Food for thought

Posted by Liz Rees in Weekly musings category on 27 Feb 19


Food and beverages are the staples of life, but should they also be a core ingredient in our portfolios? At first glance they might seem the ultimate defensive investment, after all everyone has to eat. However, recent announcements confirm that the sector is far from homogenous and there are always winners and losers.

An overview of the global food economy

The food industry is constantly evolving and has different characteristics and drivers of demand around the world.

Growth is underpinned by an increasing world population; the United Nations forecast it will reach 8.6bn by 2030, which means around 67m more people to feed every year. Most will reside in emerging markets, where rising incomes are allowing a shift to diets that include more meat and dairy products. This also creates demand for higher-value western luxuries such as processed foods, chocolate, and alcohol, leading to superior returns for suppliers.

Meanwhile, in developed economies the trend is towards adopting a healthier lifestyle. Millennials are eating less red meat, sugar and preservatives while there is a surge in interest in gluten-free and dairy-free products. Across the wider population there is greater reliance on food prepared outside the home, providing opportunities for restaurants and home delivery companies.

In the UK, the ‘once a month shop’ to fill the freezer is being partly replaced by a return to visiting local convenience outlets more frequently for fresh food. Bigger shops are increasingly done online.

A wide spectrum of investment opportunities

The food sector caters for growth, value or income investors. Listed companies range from long-established brands to start-ups trying to revolutionise what and how we consume.

The main subsectors are retailing and manufacturing. The environment is highly competitive and companies need scale, capital investment and pricing power to prosper. On the positive side, they benefit from stable overall demand, a high level of repeat business and healthy cash generation.

Food retailers are not immune to the challenges facing the high street and are adapting their formats to serve changing lifestyles. UK supermarkets had to react to the arrival of the German discounters but, after a difficult period, trading has started to improve.

UK food retailers tend to be rooted in their home market whereas larger brand manufacturers have wider reach. Nevertheless, food labels are not quite as aspirational as other goods and tastes vary from country to country. Where there is a preference for the familiarity of local products, multinationals are buying local operators and applying their brand development expertise.

Businesses further down the supply chain may earn significant proportions of their profits from food, for example distribution, packaging, pubs and restaurants. Innovation is critical; for example, robots are being successfully used in warehouses to enhance productivity, while packaging is being developed which does not pose a threat to the environment.

Who’s in the news?

Sainsbury’s proposed merger with Asda has hit the buffers, with the Competition and Markets Authority announcing ‘extensive concerns’ over whether it would undermine competition among supermarkets, convenience, online and petrol stores. Good news for consumers perhaps, but not for Sainsbury’s shares which fell 14%.

US group Kraft Heinz shocked investors with asset write-downs, a dividend cut and an investigation into its accounting practices. The problems appear to result from an aggressive acquisition strategy, while neglecting to invest in and nurture its existing portfolio of brands.

Two growth favourites have also stumbled. FTSE 100 constituent Ocado suffered the misfortune of a key warehouse being destroyed by fire; hopefully this will just be a temporary setback. Its acclaimed distribution technology is being rolled out in partnership with other major retailers (soon to include M&S).

Just Eat has fallen out of the FTSE 100 as competition in home delivery hots up. Uber Eats, whose parent Uber is set for an IPO this year, is to reduce the cut it takes from restaurants in the UK. Just Eat is currently seeking a new chief executive and has come under pressure from activist shareholder Cat Rock.

Better news however for Dairy Crest shareholders; the producer of Cathedral City cheese has recommended a takeover by Canadian-owned Saputo Dairy.

Turning vegan

One business which has successfully moved with the times is Greggs. The baker, loved by many for its tasty pies, has attributed a large rise in profits to the success of its vegan sausage rolls. It is not alone; most supermarkets are heavily promoting their vegan ranges. This is not surprising; with selling prices up to 50% higher than conventional meat products, and the cost of plant derivatives cheaper, the boost to margins can be substantial.

Which funds like food?

Food & Beverage related sectors account for less than 10% of the FTSE All Share but funds which favour the area may have significantly bigger positions.

Value investor Alastair Mundy, manager of Investec UK Special Situations, allocates 5% of his fund to Tesco for its recovery potential. Troy Trojan Income, managed by Francis Brook, has Unilever (25% of profits come from food) as its largest position. Unilever, like others in the sector, scores highly on sustainability screens and is also the top holding in Stewart Investors Worldwide Sustainability fund.

SLI UK Smaller Companies, run by Harry Nimmo, also has an appetite for food and counts Cranswick, Hilton Food Group and Fevertree Drinks among its top 10 holdings. For specialist exposure, Sarasin Food and Agriculture Opportunities is a global fund, focusing on long-term themes impacting the sector. It invests across the food chain, from growers and farming equipment to processing technology and consumption.

So, if you find you have a taste for food companies, you might like to ensure the industry is well represented in your diversified portfolio.

Important Information: We do not give investment advice so you will need to decide if an investment is suitable for you. If you are unsure whether to invest, you should contact a financial adviser. 

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