food” face a showdown over sugar?

2 May 2016

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.

Important Information: This communication is marketing material. The views and opinions contained herein are those of the author(s) on this page, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. This material is intended to be for information purposes only and is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. It is not intended to provide and should not be relied on for accounting, legal or tax advice, or investment recommendations. Reliance should not be placed on the views and information in this document when taking individual investment and/or strategic decisions. Past performance is not a reliable indicator of future results. The value of an investment can go down as well as up and is not guaranteed. All investments involve risks including the risk of possible loss of principal. Information herein is believed to be reliable but Schroders does not warrant its completeness or accuracy. Some information quoted was obtained from external sources we consider to be reliable. No responsibility can be accepted for errors of fact obtained from third parties, and this data may change with market conditions. This does not exclude any duty or liability that Schroders has to its customers under any regulatory system. Regions/ sectors shown for illustrative purposes only and should not be viewed as a recommendation to buy/sell. The opinions in this material include some forecasted views. We believe we are basing our expectations and beliefs on reasonable assumptions within the bounds of what we currently know. However, there is no guarantee than any forecasts or opinions will be realised. These views and opinions may change.  To the extent that you are in North America, this content is issued by Schroder Investment Management North America Inc., an indirect wholly owned subsidiary of Schroders plc and SEC registered adviser providing asset management products and services to clients in the US and Canada. For all other users, this content is issued by Schroder Investment Management Limited, 31 Gresham Street, London, EC2V 7QA. Registered No. 1893220 England. Authorised and regulated by the Financial Conduct Authority.