Ultra processed foods (UPF), also known as foods high in fats, sugar and salt (HFSS), have become increasingly popular pan-India. Despite the warnings from policy makers, NGOs and health professionals on adverse health impact, consumption continues to rise. In India, most of the manufacture and sale is attributed to the unorganized sector though trends show a shift to large format stores and e-commerce. I look at investment opportunities.
As investors, the decision to own a piece of a company by investing in its stock is sometimes muddled by ethical concerns. The fine line between what is acceptable (beyond the financial metrics) and what is avoidable (despite being a good investment opportunity) can be blurry. Oil & Gas, mining and tobacco companies and, more recently, social media companies have witnessed this debate from the front row seat. It may not be a stretch to presume that companies deriving bulk of their revenues from HFSS foods may be in a similar position in the near future.
According to the India-specific World Health Organization report published in Aug 2023, ultra processed foods (also called as foods high in fat, salt and sugar – HFSS) are the major driver of non-communicable diseases like obesity, diabetes, cardiovascular diseases and premature deaths. The Government of India is also cognizant of the matter and makes recommendations on this on its website Eat Right India.
However, despite the considerable interest in this industry from the policy makers, NGOs and health professionals, I believe this is the right time to take a deeper look at the players and consider investment opportunities. As the WHO report attests, the demand is high and shows no sign of moderation. Meanwhile, companies are innovating with product strategy and labeling and marketing plans. Happily, big players are starting to take steps to move towards healthier options – ranging from fortifying their products, altering components to reduce sugar/Maida content, diversifying beyond HFSS product portfolio to offer customer healthier choices in light of greater customer awareness.
Headline numbers from WHO report:
Global Processed Food Industry – USD 1925.7 billion (2020) valued
Global Processed Food Industry – USD 3407.2 billion (2030) projected
Per capita sale of processed food (essentials + ultra processed) in India – USD 57.7 (2018)
Ultra processed food and beverages in India – USD 37.9 billion (2019)
Product classification
At the time of writing this report (June 2024) there is no formal definition of what constitutes Ultra Processed Food by FSAAI, the statutory body responsible for regulation of and establishing standards for food safety. However, the Ministry of Women and Child Development, in a report on the Working Group formed to address HFSS Foods and Promotion of Healthy Snacks in Schools defined this as “foods (any food or drink, packaged or non-packaged) which contain low amounts of proteins, vitamins, phytochemicals, minerals and dietary fibre but are rich in fat (saturated fatty acids), salt and sugar and high in energy (calories) that are known to have negative impact on health if consumed regularly or in high amounts” The WHO classification seems to be in line with this.
For this report, I use the WHO sub-classification of processed and ultra-processed food in the table below and focus on ultra processed foods. UPF is used interchangeably with HFSS (High Fat, Salt and Sugar)
Popularity of Ultra Processed Foods Worldwide
The appeal of UPFs is wide-spread and interests almost all segments of population across countries. In high income countries like US, Canada and UK, these foods contribute almost half the total dietary energy consumed and between 20% to 30% in middle income countries like Brazil, Mexico and Chile. The studies are more than 5 years old. It is now estimated that 73% of US food supply is ultra processed. The study published by Northeastern University’s Network Science Institute shows that the concentration of different nutrients in food follow a fixed pattern and the amount of any given nutrient in a food follows a similar mathematical formula. However, despite the known risks from UPFs it is estimated that an average adult in US gets more than 60% of their daily calories from UPFs.
A study published in early December 2023 on BMC Global and Public Health, a peer-reviewed journal, showed that 89% of the top 20 global food and beverage companies’ brand sales were items high in fats, salt and sugar (HFSS). The study, funded by UNICEF and NIHR, looked at products and categories from 7 countries including India and used only those products that could be matched with the nutrition composition data.
Macro-environment : Changing food habits in India
Mirroring consumption trends world-wide, the rise in consumption of ultra processed foods is pan India. Driven by increasing disposable incomes, changes in eating practices and above all, the habit forming behavior of foods high in fat, salt and sugar, this sector has grown at 13.37% (CAGR) between 2011 and 2021, below that of the total food sector (including staples) of 15.32%. However, in 2021 ultra-processed foods saw a higher growth rate compared to essentials – possibly on back of low base in 2020 owing to Covid. As of 2021, the ultra-processed food sales was at Rs 2,535 billion and is expected to more than double to Rs 6,039 billion in 2032 assuming GDP grows at 6.00% and disposable income grows at 6.42%
Source : WHO report
The WHO report categorizes foods high in fat, salt and sugar into five segments
Chocolate and Sugar Confectionary
Chocolate Confectionary
Gum
Sugar Confectionary
Ice Cream and Frozen Desserts
Snack Bars and Fruit Snacks
Sweet Biscuits
Sweet Spreads
Cakes and Pastries
Desserts
Salty Snacks
Savoury Snacks
Beverages
Flavored Bottled Water
Soft Drinks / Carbonated
Juice
RTD Tea / Coffee
Energy Drinks
Flavored Milk Drinks
Breakfast Cereals
Hot Cereals (Oats & Porridge)
RTE Cereals (Muesli, Granola, etc.)
