Tate & Lyle
Carst and Walker

The missing piece in Big Food’s innovation puzzle

Food companies talk a lot about new products, so why don’t they spend money on them? This, however, is good news for ingredient suppliers.

The world’s biggest food companies harp on about the need to come up with new products. But their innovation budgets are shrinking. Investors can benefit from the contradiction if they look further up the food chain.

Snack businesses are trying to create fresh brands, or reformulate existing ones, as consumer tastes change. Companies like Nestlé and Kraft Heinz are losing market share to entrepreneur-led food brands that have reacted more quickly to a preference for healthy and convenient products.

Meanwhile, food giants have stalled what they spend on innovation. In 2018, Nespresso-maker Nestlé allocated 1.8% of total sales to its research and development team — the same level as a decade earlier.

Unilever, which owns Dove soap and Ben & Jerry’s ice cream, spends less as a percentage of sales today than it did in 2008. Kraft Heinz reinvests just 0.4% of turnover into research and development.

In truth, they are becoming reliant on others to do the heavy lifting.

Specialist food ingredient companies like Tate & Lyle and Kerry Group work with global brands behind the scenes to come up with new ideas. These businesses can spend two to three times more on innovation as a percentage of turnover than their biggest clients.

One part of their expertise is overhauling recipes. Ingredients companies can do everything from adding trendy probiotics to taking out excess sugar or gluten.

Nestlé got a hand from Tate & Lyle to remove more sugar from its Nesquik range of flavoured drinks, while Denmark’s Chr Hansen helped Kraft Heinz switch from artificial to natural colours in the US giant’s Macaroni & Cheese.

Healthy food trends will keep these companies busy for years: In Europe and the Middle East, 60% of artificial ingredients have been replaced with natural alternatives, according to Barclays’ analysts. In North America and Latin America, the figure is still around 25%.

Another service food suppliers offer is coming up with successful innovations to help revive sales. The pink chocolate in Nestlé’s ruby KitKat, which has become very popular in Asia, was actually created by cocoa producer, Barry Callebaut, for example.

Ingredients companies also supply the food entrepreneurs that are disrupting big listed companies. Sales to startup brands are increasing at two to three times the rate of those to global clients. That is one reason why sales growth at ingredients companies is projected to outstrip what companies like Nestlé, Mondelez and Kraft Heinz will manage in the coming years.

Ingredients companies also supply the food entrepreneurs that are disrupting big listed companies. Sales to startup brands are increasing at two to three times the rate of those to global clients.

That is one reason why sales growth at ingredients companies is projected to outstrip what companies like Nestlé, Mondelez and Kraft Heinz will manage in the coming years.

That kind of potential doesn’t come cheap. A basket of five food-ingredient shares trades for a 35% premium to global consumer stocks on a projected earnings basis. Five years ago, the pattern was reversed.

So long as global and startup brands keep knocking on their doors, though, appetite to invest in these companies will stay healthy.

Source: Wall Street Journal

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