Current corporate disclosure practices on healthy eating provide little insight
It is estimated that the annual health care costs of diet-related diseases are greater than $1 trillion globally. It’s no surprise that consumers and regulators are making healthy diets a top priority. For consumers this manifests in shifting purchasing habits, while for governments it includes new taxes, labeling regulations, and dietary guidelines. Recognizing these pressures, food and beverage companies are acting fast to take advantage of growing healthy product segments and mitigate increasing regulatory risks. Investors have noted these macro-trends; however current corporate disclosure practices provide investment analysts with little insight on individual company performance.
As governments around the world seek to reduce growing deficits while also addressing the increasing costs of non-communicable diseases, they’ve found a palatable strategy in sugar taxes. From the United Kingdom to Philadelphia to Mexico, governments across the globe are levying taxes on foods and beverages with high added sugar content. As governments seek to shrink the belts of their constituents, companies with high exposure to sugary products may see a similar shrinking in profits. In fact, following the November 8th passage of sugar taxes in four major U.S. municipalities, major soda companies saw major declines in stock prices. By November 18th Coca-Cola (KO), Pepsi (PEP), and Doctor Pepper (DPS) stocks were down 4.58, 6.82, and 5.73 percent respectively, during the same period that the fellow consumer staple company Clorox (CLX) was down only .40 percent and the S&P 500 rose 1.98 percent. Although this stock performance may not be entirely attributed to soda taxes, the trend is disconcerting (see graphic above).
In subsequent weeks, DPS and PEP quickly reacted to expand their health-focused product portfolios. Doctor Pepper bought Bai, a brand that promotes the health benefits of antioxidants, for $1.7 billion and Pepsi purchased KeVita, a sparkling probiotic drink, for $200 million. While all three companies have marginally rebounded from the post-election lows, they all still trail the gains made by the S&P 500 more broadly, with shares of KO and PEP still trading well below their November 8th price.
Contrary to the headwinds facing traditional processed foods and beverages, there are equal, if not greater, tailwinds for products that promote health and nutrition. Although company level data on sales from healthy food and beverage products is lacking, industry wide data shows there is strong growth in this segment. Speaking to this, SPINS data accessed through the Bloomberg Terminal shows that sales of “Natural Products”, those with a “focus on health and environment,” had year-on-year sales growth of 9.9 percent for December 2016 (especially impressive given the 0.9 percent decrease in year-on-year sales for “Conventional Products”). Such information should excite the salivary glands, as it’s a good bet companies with strong health-focused portfolios will reward the responsible investor.
The challenges and opportunities presented by changing consumer preferences and increasing regulatory scrutiny have not been lost on companies. Acknowledging the pressures presented by current regulatory trends, DPS noted in its 2015 Form 10K that the “Mexican sugar tax” decreased gross margins by .4%. In order to stem this bleeding and take advantage of growth opportunities, in its 2015 corporate responsibility report, DPS outlines its initiative to focus “at least 50 percent of innovation projects… on reducing calories, offering smaller sizes and improving nutrition.”
DPS is not alone in its efforts to capture this growth segment and reduce regulatory exposure. Companies throughout the food and beverage industries are actively working to optimize the health and nutrition profiles of their portfolios. In its Q4 earnings call, McCormick & Co.’s CEO Lawrence Kurzius established that “approximately half of new product briefs” had “health and wellness” attributes, up from 40 percent in 2014. At Unilever’s 2016 Investor Seminar, Amanda Sourry, the company’s President of Foods division exclaimed “health and wellness has never been more important.” Understanding the exciting growth opportunities in this segment, Campbell’s Soup Company notes in its 2016 Annual Report that, “capitalizing on recent consumer and retailer trends in health and well-being, we are increasing our focus on fresh and healthy foods.” These are but a few instances from a plethora of examples that outline the corporate recognition of the importance of health and nutrition to financial performance in the food and beverage industries.
Clearing up communications
Despite the investment implications and corporate acknowledgement that nutrition presents significant risks and opportunities, current corporate disclosure practices are lacking in comparability, and thus decision-usefulness for the investor. SASB analysis of 2015 annual SEC filings for the 19 largest processed foods and non-alcoholic beverage companies shows that only three provide quantitative disclosure, inhibiting investment analysts from understanding how well companies are managing the issue. In this case investors in the Processed Foods industry would benefit from disclosure on SASB’s metrics such as “revenue from products labeled and/or marketed to promote health and nutrition attributes” and “description of the process to identify and manage products and ingredients of concern and emerging dietary preferences.” To improve the current disclosure environment, it will be important to balance standardized quantitative metrics with company-tailored descriptions of strategies to address health and nutrition trends. Until that day, investors’ stomachs should continue to grumble for decision-useful information.
Levi Stewart is the Consumption sector analyst for the Sustainability Accounting Standards Board (SASB).
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