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Ozempic, weight-loss drug fears settle into longer-term risks for food companies

Investors' reaction to weight-loss drugs was overblown, but a 'significant shift in consumer behavior' will happen over time, per the Novo Nordisk CEO.

New wardrobes. Salad fests. Fuel savings.

As the popularity of Novo Nordisk’s (NVO) Ozempic (approved for type 2 diabetes) and Wegovy (approved for weight loss) rose, investors frantically debated the prospects of consumers overhauling their entire lifestyles — even as evidence remained scant.

“We're seeing no impact today with GLP-1s and two, that nobody has any idea what the impact is going to be in the future," McDonald’s CEO Chris Kempczinski told Yahoo Finance over the phone.

Nevertheless, doomsday predictions, along with other headwinds, have tanked the stock prices of food makers like Kraft Heinz (KHC) and Hershey’s (HSY). The S&P 500 Consumer Staples Index is down 5% year to date, compared to the broader index’s 20% gain.

On the other hand, the game-changing drugs, also known as GLP-1s, have propelled Novo Nordisk to become one of Europe’s most valuable companies. On Monday, the drugmaker was named Yahoo Finance's 2023 Company of the Year, after its stock clocked a 41% gain on the year.

But the initial panic surrounding food stocks is likely unwarranted, according to several sources Yahoo Finance talked to, including Novo Nordisk’s CEO Lars Fruergaard Jørgensen.

"It's really fascinating for us to reflect on how big an impact we might have," Jørgensen told Yahoo Finance in an exclusive interview.

"There's no doubt that with the intervention we see now with the GLP-1 medicines, you see [there's a] significant shift in consumer behavior ... some of these categories will be impacted," Jorgensen added.

Categories he mentioned include medical technology companies and drink and snack businesses, among others, all of which are estimated to see slower revenue growth due to rising GLP-1 use.

However, the impact will happen "over many years," as the drug becomes more widely available, per Jørgensen. Currently, a lack of insurance coverage and a supply shortage have limited the adoption of Ozempic and Wegovy.

Debating weight-loss drug impact will continue for the next decade

Noise surrounding obesity drugs ramped up over the summer and reached a fever pitch in the fall, as Wall Street salivated at the prospect of a new $100 billion market.

Yet as investors take some time to reflect, many are realizing the initial fears of the drugs’ disruption of business are "overblown," Arun Sundaram, CFRA senior equity research analyst, told Yahoo Finance over the phone.

"The market is starting to realize ... this is not having a material impact on food consumption today," Sundaram said. "This is going to be a long-term trend ... [It's] not just going to be a 2023-2024 phenomenon, this is probably going to go on for the next decade. There's a lot of time for companies to react and adapt to changing spending environments.”

Food companies have weathered numerous dieting trends — think Atkins, Keto, Paleo, Whole30, and South Beach — and many have moved towards offering healthier and more diverse options in recent years.

To underscore the point, sales of dry goods are up 7.6% in the past 12 months, while frozen prepared foods are up 5.8%, according to data from NielsenIQ. McDonald’s, long synonymous with greasy burgers, clocked an 8.1% gain for same-store sales in its Q3 results and is planning a record restaurant expansion despite weight-loss drug proliferation.

Novo Nordisk CEO Lars Fruergaard Jørgensen.
Novo Nordisk CEO Lars Fruergaard Jørgensen.

However, decreased appetite and cravings could change people’s snacking habits and create an impact on fast food.

Brands that generate substantial sales from snackers or aren’t associated with mealtime — such as Jack in the Box (JACK), Yum! Brands-owned Taco Bell (YUM), Dutch Bros (BROS), and Starbucks (SBUX) — could one day feel the hit.

"If you're on one of these drugs, it's much easier to make a decision not to pick up your dollar soda and fries at two in the afternoon or not to eat some of these more fried foods at lunch," said Stifel analyst Chris O'Cull.

Restaurant chains like Olive Garden (DRI), Texas Roadhouse (TXRH), or Chili’s (EAT) are less exposed, as people taking the drugs are still likely to go out with their friends, said O'Cull.

Meanwhile, Morningstar analyst Sean Dunlop believes "the impact is going to be financially immaterial" on fast food companies, as they have bigger fish to fry in 2024, including a pullback in consumer spending and declining foot traffic.

Morningstar estimates that by 2030, 3.5% of the US population will be taking GLP-1s. Even in a “bull case scenario” where 7% of the population is on weight-loss drugs and assuming that calorie intake for patients drops by 30%, it still only translates to a roughly 2.1% impact on same-store sales across the restaurant industry.

Such results are "hardly enough to justify sweeping concerns" regarding fast food’s future, Dunlop said. More health-conscious brands, like many fast-casual chains, may end up benefiting.

"Names like Chipotle, Cava, Sweetgreen would be proportionately better positioned," he told Yahoo Finance.

No impact on food sellers, for now

Persistent demand for the drugs could bring more consumers into retailers that have pharmacies, per Sundaram.

This spells good news for Walmart (WMT), Target (TGT), Kroger (KR), Albertsons (ACI), and Costco (COST).

The influx of "healthier" shoppers picking up their prescriptions could provide a boost to other departments, including "the food department, apparel department, other general merchandise departments," Sundaram added.

Kroger Health president Colleen Lindholz told Yahoo Finance she believes the actual impact from the drugs will not be a reduction in food purchases but rather a shift to healthier foods.

"It just makes sense that people are going to trade up to fresh foods, things that are better for them, because they're feeling good about themselves and they're feeling good about being healthy overall," Lindholz said.

But packaged foods like canned soup or chips likely won't be impacted in the near future, experts contend. Many executives have said there has been no evidence of a change in behavior amid the early adoption of the drugs.

PepsiCo (PEP) reported a record third quarter, and CEO Ramon Laguarta said that "the impact is negligible in our business" on a call with investors. Constellation Brands (STZ) CEO Bill Newlands told Yahoo Finance he didn't see any signs that weight-loss drugs are reducing demand for beer.

And it would hardly be Halloween or Thanksgiving without candy and dessert. Hershey’s CEO Michele Buck pointed out the emotional nature of food, “and the role that [it plays] in moments of celebration and joy,” on the company's Q3 earnings call. The chocolate maker recorded an 11% year-over-year jump in revenue.

Volume declines in food solely due to GLP-1 drugs will be hard to pinpoint, Mizuho Securities managing director John Baumgartner told Yahoo Finance. New changes in food habits could be due to tightening finances or other factors, even though some will attribute it all to weight-loss drugs.

As there aren't any GLP-1-related risks outside of the US currently, Baumgartner's top picks include European frozen food maker Nomad Foods (NMD) and Oreo maker Mondelez (MDLZ), which has strong international growth.

He’s also big on Kraft Heinz, as consumers look for healthier ingredients at value prices.

At the end of the day, the food industry has been resilient, and the companies’ share prices account for many risk factors.

"You've seen a number of crazes in this industry, a number of fads, and really kind of priced into the stocks ... until you start eating through IVs, or we don't need food at all anymore, and you're getting energy from sun and photosynthesis, I feel like there's going to be demand for food," Baumgartner said.

Brooke DiPalma is a senior reporter for Yahoo Finance. Follow her on Twitter at @BrookeDiPalma or email her at bdipalma@yahoofinance.com.

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