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.