Sugar is being disrupted, creating opportunities for innovators and risks for incumbents.
Consumer attitudes towards sugar could be shifting as they did towards tobacco and this supports a rethink of everything from global growth rates to investment strategies in the food, beverage and drug industries, global fund manager Platinum argues.
In his annual report to shareholders of ASX-listed Platinum Capital, managing director and billionaire investor Kerr Neilson tackles the “diabesity” epidemic and sugar’s role through the lens of objective investing.
Innovation in sweeteners has been a disruptive force for sugars but it has not unseated sugar’s dominance. Troubling health outcomes demand policy changes; and rates of productivity targets in economies including Australia are at risk if consumption patterns do not improve to avert the toll of non-communicable diseases and diabetes/obesity on the workforce.
“The interesting thing we have observed is that while there is an increased offering of ‘sugar-free’ and ‘low-calorie’ foods and drinks, they are not ‘non-sweet-tasting’,” Mr Neilson said. “People are not abandoning their sweet tooth” but they are seeking alternatives that which are better for “their livers and waistlines”.
The “high-intensity sweetener” (HIS) market is forecast to grow to $US1.9 billion in 2017. But overall global sugar consumption is still growing faster because of changing tastes in developing markets.
Shifting consumer tastes should support higher margins for makers of sweetened food and drinks because artificial high-intensity sweeteners cost “only a fraction” of the price of sugar for the equivalent sweetness. However, diet and non-diet drinks share the same price point so “it would appear that manufacturers are not passing much of the cost savings on to consumers”, analyst Constance Zhang said.
The fast-growing natural-sweetener market is still facing challenges. For example, 60 per cent of the 604 stevia-based products introduced in 2010 still contained sugar because of stevia’s inferior taste and “mouthfeel”, according to Tereos figures cited by Platinum.
Local bottler Coca-Cola Amatil, which introduced a stevia-based version of its flagship product this year called Coke Life, is one of the ASX stocks most opposed to an investor shift away from sugar-filled products.
It’s shares have fallen more than 40 per cent in the past 2½ years and chief executive Alison Watkins has made no secret of the challenges created by more health-conscious consumers. The company has said it it pleased with Coke Life’s launch.
It is estimated 90 per cent of commercial stevia farming is undertaken in China.
“Our growing sweet tooth has given birth to many corporate giants in the past two centuries,” Ms Zhang said, estimating the split between high-fructose corn syrup, and beet and cane-derived sugar in the global market at 50-28-22.
“Rising production and falling prices have led to overconsumption in most parts of the world in the last century and associated health risks have now led sugar to be regarded as the ‘new tobacco’,” Ms Zhang said. She cites research that links the embrace of high-fructose corn syrup and sweetened drinks to 20 per cent of the increase in weight measured between 1977 and 2007 in the United States.
Where the picture appears more troubling is that this is not a US or developed-economy problem. The entire world, except for Eastern Asia and Western Africa, exceeds the World Health Organisation’s daily sugar intake recommendations. (Australian consumption per capital trails only North America and Central America).
The prescription weight loss market has not yet succeeded in finding its wonder drug. Sales by 2018 are only forecast to reach only up to $US210 million. Non-prescription alternatives – supplements and weight loss programs – are still the more compelling segment.
“Sugar and the stock market require the same kind of discipline. We must strive to stand resolute in the face of temptation,” Platinum concludes.
This crisis creates healthcare costs, which need to be addressed by policymakers. The economic impact of obesity alone accounts for $US2 trillion or 2.8 per cent of world economic output.
Even if global sugar consumption patterns do not worsen, a study by Morgan Stanley showed that when productivity forecasts are adjusted for known healthy, diabetic and obese categories, gross domestic product growth will fall short of OECD targets.
“The countries that face the highest output loss are those with high rates of both diabetes and obesity (e.g. Chile, the US and Australia),” the report argues.
In the meantime, education and tax have been deployed as policies to reduce sugar-related illness. A sugar tax in Mexico, where consumption of sweetened soft drinks outrates the US by 40 per cent, saw lower-income households record the biggest decreases in consumption, according to Ms Zhang’s research.
Since the tax was enforced in January 2014, national consumption trends fell by as much as 12 per cent in the latter part of the year, and by as much as 17 per cent within low-income families.