In focus - Managers' views
Sugar in 2019: Current state of play
Sugar has become an increasingly important driver of the food and beverage industry since we first explored the topic in 2015.
Sugar has become an increasingly important driver of the food and beverage industry. We look at how the risks have evolved, how the industry is responding and what we’re doing at Schroders to incorporate this risk into our investment processes.
Sugar is a key strategic issue for the sector
The three risks below have continued to build and point to tougher action and bigger impacts on the industry in the future.
Firstly, the media, consumers and regulators are all increasingly focused on the role of sugar in our diets. Data from Google trends demonstrates the continued momentum in consumer interest in sugar in soft drinks compared to a ‘known’ risk of cancer from smoking. Regulators have attempted to reduce excessive sugar consumption with a range of sugar taxes, advertising restrictions and voluntary targets. The regulatory focus and increasingly negative perception of carbonated soft drinks has contributed to the continued decline of soft drink volumes.
Secondly, the growing number of people globally diagnosed with obesity, diabetes and non-communicable diseases is undeniable. The World Health Organisation states that obesity rates have doubled since 1980. This rising healthcare burden is a key incentive for introducing a sugar tax.
Lastly, we have seen an increase in litigation risk for the food and beverage sector. Despite challenges quantifying and attributing the damages caused by sugar consumption, we estimate that average forecast earnings for staples could decline by 1.3% due to this litigation risk alone.
The industry is responding
With sugar firmly on the radar of all stakeholder groups, food and beverage companies need to adapt to survive these increasing headwinds.
Increased stakeholder awareness is a double-edged sword; there is a rise in challenger brands meeting consumer demand for healthy products, creating M&A opportunities for the food majors. However, it also changes investor expectations on the speed of product reformulation and portfolio restructuring. Those companies investing in R&D, product reformulation and acquiring healthier brands are better positioned to take market share and protect the sustainability of future earnings.
As well as acquiring challenger brands, 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.
Another response we’ve seen is an increase in advertising to help offset the move to healthier alternatives. The introduction of a sugar tax has also contributed to the ‘demonisation’ of sugar, the perceptions of which advertising agencies are trying hard to fight. Advertising spend data from Societe General shows that 66% of the top 32 staples brands have increased their ad spend over the last five years1.
We’re taking steps to mitigate sugar risk
Engaging for better disclosure – There is greater pressure on companies, from all stakeholders including investors, to explain how they are responding to the increasing sugar risks. We recognised that opaque disclosure and restrictive assumptions hinder our ability to conduct company analyses. Schroders’ publication, Investor Expectations: Sugar, Obesity and Non-communicable Diseases, provides a framework for company disclosure and has been communicated to over 40 global food and beverage companies.
Company research and portfolio construction – Our proprietary research platform at Schroders includes over 40 instances of analysts factoring sugar risk into their recommendations, research or company discussions. The risks and opportunities around sugar are being incorporated into the investment processes, with over 50 references to sugar taxes alone. That analysis is feeding into portfolio decisions across Schroders with teams adjusting their sector exposure to mitigate potential balance sheet risk faced by the food and beverages sector.
1 Societe Generale, Global Staples and Global Media report, November 2017.
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