Last fall in this space I reported on a landmark study authored through the Hudson Institute titledBetter-for-you Foods: It's Just Good Business. In that report we analyzed fifteen of the largest consumer packaged goods (CPG) corporations such as General Mills, Kraft Foods, Coca-Cola and Nestle and concluded that companies with above average sales of better-for-you (BFY) products enjoyed larger sales increases over a 5-year period, higher operating profits, better returns to shareholders and superior reputations.
The message was clear: companies can make money while selling healthier products.
Now that the first quarter of 2012 is behind us, we asked ourselves: Are those findings holding up? This appears to be the case.
In reviewing the first quarter performance of all fifteen food and beverage companies evaluated last fall, we found that stocks of companies with the larger percentage of their sales in BFY products grew at over 3 times the rate compared to those companies selling a smaller percent of BFY products (+3.4% vs. +1.1%, respectively). While neither group approached the rise in the S&P 500 Index (+12%) for the quarter, those emphasizing their better-for-you portfolio benefitted more. Even more compelling, the average gain per share was +$1.74 for high BFY companies, compared to +$.25, a +$1.49 per share difference, or a 7 times greater dollar return on investment.
The conclusion that emphasizing better-for-you foods may embellish financial performance appears to be no fluke as the disparity in stock price appreciation occurred despite both groupings of companies growing revenues year over year at virtually identical rates (+6.9% and +6.8%, respectively). What this means is that growth alone does not generate superior stockholder returns; it may now require pushing out healthier versions versus the traditional standbys.
Perhaps those companies enjoying higher returns to their shareholders are more innovative, or simply understand consumer needs better than their peers. Regardless, they have figured out that maintaining and growing their better-for-you products are key contributors to their success.
These results offer several key lessons:
- It makes business sense to push sales of lower calorie and healthier foods and beverages
- As a group, companies emphasizing and growing their BFY sales appear to be better investment opportunities
- Shareholders have reason to nudge companies they invest in to pay more attention to selling more BFY items as this may lead to higher returns on their investment.
These results carry wide ranging implications by signifying that change in the form of healthier and lower calorie foods can come via financial motivation ("carrots") rather than the historical "stick" approach taken by advocates of harsh regulatory actions such as soda/fat taxes, restrictions on marketing practices and the ever effervescing menu labeling constraints.
Companies are in business to make a profit and to maximize their shareholder's returns. I can see no better way for food and beverage companies to deliver on their missions than to speed up the proliferation of healthier, lower calorie offerings.
Is Wall Street listening?