Packaged food companies are having a difficult time convincing consumers to buy their cereals, canisters of coffee, cans of soup or even the unputdownable snacks amid rising demand for healthier and natural food items. Besides changing consumer tastes, slowing international sales and significant currency headwinds on a stronger U.S. dollar were the primary challenges faced by the food giants in 2015.
A Look into the Consumer's Palate
Consumer tastes are evolving in a big way. And eat healthy is the latest buzzword. Consumers are increasingly turning their back to eating junk, demanding in its place food rich in protein, gluten-free choices and simpler ingredients. Changing consumer tastes are challenging even the most established food brands.
Leading cereal companies like Kellogg Company K and General Mills, Inc. GIS are confronted with declining demand as other breakfast alternatives like yogurt, eggs, bread and peanut butter gain popularity. Moreover, a shift in consumer attitude from dieting to health and wellness has hurt sales of Kellogg’s weight management cereal brands, Special K and Kashi.
The snacks category is also not growing on soft global retail and consumer demand. Many U.S. snacks producers like Mondelez International, Inc. MDLZ, General Mills, Campbell Soup Co. CPB and, to some extent, PepsiCo, Inc. PEP are losing out to consumers’ preference for natural and organic ingredients over packaged and processed food. Even the craving for chocolates has given way to nuts and other healthier alternatives with The Hershey Co. HSY probably having its worst year in 2015.
Needless to say, the soda makers – The Coca-Cola Co. KO, Pepsi and Dr Pepper Snapple Group, Inc. DPS – are witnessing declining sales of their carbonated beverages, especially the colas, due to this emerging health and wellness fad.
International Markets Losing Appetite
Processed food companies like Kellogg, Pepsi and Mondelez have substantial businesses abroad. Though opportunities for sales growth are huge in the emerging markets, fluctuating currencies and other political, economic and regulatory risks made 2015 a particularly bad year.
Economic slowdown in China has affected consumption across most consumer goods. Moreover, persistent economic weakness, softening category trends and consumption declines are hurting business in Brazil. Economic conditions are no better in neighbouring Venezuela and Argentina. The Middle East, Russia and Ukraine are mired in political and civil unrest — not the best of conditions for flourishing food sales.
Emerging market woes have led to a deceleration in personal consumption expenditures as well as industry growth. The fundamental challenges plaguing these regions are expected to continue in 2016.
Among the developed international markets while Europe’s economic improvement has been at best lackluster and is still heavily dependent on stimulus measures, Japan’s economy slowed down in 2015 with GDP declining in the last two quarters.
Strengthening U.S. Dollar
A strong U.S. dollar was a major headwind for these food companies for most of 2015. With almost all the foreign currencies slumping against the U.S. dollar this year, international sales lost value. The issue isn’t going away anytime soon. With the prospect of interest rate hike back on the table, the dollar’s upswing is expected to continue in 2016. The federal fund rate will probably be raised due to improving economic conditions in the U.S. Investors will thus be interested in investing in the U.S., thereby increasing the demand for the greenback.
The Future of Food & Stocks
Despite challenges, things are not all that bad for the food companies. Their domestic business did relatively well in 2015 supported by an improving economic and consumer spending environment. Margins of most of these companies have remained stable backed by lower commodity costs than last year and cost savings and productivity gains from their restructuring programs.
Savings from restructuring programs are being used to fund consumer-focussed marketing investments and drive capacity expansion. This would pave the way for a higher top line and market share expansion.
These companies are also being more innovative in their product lines – removing artificial flavors and colors from their products and using simpler ingredients in their food – to meet demanding consumer preferences. Importantly, some of these companies are acquiring complementary brands and companies to strengthen their portfolio.
We believe these efforts should act as a cushion to growing international headwinds and be a fitting answer to widely varying consumer tastes in 2016 and beyond. We’ve highlighted three food stocks below sporting a bullish Zacks Rank and looking good for next year.
3 Stock Choices
B&G Foods Inc. BGS
Pricing gains and acquisitions made since May 2013 (Pirate Brands, Specialty Brands and others) are largely driving revenues at B&G Foods. In November, the company acquired General Mills’ Green Giant frozen and canned vegetables business, which will help it to enter the lucrative frozen food market.
A Zacks Rank #1 (Strong Buy) stock, B&G Foods’ shares have surged 31% year to date. In fact, this company has delivered positive earnings surprises in three of the past four quarters.
Campbell Soup Company
Last week, the worldwide manufacturer of branded convenience food products reported better-than-expected first-quarter fiscal 2016 results, accompanied by encouraging earnings guidance.
Campbell Soup is making aggressive efforts to enhance its brand portfolio and accelerate future growth through acquisitions and joint ventures. This Zacks Rank #1 company also plans to alter recipes of many of its soups, remove artificial colors and flavors from its products and offer more organic food items.
The stock’s price has gone up around 23% year to date following a 31% gain in 2014. The company has delivered positive earnings surprises in the past four quarters.
Omega Protein Corp. OME
Omega Protein is a leading producer of edible fish oil, which is high in nutritionally desirable Omega-3 fatty acids and is used in a variety of food products. Omega Protein also produces specialty fish meals for use in livestock feeds, and fish solubles which are used as an organic fertilizer and in other applications.
Shares of this Zacks Rank #1 company have surged a massive 124% in 2015. It has delivered positive earnings surprises in the past two quarters.
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