In focus - Economics

Sugar in 2019: Current state of play

Sugar is moving up social and political agendas, handing an advantage to those companies that are already adapting to a more sugar-constrained industry.

15 February 2019

Elly Irving

Elly Irving

Sustainable Investment Analyst

Sugar has become an increasingly important driver of the food and beverage industry since we first explored the topic in 2015. Below we look at the original risks we identified in 2015, and provide an update on how the industry is responding and what we’re doing at Schroders to incorporate this risk into our investment processes.

Part 1: Sugar is a key strategic issue for the sector

The three catalysts we identified in 2015 have continued to build, pointing to tougher action and bigger impacts on the industry in the future.

Catalyst 1: Increasing awareness amongst consumers and public health bodies

Increasing awareness of the health effects of sugar is leading to volume and price growth declines across the consumer staples sector, partly as a result of tougher regulations. While soft drinks have shouldered the bulk of this burden, food producers are next in the firing line.

Catalyst 2: Rising healthcare costs

Sugar is adding to governments’ increasingly burdensome healthcare bills, thanks to the part it plays in the global prevalence of obesity, diabetes and non-communicable diseases. Governments around the world have reacted by introducing sugar taxes, raising revenue and making products more expensive for consumers. Those companies that have already reformulated their ranges or have less exposed portfolios should benefit relative to slower peers.

Catalyst 3: Increased possibility of large scale litigation

Litigation risk remains material. Despite challenges quantifying and attributing the damages caused by sugar consumption, we estimate the impact could be over 1% of the consumer staples sector’s current earnings. Companies with portfolios which are structurally less exposed to sugar are in the strongest positions.

Part 2: The industry is responding

M&A, divestment and the threat from activist investors

Since 2015 we’ve seen the continued rise of smaller challenger brands creating a wide range of M&A opportunities for the food majors. We have also seen the food majors themselves become a target of activism regarding their commitment to R&D into healthier products. 

Reformulation, reducing portion sizes and product innovation

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.

Increase in advertising spend

Another response we’ve seen is an increase in advertising to help offset the move to healthier alternatives.

Part 3: We’re taking steps to mitigate sugar risk

Engaging for better disclosure

We have seen an improvement in corporate disclosure with greater coverage of the issues around sugar since the publication of our Investor Expectations: Sugar, Obesity and Non-communicable Diseases. Our research provides a framework for company disclosure and has been distributed to over 40 global food and beverage companies.

Company research and stock recommendations

Our proprietary research platform at Schroders includes over 40 instances of analysts factoring sugar risk into their recommendations, research or company discussions. There are over 50 references to sugar taxes alone.

Portfolio construction

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.

Conclusion

The majority of the risks identified in our original research piece in 2015 have risen. We believe that trends such as the implementation of sugar taxes, regulations regarding advertising and selling practices, and ongoing changes in consumer tastes will continue to create headwinds for the food and beverages sector. Food companies now face greater pressure to reformulate and innovate to protect future earnings. Improved corporate disclosure has helped us to more effectively identify industry leaders and laggards but we will continue to engage and monitor emerging best practice.

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