Young and elderly people, tall and short, white and black, men and women
no matter who you are, we have something we cannot escape: we all need to feed ourselves, every single day.
Even though the tastes and traditions vary from person to person and from location to location, which some prefer to healthy food to Fast food, others prefer barbecue to vegetarian cuisine, is a concrete fact that seven billion people on this planet will do something around three meals a day, and this is a huge opportunity, if we think in terms of business potential across a gigantic chain.
The technology applied to food production combined with the scalability gains resulted in something quite relevant, in historical terms: we can say that it has never been so cheap to get food.
An article from the Journal The Cancer Journal for Clinicians points out that the North Americans today enjoy not only the more accessible food at all times, with an abundance without precedent, but also spend a smaller percentage of their income for food, as indicated by the chart below:
Never been so cheap to get food
Is it a sector that only grows up?
If we consider the world´s population increase over the years and look out the fact that many countries and people began to enter the market to seek food, it would be reasonable to assume that this is a sector that has experienced growth, correct? Yes, in fact this is exactly what happened.
Looking closely at the North American market, the food industry has grown steadily, with only a few bumps. From 1992 to 2015, the growth of 166% translates into an average annual growth rate of 4.5% and a total market jumping from US$2 trillion in 1992 to US$5.35 trillion in 2015. During this same period, American inflation on food was 2.7%; hence, the real growth of the sector was 1.8% on average per year.
Food services in U.S. (1992-2015 in trillion US$)
The sector can be subdivided into several different segments. Let's look at some of them.
Food producers and supermarkets
The sales of this segment had a good evolution, albeit growing less than average, which suffers a positive influence of sales growth of food in restaurants.
The sales in supermarkets and food retailers increased by 89% between 1992 and 2016, something like 2.8% per year, very much in line with the inflation of the period. This is a segment that counted with sales of more than $700 billion in 2016, in the United States, scattered by more than 38 thousand supermarkets in the country.
Walmart absolutely reigns with revenue three times larger than the second placed - see chart on the left. Obviously, the growth for a company of this size becomes more difficult, and in recent years other networks have shown much more vigorous growth than Walmart - see chart on the right.
Gourmet progress: A large part of the increase in the number of establishments is due natural and premium food at specialized supermarkets. Even so, this model has a reduced representativeness when compared to the total. In 2016, slightly more than 6% of the total sales came from this type. Soon, many believe that this is a segment with great space for evolution. Highlight for Sprouts Farmers Market, a Phoenix´s supermarket network that focuses on organic and fresh products, bulk foods, vitamins, dietary supplements, resulting on their sales expansion in more than 12% in 2016;
Organic food: USA have experienced a strong sales expansion of organic foods in recent years. This market has grown eight times the years 2000 to here, which made the country the largest organics market in the world, with sales of more than $48 billion (chart below in euros);
Organic food revenue per country in 2016 (million Euros)
Online Purchase: : In U.S., it is estimated that the online food marketplace (such as restaurant delivery services) has generated a value of sales of approximately $14.2 billion in 2017, with an expansion forecast at an annual rate of 20%. It is still small in comparison to the whole, but this expansion has attracted the attention of giants. Companies more involved in the online market are AmazonFresh, FreshDirect, NetGrocer, Walmart and Safeway - with absolute highlight for Amazon (see chart below).
Online marketing participation for Food and Beverage in U.S. in 2016 (per company)
As it would be expected, we are talking about a gigantic market. Overall it is estimated (data from 2014) in the order of US$1 trillion.
Interestingly, despite the symbolic relationship existing between the Coca-Cola and United States, sales of soft drinks have been falling year after year, in the country. Not by chance, the industry giants sought in other markets the source to quench their thirst for more profits.
The next graph shows that, in the comparison between 2012 and 2017, the focus of the companies began to be peripheral markets or the non-developed world. While the Soft drink sales expanded only 3% in North America and 5.5% in Europe, the growth in Asia was 39%, in the Middle East and Africa of 31% and in Latin America was 20%.
Soft drinks sales in 2012 and 2017 (per region in Million Liters)
Another solution/trend found by the sector was to focus on selling products other than soft drinks. The concern with the sugar level on soft drinks of sugars has been influencing and changing consumption patterns in recent years, with more and more people looking for products such as lightly sparkling or flavored water. While carbonated soft drinks sales fell by around 2% in 2016, bottled water sales grew by 8% and flavored or slightly sparkling water rose 13%.
In this segment Coca-Cola continues to be the queen, keeping itself as the company with the largest market share in carbonated soft drinks - 42.5% of market share in 2015, while Pepsi´s market share decreased from 32% in 2004 to 27% in 2015.
Carbonated Soft drinks market participation per company (from 2014 to 2015)
Regular and fast food restaurants
Perhaps one of the biggest changes of modern society was our way of eating outside home. New processes, standardization, preready food became the food consumption cheaper. If before it was restricted to an elite, be served began to be something common. Numbers can substantiate this.
In the decade of 50, the out-of-home eating accounted for 25% of total expenses with feeding the family. Currently, this number is 48%. The chart below shows a little of this spending growth. Sales of food and beverages in restaurants in the United States comes being increased when we look in periods of ten years, or even presenting a stable growth over the years. In 2016, food/drink sales from the restaurant industry in the United States totalized approximately US$766 billion, showing a growth of 39.4% in the last ten years, an average of 3.8% per year.
