Consumer companies hungry for revenues are starting to place more emphasis on nutrition and other global health challenges, but they could be taking bigger bites. This is especially true in the developing world where the societal needs and economic growth prospects are the strongest.

According to the latest annual State of Food Insecurity in the World report from the United Nations’ food agencies, 842 million people worldwide (roughly one in eight) suffered in 2011 to 2013 from chronic hunger—not getting enough food to lead active and healthy lives. Most live in developing regions, where improving incomes are helping ease hunger but obesity is escalating as rising middle classes eat more processed foods and grow more sedentary. The World Health Organization estimates that globally 1.4 billion adults are overweight and 500 million are obese.

In total, one-third of the world’s population is impacted by undernutrition or obesity and 2.5 billion people lack access to adequate sanitation facilities and hygiene products, according to the report Creating Value in Underserved Markets, published by MSCI ESG Research in 2013.

While the top 20 global publicly listed consumer companies generate an estimated 40% of revenues in emerging markets, only 12% provide appropriate products to address undernutrition and poor sanitation, the report indicates. Fewer than 30% of the 250 consumer companies in the MSCI All Country World Index generate more than 5% of their revenues from healthy and natural products.

“Since we know there is a lot of growth potential in this field, we think there are large opportunities for companies,” said Véronique Menou, manager of thematic research for MSCI ESG Research and a co-author of the report, in a recent phone interview from her office in Paris.

Healthier products do not always make for happier consumers or investors. Campbell Soup Co.’s soup sales slowed after it reduced salt, so in 2011 it made some soups saltier. PepsiCo’s share price fell in 2011 because investors felt the company was focusing too much on healthier items at the detriment of its North American soft drink business, whose market share had slid to third place, says Lauren Compere, a managing director and director of shareholder engagement for Boston-based Boston Common Asset Management.

Still, she and Menou think that changing consumer needs and demands will help push companies to be more health-focused.
They note that sales of health and wellness foods and beverages jumped to $663 billion in 2012 from $524 billion in 2007 and $375 billion in 2002, according to Euromonitor.

Macroeconomic arguments for better nutrition are also strengthening. A 2012 Cornell University study they point to estimates that obesity adds $190 billion a year to U.S. medical costs and accounts for about 21% of the nation’s annual medical expenditures. Malnutrition, which can cause lifelong physical and mental disabilities, can cost poor countries 2% to 3% of their yearly GDP, according to the World Bank. “Undernutrition is a drag, obesity is a drag,” says Compere.

To help curb obesity-related health-care costs, legislation to ban or tax junk food has been proposed or passed in a number of developed and developing countries. The toughest law, in Japan, sets maximum waistline limits for adults age 40 and older (33.5 inches for men, 35.4 inches for women). Menou and Compere anticipate more regulations around the globe.

They also expect companies to look closer at their labeling and marketing practices. At least two dozen lawsuits have been filed in the U.S. against food and beverage makers for allegedly misleading consumers about the nutritional content of products. “You’ve heard a lot about Big Tobacco and Big Pharma,” says Compere. “Now you’re hearing more about Big Food.”

Building a business case for undernutrition is more difficult than for obesity, says Menou. People living at the base of the pyramid—the world’s poorest citizens—offer a huge new market, but making scalable profits is currently challenging given poor infrastructure and weak distribution channels in developing markets and difficulties reformulating products to fit local needs. However, “we think that companies that now start to reach out to consumers in those markets can help establish brand recognition and then capitalize on opportunities in the long term,” she says.

Feeding Frenzy
Danone SA, Unilever and Nestlé SA are already reaching out and topped the 2013 Access to Nutrition Index (ATNI), a ranking of the world’s 25 largest food and beverage makers on their nutrition-related commitments, performance and disclosure practices. MSCI ESG Research was the research partner for the inaugural index, published last March.

“The three companies have good programs for formulating healthy products, making healthy products accessible and affordable, and marketing them responsibly,” says Menou, who directed the research team. “They have room to grow, but I think compared to the others they are doing a better job demonstrating that nutrition is part of their business and growth strategy.”

For the index, France-based Danone reported that 45% of its 2011 sales of newly launched products were of healthy options (as defined by its internal nutritional standards) and that 20% of its products were reformulated over the past three years with lower levels of fats, sugars and salt. The company has also begun to reformulate its products to include specific nutrients that are missing in local emerging markets such as vitamin A, iron, zinc and iodine. More than half (53%) of Danone’s net sales came from emerging markets in 2012, up from 17% in 1996.

Danone’s medical nutrition division reported double-digit sales growth in 2012 in China, Turkey and Brazil, and has launched new products to improve nutrition for the fast-growing global elderly population. The company also dominates the global yogurt market, says Margien Tolson, a global analyst in the consumer staples sector and head of the client services team at Boston Common Asset Management. “It’s good for you and your digestive health,” she says. Danone is investing in milk farms in Russia, its largest market, and recently announced an acquisition that will enable it to expand its dairy business into West Africa.

Danone’s infant formula sales in emerging countries gained nearly 20% in 2012. Still, investors should be aware of its unfolding infant formula bribery scandal in China, cautions Menou. She says food safety issues negatively impacted net income at Kellogg Co. (by 2% in 2011) and ConAgra Foods (by about 2.5% in 2009). Corruption can also bring hidden costs related to legal and compliance issues, loss of access to markets and reputation, she says. Danone’s American Depositary Receipts (ADRs) trade over the counter in the U.S. under the symbol DANOY.

