Sugar: The current state of play
With the UK’s tax on sugary drinks coming into force from 6 April, Schroders’ Sustainability team explores the current state of play for the industry.
Schroders Environmental, Social and Governance Analyst, Elly Irving assesses today's landscape for food and beverage companies, the industry response and how this is being factored into Schroders’ investment decisions. More than two years ago, Irving produced a research report exploring the idea that sugar could turn ‘Big Food’ into ‘Big Tobacco’.
How sugar has changed the landscape for food and beverage companies
How the industry is responding
With sugar firmly on the radar of all stakeholder groups, food and beverage companies need to adapt to survive. The key trends we’ve identified are explained below:
Increased Mergers and Acquisitions
Increased stakeholder awareness is a double-edged sword; there is a rise of challenger brands meeting consumer demands for healthy products which offer a wide range of M&A opportunities for the food majors. But at the same time, it also changes investor expectations. Companies failing to adapt to these new trends fast enough have become the target of activist investors.
Reformulation and innovation
Food and beverage majors are reformulating existing product portfolios to respond to consumer demand and the threat of sugar taxes. But reformulation success is not guaranteed; it can be costly and can damage the brand if it doesn’t meet consumer expectations. In the past two years we’ve seen mixed results. For example, the reduction of sugar in Nestle’s Kit Kats, the first major recipe change since the Second World War and marketed as an increase in milk and cocoa, met negative media attention11. We’ve also seen product innovation from private label brands that are keen to benefit from the rising health and wellness trends.
Increase in ad spend
Another response method 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 perception of which advertising agencies are trying hard to fight. Advertising spend data from Societe Generale shows that 66% of the top 32 staples brands have increased their ad spend over the last five years.
Increase in company disclosure
There has been increasing pressure on companies from all stakeholders, including investors, to explain how companies are responding to this trend. The graph in the full report shows how sugar taxes alone have received more attention in annual reports and company disclosures. Some corporates have introduced new nutritional targets, such as those launched at Mars, which breaks down its product portfolio into recommended frequency of consumption. This helps educate the consumer, demonstrates a proactive commitment to regulators and provides greater insight into higher risk categories to investors.
How we’re considering sugar risk within our investment process:
Engaging for better disclosure
In 2017, together with another investor, Rathbone Greenbank, we published “Sugar, obesity and noncommunicable disease: Investor Expectations”. The document outlines why investors are looking at sugar, what disclosure they want from companies and how they will use it. It also provides an engagement framework, backed by investors representing more than £1 trillion in assets, to use when engaging with the food and beverages sector. The final draft is available online and has now been communicated to over 40 global food and beverage companies.
Company research and stock recommendations
How are we using this increased disclosure in our investment process? Our proprietary research platform at Schroders includes over 40 instances where analysts have factored the risk into their stock recommendations, sector research or discussed at company meetings.
This increased research focus has also influenced portfolio construction. For example, our credit teams consider a broad range of thematic trends when investing. The pan-European credit team started looking at diabetes in 2013, which was further enhanced by the wider obesity and non-communicable disease risks driven by sugar highlighted by the sustainability team. As a result of our research the team adjusted their sector exposure to mitigate potential balance sheet risk faced by European food and beverage corporate bond issuers.
To read Irving's full report on sugar, please click here.
For further information, please contact:
Andy Pearce, Institutional Tel: +44 (0)20 7658 firstname.lastname@example.org
Charlotte Banks, Intermediary Tel: +44 (0)20 7658 email@example.com
Lucy Cotter, International Tel +44 (0)20 7658 firstname.lastname@example.org
Notes to Editors
Important Information: The views and opinions contained herein are those of Schroders’ Elly Irving, Schroders Environmental, Social and Governance Analyst, 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. The material 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 guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested. 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. Reliance should not be placed on the views and information in this document when taking individual investment and/or strategic decisions. The opinions in this document 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.