Nick Train: Snacking sector still in sweet spot despite consumers losing their appetites

The manager of the Finsbury Growth & Income Trust discusses performance struggles for Mondelez and Unilever holdings


The popularity of appetite-suppressing weightloss drugs is hitting the pockets of snack producers such as Mondelez and Unilever, according to Nick Train, manager of the Finsbury Growth & Income Trust.

In the investment company’s latest factsheet, published today (13 November), Train said Unilever’s share price fall of 4% for the month of October was unsurprising, but that he retains conviction in the stock, which currently accounts for 8.9% of the portfolio and is its fourth-largest position.

“Its third quarter results confirmed there are some genuinely good bits in the product portfolio, with beauty & wellbeing and personal care beating expectations (43% of group sales),” he wrote. “However, this was not enough to offset disappointment about the less good bits, with nutrition and ice-cream (36%) falling short of forecasts. With a new CEO and soon-to-be new chair and CFO, there are new eyes in senior roles at Unilever, doubtless charged with delivering more growth or extracting more value for shareholders.”

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Elsewhere in the portfolio, Mondelez – the trust’s eighth-largest weighting at 6.9% – has struggled, as consumers have made an increasingly conscious effort to improve their health and lose weight. US confectionary company Mondelez (formerly Kraft Foods) was inherited by Finsbury Growth & Income years ago from its original investment in Cadbury’s, according to Train, which the snacking company giant acquired in 2010.

In particular, Train said the impact of weightloss drugs “saw a scare for consumer companies” last month, which negatively impacted Mondelez. Madeline Wright, who is a deputy portfolio manager at Lindsell Train and works closely alongside Train on its open-ended mandates, said the number of patients taking GLP-1 drugs is projected to increase more than five-fold by 2035, encompassing some 7% of the total US population. The drugs suppresses users’ appetites, and therefore their daily calorie intake, by an average of 20-30%.

“Snack food manufacturers’ share prices fell when Walmart’s US CEO highlighted that shoppers buying these drugs from its pharmacies purchase “just less units” and “slightly less calories” from its grocery stores,” she said. “Certainly these drugs do have the potential to effectively suppress appetite, which does have the potential to impact snack brands, but we’d point to a few dynamics which are likely to prove protective, in our view.”

First, she pointed out the snacking industry behaves differently from the grocery store sector, and that Walmart’s US CEO didn’t specify which products were being left on the shelves.

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“Changes in consumer perception and evolving government guidance have been steering people away from highly artificial full meals and meal components for some time now – but the enjoyment of ‘unhealthy’ foods on an occasional basis hasn’t been affected in the same way, as these consumption patterns are different,” she argued.

“We’ve long thought that snacks are a superior category to grocery as products tend to be impulse, low volume and low unit priced purchases with strong brand loyalty and low private label penetration, so even if American consumers reduce their calorie intake by the highest 30% estimate, there’s likely to still be room for the occasional indulgence in their favourite snack.

“I hope we’re not being too optimistic to think this may even enhance brand loyalty – nobody wants to waste their occasional treat on an inferior product – which could put the owners of ‘real deal’ category leading brands, such as Mondelez’s global #1 Oreos, in a stronger position.”

While the US snacking sector is contending with some headwinds, Train said pointed out that the US Census predicts the US population will grow by 79 million people by 2060, while international migration will likely overtake natural increase.

“Some of this growing population will use GLP-1 drugs – but most will not, especially within the lower-income demographics whose consumption of snacks has historically grown,” he said. “Again, we’d view the “centre store” brands as being at more risk from these demographic changes – migrants living in the US, unfamiliar with ancient American staples like boxed mac’n’cheese, are unlikely to develop a new artificial cheese habit, but might well reach for more branded snacks. Which is why we don’t view PepsiCo’s 57% of revenues from the US as necessarily a bad thing.”

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He added that most snack companies have also moved the dial on some of their products over recent years, having shifted towards creating lower-calorie, higher nutrition products.

“Five of Mondelez’s nine most recent acquisitions fall into the ‘well being’ bucket, and three of the five were premium (most of the non-premium brands are emerging market brands),” he said. “Of course we wouldn’t want to see Mondelez devoting more time and energy to these brands than its core Oreos or Cadbury, but we believe that having these high-quality brands in its portfolio allows it to reach the widest possible range of consumers with offerings that are likely to be viewed as compatible with even diets containing 30% fewer calories – whether they’re consumed occasionally or daily.”

Over the month of October, the £1.7bn Finsbury Growth & Income Trust’s share price fell by 4.1%, while its net asset value was down 3.6% in total return terms. It has outperformed its average peer in the IT Global sector over five years, however, achieving a second-quartile total return of 17.7% compared to 13.3%, according to data from FE Fundinfo. The company is trading on a 5.7% discount to NAV, according to AIC data.

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