Healthy eating creates dilemma for the food industry

By staff reporter

- Last updated on GMT

Food companies are facing a business conundrum in the wake of the
consumer stampede towards healthier eating, according to a new
report from JPMorgan: continue going against the grain with high
margin, not-so-healthy products or deliver healthier foods at
smaller margins.

Neither would seem ideal, if you were a shareholder in a company that has a portfolio of confectionary, hot beverage or snack products.

The global equity research report Obesity: Re-shaping the food industry​, was requested by United Nations asset managers who wanted an analysis of how obesity may affect company performance and valuations.

It says that the profitability of most food products normally considered to be healthy, such as water, dairy, soy, fruit and vegetables, is well below average. For instance, carbonated soft drinks players have long been tempted by growth in the water category, but the comparatively lower profitability of water puts them off the venture.

"Moving down the value chain or seeing a reduction of its operating margin is hardly ever seen as an attractive option for industry players (except when growth prospects are too good to ignore),"​ wrote author Arnaud Langois.

So far, companies have been able to avoid the wrath of their shareholders by appearing to move with the times without a complete change of direction. They have tended to reformulate existing products to make them 'healthier' or 'better for you' - for instance by reducing the fat in potato crisps, or making low-calorie chocolate bars.

However the report also sets out three ways in which companies can actually improve their gross margins in the healthy eating climate: pricing differentiated products that can make health claims at a significant premium; lowering the cost of reformulated products to make them more attractive to consumers; and reducing package size while maintaining or only modestly lowering the retail price.

But these three tips do not constitute a panacea. Langois predicts that the forthcoming EU regulation on nutrition and health claims made on foods will complicate the issue and make it even more expensive to launch wholly healthy products.

On the one hand, foods ascribed a negative nutrient profile, such as soft drinks, ice cream, confectionary and snacks, will come under pressure since they will not be able to make health claims, and probably only limited nutritional claims. Moreover, ready to eat cereals, fruit juice and medicated confectionary may be excluded because of their high sugar content.

On the other, companies will have to invest more heavily in R&D in order to put together a convincing argument as to why their food merits a health claim. Although healthy food companies have historically been small, niche players, the costs and complexity of this would, in fact, favour large companies with correspondingly large budgets.

This is expected to cause a continuation and even acceleration in consolidation and restructuring within the industry.

The report identifies a handful of companies that it believes are better prepared or positioned than others to benefit from the growing demand for healthy products: Danone, Nestle, Campbell and Dean Foods.

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