Nestlé, headquartered in Switzerland, derives approximately 74% of its sales from food products that meet its internal nutritional profile, says Ivka Kalus-Bystricky, who manages two funds for Portsmouth, N.H.-based Pax World Management LLC. Nestlé also has a health sciences research division that focuses on the prevention of diabetes, obesity, cardiovascular and Alzheimer’s disease and other conditions. “Nestlé is way ahead of the game on that,” she says. “That’s something to say for a company that gets 10% of its sales from chocolate.”

Nestlé receives approximately 45% of its total sales from emerging markets. Its infant nutrition products (formulas and cereals) have been experiencing double-digit growth in the BRICs (Brazil, Russia, India and China) and Africa.

As of September 30, Nestlé was one of the top 10 holdings in the Pax World International Fund and was also held by the Pax World Global Women’s Equality Fund. What’s really important from an investment perspective to Kalus-Bystricky, who manages both funds, is Nestlé’s strong financial picture. This includes a low debt-to-total capital ratio of 10% and a high dividend yield (around 3.5%) and free cash flow yield (around 5%), she says. Bloomberg consensus estimates call for earnings growth of 7.5% over the next one to two years, 6% to 7% over three to five years, she notes. Nestlé’s ADRs trade over the counter in the U.S. under the symbol NSRGY.

Unilever, which straddles the food, personal care and home-care sectors, saw its emerging markets sales rise more than 11% in 2012, to account for 55% of total business. The company has been reaching into new markets, including Central Africa and Myanmar, and is also stepping up its product offerings for low income shoppers across Europe and the U.S.

Unilever has applied a nutritional profiling system to its entire food portfolio that lets it set specific targets around product reformulation to reduce salt, sugar and fats, says Compere, who helped develop metrics for the Access to Nutrition Index. Her engagement with the company on access to nutrition has been positive, but she says more work is needed. “If you look at Unilever’s food portfolio, its largest sellers in the developing world are tea and ice cream,” she says.

Cleaning Up
Unilever is the leader in liquid laundry detergent in emerging markets with market share of more than 25%. Unilever’s Lifebuoy hand-washing programs have reached over 119 million people since 2010, helping its Lifebuoy soap brand generate double-digit growth. The company’s Pureit in-home water purifiers are bringing safe, affordable drinking water to millions of people in India and other emerging markets. ADRs of Unilever NV (“UN”) and Unilever PLC (“UL”) trade on the NYSE.

Henkel AG & Co. KGaA—a Germany-based producer of laundry and home-care products, beauty care products and adhesive technologies—markets soaps in North Africa and Latin America that are easier to rinse out with less water, says Kalus-Bystricky.

It also uses smaller, less expensive packaging. “They work with how people live on a hand-to-mouth basis,” she says. “They are definitely focused on affordability.” While Henkel may not be making a lot of money on these products, “it’s an investment in the future,” she says. The company generated 43% of its overall 2012 sales in emerging markets.

But Henkel’s big growth driver is its adhesives business, says Kalus-Bystricky, who describes the company as “the go-to adhesives producer” and held its shares in both of her funds as of September 30. Henkel is focusing on new applications for adhesives, including carbon fiber airplanes that must be able to withstand heat, cold and vibrations. Bloomberg consensus growth is 9.8% for one year, 8.5% for three years—numbers she thinks may be low given the strength of Henkel’s adhesives business and how deep a recession Europe is coming out of.

Henkel, which imports and produces chemicals, is also ahead of the curve on using certified, safer chemicals, so it’s less likely to have to pull its products as chemical regulations tighten in Europe, she says. Its ADRs trade over the counter in the U.S. under the symbol HENKY.

Tolson of Boston Common Asset Management says it’s easier to transition household and personal products to the developing world than food, which is more regional and harder to adapt to local preferences. “Taste helps drive the decision-making process,” she says, “and companies have to really understand local needs and resources.”

When analyzing companies, Tolson looks for robust end-market growth, leading market share positions and strong innovations (as measured by R&D and the percentage of revenues coming from products introduced in the last three years), as well as the companies’ advertising efforts. In emerging markets, this includes visiting communities to explain products’ health benefits and introducing consumers to inexpensive single-use items that can create loyalty. She notes that Colgate-Palmolive Co. has made such efforts in Latin America for decades. “Colgate is sort of the poster child,” she says.

As incomes rise in emerging markets, she expects to see greater consumer interest in products that are more convenient, healthier and geared for personal hygiene and appearance. Strategies used in emerging markets, such as smaller, more affordable packages, can also be an effective way to reach lower socioeconomic status consumers in developed markets, she says. “For a lot of consumers, it’s not the cost of what’s inside the bottle but the bottle itself,” she says, noting that plastic is tied to oil prices.

Other consumer companies she says are making efforts in the developing world include Mondelez International (spun off from Kraft Foods in 2012) and Procter & Gamble. “For example, Tang, a Mondelez product offered in powdered and ready-to-drink forms, can also be used as a medium to deliver health benefits including vitamins and minerals tailored to regional needs,” she says. P&G’s innovations are driving its pricing power and unit growth, she says.

To make their efforts in emerging markets sustainable, consumer companies must collaborate with local authorities, microfinance institutions and other organizations, says Menou. However, “when you want to contribute positively through your investment, you do not necessarily have to invest in small-scale microenterprises and microfinance projects,” she says. “You can invest in large-cap equities that are actually doing things to improve nutrition or health.”