Food and beverage sales for the restaurant industry in U.S. (from 1970 to 2017 in billion US$)
What comes to your mind when you relate the two words, food and U.S.? Hard not to think in networks Fast-food restaurant networks or, in particular, certain burgers and two golden arches, isn't that true? And it´s not just folklore, because approximately 17% of U.S. consumers dine in fast-food restaurants at least once per month, and approximately 44% visit at least once per week. In fact, it seems a brand of American culture. Not by chance the sales of "Quick service" restaurants totalized $290 billion in 2017, a growth of 55% in 13 years. But if we annualize this rate we get a modest number of 3.4% per year, which denotes that this is an industry that is already mature.
Consumer spending in the Fast food restaurant sector in U.S. (from 2004 to 2017 in billion US$)
Characteristics of the sector as an INVESTMENT OPTION
Non-Cyclical sector: The main feature of this sector is that it isn´t cyclical, i.e., little depends on the expansion or contraction cycles of the economy, of crises and euphoria moments. In other words, you will not buy two peanut butter pots if the economy goes well and perhaps don't miss eating peanut butter even in situations of crisis. In some cases, some companies and products can even be anticyclical. This is the case of discount stores such as Dollar Tree, for example; Lower volatility: This anticyclical characteristic helps in less volatile results for companies and this is also reflected in their stock performance, which also tend to present a lower volatility and low correlation with the market in general;
Low price elasticity: In general, companies in this industry tend to have a low demand elasticity, i.e. the demand for these products will not change much to the extent that their prices rise or fall. In theory, the consumer does not tend to eat three burgers in a meal only because the price has fallen;
Less bargaining power of suppliers: The producers seek to differentiate their products through marketing strategies to add value or position some differential, given that in practice there are various substitutes available to customers. Think of how many brands of chocolate bars exist;
Stable demand: There is substantial growth in sectors which depend on the population growth, income increase and new markets opening. But we can say that this is a sector of lower growth compared to other sectors - such as technology, for example.
In addition to these common characteristics, which may be positive and negative points?
In general, we can say that the sector stocks provide an interesting portfolio diversification, to the extent that its performance tends to be less related to the market fluctuations. In addition, the investor who bet on the sector seeks an already proven business security and with a relatively stable demand, which is conducive to him enjoying the dividends that companies distribute.
WHAT ARE THE INVESTMENT OPTIONS?
Looking for the S&P 500, the food companies represent something like a 7.5% index and have a great diversity of options. Filtering the largest companies (market value of over US$ 2 billion), we get a list of over sixty companies that add up to $1.6 trillion in market value. Below, we present the top twenty:
And despite this being a more stable and conservative industry, the performance of some stocks will call attention and prove that it is possible to achieve good investments. The chart below shows for the performance of Domino's (blue line), Starbucks (green line), McDonald's (orange line) and the S&P (black line). In the last ten years, Domino's stocks surprised everyone with appreciation of more than 2000%; similarly, Starbucks´ stocks outperformed the S&P, rising nearly 500%; and even the traditional McDonald's, with a high of 175%, was a good investment.
Stock performance comparison between DPZ (blue line), SBUX (green line), MCD (orange line) and S&P 500 (black line)
From 2008 to 2017, Domino's has opened more than 6000 shops around the world, something like over 600 stores per year, expanding in almost 70% of its number of establishments. A large part took place outside the United States, in particular with focus on India, which is today the second largest market for them. With that, it saw its profit jump 247% in ten years, from US$ 54 million in 2008 to US$ 278 million in 2017.
Exposed to a world of options in this vast menu, the doubters can have difficult to choose. If this happens, the diversification is always the best option, and in this sense the ETFs offer a good solution.
Here are three options:
- If the investor seeks a standard sector exposure the Consumer Staples Select Sector SPDR Fund (XLP) is an option that offers low cost advantages, high liquidity (more liquid between the sector´s ETFs) and with a high dividend within the category. This is a fund that invests in the food sector, but also in other segments of similar characteristics. XLP has a diversified portfolio composed by 35 assets with shares of companies like Procter & Gamble Co (PG), Coca-Cola Co (KO), PepsiCo Inc (PEP), Philip Morris International Inc (PM) and Walmart Inc (WMT) as its largest positions;
- The Invesco Dynamic Food & Beverage ETF (PBJ) provides targeted exposure to the consumption sector, but with a different methodology for assets allocation in the portfolio. It uses a quantitative analysis to make the stock triage. Despite the mathematical sophistication, the main fund positions are companies known as Kraft Heinz, Tyson Foods, Mondelez, among others;
- The First Trust Consumer Staples AlphaDEX Fund (DVDRIP) has an interesting methodology for allocating shares that makes it more diversified and less dependent of the largest positions of the fund. Said another way, the large companies that usually have a greater weight, end up having similar weights to other smaller ones. Not by chance, over 50% of the Fund is invested in Small and Mid caps. In the last five years, the ETF appreciated approximately 60%.