In 2015 Warren Buffett and 3G helped to engineer a merger between two of the twentieth century’s biggest American food brands, Kraft and Heinz. Earlier this year, just four years after the merger, Buffet told his investors that he “misjudged the retail versus brand fight as to who would be gaining ground on the other.”

Stricter food regulations (sugar taxes, salt reduction targets), and shifts in consumer behaviour, favouring natural foods and budget brands, are changing the food industry. At Impax we are particularly interested in the shift to sustainable food; a compelling story that is moving on from its infancy.

Brand disloyalty

There is a notable generational shift in how brands are perceived. Unlike the baby boomer generation, which was largely loyal to brands, millennials have exhibited little loyalty. Poor diets leading to health risks continues to be a global issue, a driver perhaps of millennial interest in the quality of the food they buy, preferring less processed foods and natural ingredients. This interest led to greater experimentation with lesser-known brands and supermarket own-brand products (‘private label’), a trend that has accelerated as other generations followed millennials’ lead. For food companies in this space, the slowdown in the consumption of branded processed food has had a significant impact.

Dynamic adaptation 

Less processed, natural foods are gaining market share from larger branded manufacturers. The natural foods category is growing at a compounded annual growth rate (“CAGR”) of 9% globally, and 27% of new product launches today have a natural claim, up from just under 15% 10 years ago.

Smaller food companies tend to be more nimble than larger manufacturers and more able to respond quickly to changes in the market, commercialising product launches in shorter time frames – keeping their portfolios relevant. In contrast, companies encumbered by portfolios of long-established brands tend to be slower to launch new products, wary of the risks to their brand image. As a result, smaller brands are outpacing larger food manufacturers, gaining 200bps of market share from 2012 to 2015, from 47% to 49%.

Big Food 

Faced with these pressures, large brand food manufacturers have responded by investing in both the reformulation of existing products (lower sugar, fat and salt) and new product development. But the desire to attract new customers without disappointing ‘loyal’ customers has proven a complicated balance for these companies to manage.

Kraft Heinz illustrates this. The company’s value collapsed from its $89bn IPO valuation to $42bn at the end of March. Dividend payments have been slashed, and it had to endure a $15bn write-down. Like several of its peers the company failed to fully appreciate the speed at which consumer appetites were changing, relying on ‘iconic’ brands over innovation.

Opportunity in Sustainable Food 

To date the key beneficiaries of the shift in consumer interest have been ingredient companies, whose share prices have risen to new heights thanks to increased demand from food manufacturers, and sustainable packaging (perhaps surprisingly also a part of this narrative). Yet, despite the noise around this topic, the journey is really just beginning.

Since the Impax Sustainable Food Strategy was launched in 2012, we have seen a number of key ‘moments’, but it is fair to say that movement has been at a slow pace. Looking ahead we see acceleration supported by fast-changing consumer preferences and policy. The new age of sustainable food is coming.

Agne Rackauskaite

Portfolio Manager

Agne co-manages the Sustainable Food strategy with Michael Landymore, and has been a member of the strategy’s Portfolio Construction team since its inception in 2012. Agne researches stocks globally with a focus on the Consumer Staples, Industrials and Real Estate sectors.

Agne joined Impax in 2010 and has since led work that has been instrumental to the investment strategy, including her role in analysing sector themes and companies in the investable universe, including promoting them to the other co-portfolio managers. In addition, Agne’s work developing the strategy’s Sustainable Food taxonomy has been key to supporting the identification and categorisation of sustainable food investment opportunities.

Agne graduated from the University of Warwick with a BSc in Economics. She is a CFA charterholder.

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