Friday, June 5, 2015

Potential Value in Diversified Food Companies: Meditations on Markets

One of the large consumer trends in recent years has been the switch from chemical enhanced foods to organic products. This rise in consumer taste can be visualized with the explosive growth of companies like Whole Foods (WFM) who have increased revenues from FY2010 to FY2014 a staggering 57%. This drastic change in consumer preferences spells troubles for large diversified food and beverage companies like PepsiCo (PEP), Coca-Cola Co (KO), and JM Smucker Co (SJM). Top line growth has been negative at Coca-Cola (KO) over the past two years as consumers switch away from. This has lead to a deterioration of the company's share prices which trades at a 10% discount from its 52 week high as their main products lose market share.

While not leading the forefront of the organic trend, large diversified food and beverage companies are responding to consumer trends realizing that the market is diverging from their popular products that contain the currently taboo high fructose corn syrup. PepsiCo in particular is looking to take advantage of the recent craze in craft beverages that have been hitting the large beer brewers as consumers move towards smaller craft brewes that offer exotic beverages. PepsiCo will be releasing a new soda fountain that will deliver exciting new flavors such as agave vanilla cream and black cherry with tarragon. JM Smucker Co (SJM) who recently posted an 8.2% decline in sales in the latest quarter is also trying to respond to changes in consumer preferences by removing trans fats and aiming at creating "clean labels" for their products.

While these large companies are lagging behind the smaller companies who are focusing on organic the organic trend you can't count them out yet. These large companies will continue to decline in share value as top-line growth further diminishes . However the huge advantage that these companies have are established marketing presences and economies of scale that would possibly allow a lower cost of production than the smaller higher premium craft beverages and food companies. Companies like PepsiCo have massive disribution channels that reach way into the restaurant industry and because they are branding these products under a different name (Stubborn Soda) this will diminsh the negative conotations that the Pepsi brand bring to some consumers. While top-line growth may diminsh over the next couple years the long-term growth of these companies who recognize the consumer trend are not in question since they already have the structure to compete. This could create potential value as share prives continue to diminish as investors focus on the short-term results.

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