Food for Thought in London
December 13, 2013
In a low-growth world, where many companies are struggling to increase revenues, it is our challenge as fundamental stock pickers to find companies that offer attractive growth opportunities. One industry that we believe has exciting potential is the food and beverage ingredients sector.
On the surface, this may not sound particularly exciting, but it’s an industry that we believe has significant secular growth potential—whether from rising demand from growing middle classes in developing nations or due to a shift toward health and wellness products in more mature developed countries.
More Than Meets the Eye
Walking into a restaurant, supermarket or convenience store, one just sees the finished product. What’s less evident is the amount of effort that goes into food and beverages to make them tasty, convenient, affordable and healthy. The “healthier” tag can mean many things—whether low in calories, fat or sugar, smaller portions, or more fiber and/or more vitamins. Food intolerances are also a growing focus (think lactose or gluten). Such trends demand R&D and innovation to get the right product on the shelf. With the food producers themselves focused on marketing and distribution, they increasingly look to their partners in the supply chain for help in developing new products to address these growth opportunities.
Our investment approach has long favored companies that help their customers become more innovative, efficient and responsive—we continue to see examples in technology, industrials and health care. The food ingredients sub-sector offers a similar opportunity: a clear value proposition tied to an important client need, relatively high barriers to entry, and niche business economics. The ability and willingness to invest in mid- and small caps may open up additional potential, in companies that tend to be significantly smaller, though not necessarily less profitable, than the clients they serve.
Challenges and Opportunities
On a recent trip to London, I met a number of European companies from both the food manufacturing and ingredient-supplier spaces. Aside from interesting company-specific stories, some of the challenges and opportunities discussed included rising raw materials prices, intensifying competition in emerging markets, the potential in private label products, and a move toward natural/botanical/organic ingredients. Other trends included the ongoing demand for “affordable luxury,” which should underpin demand for cocoa and high intensity sweeteners.
With global markets significantly focused on macroeconomic and central bank policy, it is refreshing to meet company management teams that are building their strategies around a long-term sustainable opportunity. Many of these businesses continued to execute through the European slowdown and are well positioned for improving growth ahead.
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