As a slowdown in emerging markets takes the shine off shares in consumer goods makers like Nestle, Unilever, Danone and Procter & Gamble, hungry investors have been sampling more of the companies that supply them.
Scent and flavour makers such as Symrise, Givaudan and International Flavours & Fragrances, and food ingredient names like Glanbia and Kerry Group are attractive, analysts say, because they are more resistant to weak consumer spending and benefit from health and wellness trends forcing so many brands to modify their products.
“The companies in those segments have exposure to faster growing specialty areas, serve a wide range of customers (from top brands to white label) and constantly invest in new technology,” Berenberg analysts said this month. They upgraded Germany’s Symrise to ‘buy’ and Switzerland’s Givaudan to ‘hold’.
JPMorgan Cazenove estimates the European food ingredients sector will, on average, see six per cent earnings growth in 2014, while European food producers will see no growth.
Indeed, consumer staples stocks have been battered by currency devaluations and cooling demand in emerging markets and lingering economic malaise in Europe and the US. Over the past 12 months, the top 25 global consumer staples stocks are still up 7.5 per cent on average, but down 3.5 per cent in the year to date, according to Reuters data.
By contrast, 2014 has favoured ingredients. At Thursday’s close, Kerry was up three per cent, IFF five per cent, Symrise six per cent and Givaudan nine per cent. Still, there are outliers.
Lower European sugar prices are squeezing profits at German sugar company Suedzucker, while Britain’s Tate & Lyle on Thursday forecast sharply lower prices for its Splenda sweetener due to competition from cheaper Chinese sucralose makers. Both companies’ shares are down by double digits.
“There are some very, very good businesses in that space, but I don’t think you can just bundle them all together, as you can see with Tate & Lyle,” said Exane BNP Paribas analyst Jeff Stent. “If you take a stock like Kerry, we’ve been buyers of that stock for as long as we’ve been analysts at Exane.”
The European food ingredients sector will, on average, see six per cent earnings growth in 2014
In developed markets, makers of everything from beer to bread to bodywash have lost some ground to generic, white-label products. But for the ingredients makers, those brands are customers. And in less mature markets, the growing customer base is local manufacturers.
Kerry Group’s deal to supply dairy ingredients to Chinese infant nutrition company Beingmate shows how the sector can benefit from the development of local players who are stepping up their game against multinationals. Companies like Natura Cosmeticos from Brazil and Grupo Bimbo from Mexico are just two developing market consumer companies actively expanding into new markets.
Analysts at Davy Research who follow the sector say that as local manufacturers get bigger and more savvy, they are turning to internationals for more reliable and high-quality supply.
That is especially true in China, where a 2008 scandal involving tainted milk made consumers wary of local brands.
China’s top milk producer, China Mengniu Dairy, this week agreed to sell more of itself to Danone as it tries to win customers. Denmark’s Arla Foods, another dairy supplier, also has a stake in Mengniu.
The average consumer goods maker spends about eight to 10 per cent or more of its sales on advertising and marketing and just two per cent on research and development.
Over time, R&D spending has come down as categories mature and companies cut costs, leaving them to outsource technical development to their suppliers.
“I think they have always been marketing companies,” said JPMorgan analyst John Faucher.
“As the technologies and categories become more complicated, they simply need to cast a broader net.”
By contrast, flavour and fragrance companies often spend more than seven per cent of sales on R&D, and have been buying smaller makers of specialised ingredients for which they can charge higher prices and boost margins.
Last year, Tate & Lyle bought a maker of oat beta glucan, and in January IFF bought a maker of complex specialty ingredients, while Symrise is trying to take over Sweden’s Probi, which makes probiotic ingredients for yoghurt. Israel’s Frutarom Industries has bought 12 companies since 2011.