Ready-made and Convenience Food
Ready Meals
Frozen Processed Fruits & Veggies
Chilled / Frozen Meat
Frozen Seafood
Meet and Seafood Substitutes
Instant Noodles
Sauces / Dressings / Condiments
Soup
Milk Substitutes and Alternatives
The per capital consumption in the 10 years ending 2021 show an increase of 2.5X to 3.5X across all subcategories except for breakfast cereal
Source : WHO report
Trends in HFSS sector
Sales between 2011 and 2021 grew at 13.37% CAGR and in 2021 stood at INR 2,535 billion
The sector accounted for 36% of sales in the total processed food category – divided between essentials and ultra processed in 2021 and is expected to touch 39% in 2032 for sales worth INR 6,000 billion
WHO report estimates that around 80% of the production and 70% of the sales happen through the Kirana stores even as the share of hypermarkets and e-comm is steadily increasing
In the next 10 years, between 2023 and 2032, salty snacks will become the second largest sub-category after chocolate and sugar confectionery buoyed by the growth (CAGR) of more than 11.8%. The only other sub-category expected to see double digit growth during this period is breakfast cereals.
·In the top 100 companies by market capitalization, 8 have products that can be mapped to the WHO categorization of ultra processed foods. A few companies also operate in mid and small cap space. Haldiram, an unlisted player, has been in the news recently. Business Standard reported this May about the interest in Haldiram from private equity firms Blackstone and Bain, in collaboration with Temasek Singapore at a valuation of around $8 billion. In September last year, Reuters reported of a similar deal in making with Tata Consumer having reportedly shown an interest. Both the reports have been denied. Haldiram is reported to have a revenue in the tune of Rs 9000 crore.
Source : WHO report
Risks to the estimates
1. Policy interventions related to restrictions on point of sale, advertising, labelling of products
2. Greater awareness of customers leading to self-moderation of consumption
3. Overall slowdown in growth rates of GDP and/or disposable income
4. Change in eating habits – reversion to traditional items
Investment Opportunities
While the bulk of production and sales is through the unorganized sector, there are publicly traded companies that have considerable market share in the respective categories.
I looked at Nifty 100 Index and selected companies that have products “fitting” the sub-categories of HFSS. It would be good to get the qualifier out of the way. The match of sub-categories with the company’s product is based on my judgement. I did reach out to the manufacturers but didn’t get confirmation from any.
The companies listed here are either manufacturers of ultra processed foods or retailers having operations pan India. Zomato (via Blinkit) is an exception – the company is a constituent of Nifty 100 Index but doesn’t make it to the list on account of having less than 5 years of being a public limited company
Criteria for selection of companies
Significant presence across HFSS sub-categories – either manufacturing or sales
Part of Nifty 100 – large cap
Long history – stable revenues, wide distribution network, high market share for specific sub-categories in organized retail
Source : Self-assessment
Companies not producing or distributing HFSS products are not included in this list. For instance, Adani Wilmar, a heavy weight in FMCG category has been excluded.
Current Players in Nifty 100
I looked at a few critical variables for the shortlisted companies and tabulated them for quick review. It is worth noting that none of the companies declare the revenue derived from the sale of HFSS except perhaps for Varun Beverages which, I would assume, to be 100%.
Having found no clear winners based on the product mix and the metrics, I ran a Mean-Variance Optimization in Excel based on last 5 years monthly return. I developed three models – equally weighted, optimized with single constraint and optimized with 3 constraints (my discretion).
Results below:
Qualifiers
This report is an overview of the ultra-processed food sector. Foods in UPF sector are loosely defined as those high in fat, sugar and salt. No official definition has been provided by FSSAI
The mapping of the sub-categories in the WHO report with the products sold by companies is based on my judgement call. I had reached out to the companies and have not received a confirmation
Of the 10 companies mentioned in the report, I have not assessed the quality of their financial statements and have used the numbers as is. Also, none of these companies report revenues from HFSS category.
Mean-Variance Optimization is a model that uses only past prices to compute returns and var-covar matrix. It gives a recommendation on the weights based on that. However, per advanced finance, using just past prices to make investment decisions is risky.
Risk free rate in the model is taken as 6.984% which was the yield on the 10-year GOI bond on 18th June 2024
While this report finds potential in this industry and recommends a look at the companies operating in this space, it is important to note that the side effects of sustained consumption of foods high in fat, sugar and salt can cause serious damage to health.
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