Large food companies struggle again to fight and thrive

On the positive side, stock prices have become much more attractive. A basket of nine US food manufacturers followed by FactSet has dropped by 30% in the last two years. A few years ago, before the Federal Reserve began to raise interest rates seriously, this group negotiated more than 20 times the projected profits, a premium of more than 30% at the time in the market. American scholar. Now, the nine are looking for 14.8 times the winnings, a 10% discount. The Fed, for its part, stopped on rate hikes, which could prevent dividend hunters from hiding. The FactSet food basket pays 4%.

But food stocks can no longer be called defensive, as long as sharp price swings abound. Kraft's disadvantages have been blamed on reducing costs at the expense of investments in innovation, but that's a symptom. The underlying cause is that once stable growth has been disrupted by deep and lasting changes in the way consumers buy food.

"Before you went to a supermarket to see a brand and a jingle was in your head," says Donny Kranson, Portfolio Manager at Vontobel Asset Management. "You would buy the same brands as everyone else because we were watching all three same prime-time TV channels," he said. What has happened today can be summed up in one word: fragmentation.

Buyers, especially younger ones, are discovering online products from friends, bloggers, YouTube celebrities, and so on. The shift to online shopping has opened up an endless space for niche products. Barriers to the entry of new food products are low.

"Reviews on Amazon.com and other online stores are building a playground," says Kelly Flynn, Portfolio Manager at Winslow Capital Management. "Companies no longer need to invest in brands for decades. You can read reviews online and see thousands of people who have awarded a five-star product. "

The tastes of the customers have broken. Some want gluten free. Other, low carb for so-called keto diets. Many want simpler ingredient lists and virtuous treatment of workers and animals. Those who can afford it are looking for craft foods, not megabrands.

According to Credit Suisse analyst Robert Moskow, very early on packaged foods and Kraft Heinz in particular, the combined market share of the 20 largest packaged food companies fell to 46.4% in 2011, from 46.8%. % in 2011. share went to niche and entrepreneurial brands. Moskow recently calculated that of the top 20 foods and beverages on Amazon.com, more than 70 percent were created by start-ups. These include a brand of coconut oil called Viva Naturals, which is experiencing a craze for keto, and a snack called RXBar, whose manufacturer was purchased by Kellogg in 2017.

It's not just the niche brands that are taking part. In a recent CNBC interview, Warren Buffett, a major shareholder in Kraft Heinz, highlighted the popularity of Kirkland, a store brand
Costco

(COST). Indeed, private labels have gained more than a percentage point of their market share since 2011, reaching about 19.5% last year.

This is part of a broader takeover of grocers. Increasing competition forces small players to leave the grocery sector, thus gradually strengthening control in the hands of some huge data-hungry players. Barron's advisable
Kroger

(KR) at around $ 24 last May, but advised taking profits in November at $ 31. It's slightly lower now. Last fall, she described her fastest-growing customer base as "price-sensitive" and was increasingly touting its internal brands.

Packaged foods have been in turmoil for years, but investors have ignored some of the problems when interest rates were at historically low levels and massive dividend yields were rare, says Flynn of Winslow Capital. Now, the defects are attracting more and more attention. Big Food has been reducing advertising spending for years to follow the example of 3G Capital investor, who had reduced overheads and increased Kraft Heinz's margins.

The gain is not immediately obvious. The group increased its earnings per share by 7% last year, but without tax cuts, it would have decreased by 2%, says Moskow. According to his calculations, 30% of products sold by large food companies face structural challenges. For Kellogg, Smucker and Kraft Heinz, the number is 40% or more.

Do not overestimate the disadvantages. According to Rob Dickerson, an analyst at Deutsche Bank, the big agribusiness companies of the future are likely to be large. On the one hand, nothing replaces their scale. "These companies are half-half innovation and marketing and half-half logistics and distribution," he says. "Without Big Food, there is no food, because you do not have that kind of capacity anywhere else."

Niche brands often sell to giant brands once the volume of orders has increased. For example, the fashionable skinnyPop, made from popcorn, oil and salt, was bought by
Hershey

(HSY) last year.

And the food giants are not left out on innovation. "It's not like they're ignorant," says Dickerson. "They understand exactly what's going on, and thousands of people are working in these companies to grow." But they will have to spend to find new winners while disinvesting the losers, he says. And that could hold back growth for the moment.

It is possible to find profitable food investments in the absence of earnings growth, if the price is sufficiently attractive. Last April, Barron's makes a case for
General Mills

(GIS). Since then, he has yielded a return of 12%, including dividends, against 6% for the S & P 500 index. His experience shows why investors should avoid formulating unique theories about what works in the diet .

At a recent powwow called CAGNY 2019, for the New York consumer analyst group, the management of General Mills touted the virtues as waste reduction and fashionable products as organic foods Blue Buffalo pet, purchased by the company last year. But he also benefited from a healthy demand for naughty treats, like Lucky Charms cereals.

However, we are reluctant to recommend a second portion of shares at their now higher price, with earnings per share expected to decline slightly for the year ended May.

European food companies, including
Unilever

(UN) and
Nestle

(NSRGY), are better placed than their American counterparts at the moment, says Kranson de Vontobel, for two reasons. They come from relatively small countries compared to the United States – Unilever is Dutch and British, and Nestle is Swiss – and so were forced very early to expand into various markets with local tastes. This makes them well adapted to the current fragmentation of food demand. They also have broad exposure to emerging markets, where growth is relatively fast.

An American company that Kranson likes is
Mondelez International
,
(MDLZ) for its good distribution of sales abroad and its exposure to snack foods, which are growing above average. Dickerson of Deutsche Bank also likes Mondelez, as well as a smaller group from the UK called
Nomad Foods

(NOMD), which sells frozen products in Europe under the Birds Eye and other brands.

The US heavyweights, meanwhile, are the most appetizing of years in terms of stock valuation, but growth recipes still need work. The best is to wait before digging.

Write to Jack Hough at [email protected]