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Is Health Wealth for Food/Beverage Industry?

Zacks Equity Research

It seems like the North American Food and Beverage sector will have to take the saying “Health is Wealth” a little more literally. The sector is witnessing changes in consumer preferences toward health and wellness and “good-for-you” products due to rising health consciousness and increasing public and governmental concerns regarding obesity and other maladies.

The American Heart Association estimates that currently about one-third of U.S. adults are obese. If the current obesity growth trends continue, total healthcare costs attributable to obesity could account for as high as 16% to 18% of US health expenditures. A number of factors are often cited for this harmful trend -- for example the rise of motorized transport and sedentary jobs -- but the main culprit seems to be unhealthy food habits.

Health consciousness is inevitably increasing among the masses and Americans are gradually refraining from high calorie soft drinks and energy-dense food high on fat and sugars but low on vitamins, minerals and other micro-nutrients. As a result, the demand for healthier food and beverage alternatives is growing.

Accordingly, food and beverage companies are fast changing their priorities to focus more on health and wellness products. The companies are coming to realize that future profit and sales lie not in a sugar-laden fizzy can.

Are Colas Losing Their Sizzle?

Beverage giants are witnessing declining sales of carbonated beverages, especially the colas, due to this emerging health and wellness fad. So growth in the beverage segment is possible only by shifting away from high calorie carbonated beverages to healthier products like juices, energy and sports drinks.

The Coca-Cola Company (KO) is expanding its portfolio of non-carbonated drinks which include Powerade sports drinks and Minute Maid fruit juices. Coca-Cola’s bottler Coca-Cola Enterprises Inc. (CCE) is also slowly shifting its product mix from colas to energy drinks and other non-carbonated beverages.

Coffee giant Starbucks Corporation (SBUX) is looking beyond its traditional coffee business and making an effort to bring more nutritional and healthy products to its menu. These include Evolution Fresh juices, Starbucks Refreshers energy drinks and new wholesome Salad Bowls. Starbucks vows to post calorie information on its menus across its U.S. stores soon.

Offering healthier versions of their existing products is also a smart trick adopted by some of these soft drink companies to lure customers. To reinvigorate sales of its sparkling beverages like Coke and Fanta, The Coca-Cola Company is offering more choices to customers in package sizes, sweeteners and beverages (including more low- and no-calorie selections).

Its no-calorie version of Coke -- Coca-Cola Zero -- is doing quite well. In fact, a market research conducted by the cola giant during the London 2012 Olympics showed Diet Coke, Coke Zero and water accounted for 73% of their sales, with red-label Coke only making up 23%.

PepsiCo, Inc.’s (PEP) low calorie cola, Pepsi Next, which contains 60% less sugar, achieved nearly $100 million in retail sales in less than 12 months in the market. PepsiCo is now making evolutionary natural sweeteners and flavorings aimed at reducing calories to re-vitalize declining sales of its colas. The food and beverage giant also aims to grow its nutrition brands like Quaker, Tropicana and Gatorade.

Following the success of Dr Pepper TEN (the low calorie version of its Dr Pepper brand of soft drinks), Dr Pepper Snapple Group Inc. (DPS) plans to expand its TEN platform to revive its carbonated soft drinks (CSD) sales. Accordingly, the company launched TEN versions of 7UP, Sunkist Orange Soda, A&W Root Beer, Canada Dry Ginger Ale and RC Cola brands in the U.S. in early 2013.

Coca-Cola Enterprises has already launched products with new sweetener alternatives, such as the zero-calorie sweetener Stevia in both Nestea and Sprite.

With consumers becoming more and more aware of the pitfalls of obesity and its popular connection made with CSDs, the beverage makers are donning the role of the new health pundits. In their more responsible avatars the cola giants are not only providing transparency in labeling but are also promoting fitness and nutrition education programs.

Food Companies Not to Miss Out on the Health Brigade

Food companies are also working hard to meet the evolving demand for food products with improved nutrition or simpler ingredients. Some of General Mills Inc.’s (GIS) recent innovations, mainly in the yogurt category, add more nutritional value to the packaged food with more fruits, vegetables and fiber, and less fat content.

This global consumer food company has also expanded its U.S. organic and natural foods business. The idea is to appeal to the growing number of health conscious customers that prefer the convenience of packaged food without compromising on health.

Kraft Foods Group (KRFT), which was split off from Mondelez International Inc. (MDLZ) last year, also offers a variety of products with improved nutritional profile like Planters NUT-rition, Oscar Mayer Selects and more low-fat cheese options. The packaged food company has also re-formulated products to add beneficial ingredients, fruits, vegetables and vitamins. Its Capri Sun Super V beverage contains a full serving of fruit and vegetables.

Convenience food maker Campbell Soup Company’s (CPB) strategy has been to make its existing portfolio healthier through initiatives such as reducing the sodium (salt) content in its soup.

Meat processor, Tyson Foods Inc.’s (TSN) chicken business has gained momentum recently as an increasing number of health-conscious consumers are opting for chicken instead of red meat because of the associated health risks. Demand for burgers, seafood, pizza, soup and pasta has declined in the past few quarters giving way to servings of breakfast sandwiches, chicken nuggets, tacos, fried chicken and wraps.

Restaurants Not to Lag Behind

Of late, it has been a fad among U.S. eateries to serve a healthy menu owing to consumer preference for fresh, organic, nutritious and low calorie food.

Upscale Mexican restaurant chain, Chipotle Mexican Grill Inc. (CMG) is seeing consistent traffic growth at its restaurants as customers endorse its naturally raised/locally grown ingredients like pork, chicken and beef. Chipotle is the only national restaurant company to use fresh produce since 2008.

Offering gluten-free or ‘wheat-free’ foods is also fast becoming another trend for restaurant chains. Though these foods are not exactly low calorie, they do provide alternative choices for people with food and dietary restrictions. While Domino's Pizza Inc. (DPZ) offers gluten-free crusts, coffee and baked goods chain Dunkin’ Donuts owned by Dunkin' Brands Group Inc. (DNKN) sells gluten-free pastries in some markets.

Is the Health and Wellness Trend Here to Stay?

The food and beverage companies can price their healthier products at a premium to cash in on this emerging trend. However, tight consumer spending trends and a shift towards lower priced products will act as a headwind.

Cash strapped consumers may decide to forego expensive health food for cheaper but simpler products. Thus the challenge is to provide value products with health benefits. The companies’ capability of crafting healthy products at a reasonable price should finally emerge as the real winner.

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