Pictured (L-R): Jason Molins, Patrick Higgins and Fintan Ryan.
1. Jason, tell us about the Food and Beverage team?
Given Ireland’s strong heritage in food and beverage, the sector is an integral element of Goodbody’s capital markets research offering. Over the last few years, we have more than doubled the number of listed stocks that we cover, expanding into predominantly UK companies. At present we cover just under 25 companies right across the spectrum from small and mid-cap to large-cap. Our coverage has a total market capitalisation of approx. €150bn. Unlike other sector research teams who tend to either look at a specific product category or sales channel, we take a more holistic approach. This provides insights that we share with investors along the value chain from upstream suppliers to speciality ingredients, to manufacturers/processors and hospitality/out-of-home consumption channels. Alongside myself, Patrick Higgins has been part of the team for over 10 years and earlier this year Fintan Ryan joined us, bringing a wealth of experience having worked at some of the large UK-based investment banks. By this time next year, we aim to have over 30 companies under coverage.
2. How have companies been performing given the current economic backdrop?
Like many others, food and beverage companies have faced unprecedented input cost inflation headwinds over the past 12-24 months. Given the magnitude and widespread nature of the cost increases, most companies have simply passed them on to the retail or foodservice customer and then ultimately to the eventual end consumer. So far, we have been positively surprised by the resilience of consumer demand across the retail and hospitality channels, despite the well-documented cost-of-living challenges that they have been facing. That said, there have been some shifts in consumer behaviour. For example, within the retail channel, whilst volumes are broadly flat this year across Ireland and the UK, there has been share gains for private label products as well as the discount retailers. Within the hospitality sector we have seen venues that have a compelling value offering also perform well and gain market share.
3. How is Environmental Social Governance (ESG) impacting the sector?
Sustainability or ESG investing to a large degree has always been an implicit part of how we would analyse a company, particularly governance. However, we have clearly seen a step-change in terms of its prioritisation across most stakeholders including governments, regulators, and financial institutions. This has led to more explicit requirements in terms of reporting and analysis of key risks and opportunities facing companies across ESG factors. The food and beverage sector is no different though areas of focus can vary considerably depending on sub-sector or region etc. Carbon footprint and energy consumption is a common thread across most industries, some of the key areas of focus worth calling out for the food and beverage sector include: i) Food waste; ii) Water stewardship; iii) Sustainable sourcing and packaging; iv) Ecological impacts; and v) Customer welfare in terms of health and nutrition, product safety and quality.
4. You recently released a report ‘The Future of Food’, tell us about it?
Goodbody hosted the Food and Beverage Finance 2023 event in May in Cork. This was the second year of the conference bringing together industry leaders, investors and financiers in the food and beverage sector.
Ahead of this, we produced the ‘Future of Food’ report highlighting several challenges facing the world, given the need to feed an increasing population. Against finite resources of land, water, and energy, we will need to produce approx. 60% more food by 2050. We looked at a number of areas that can help deliver a more sustainable food ecosystem, such as precision agriculture, vertical farming and food waste. We also looked at solutions that help deliver better health outcomes for individuals – which is increasingly in focus given the rising level of obesity and the pressure and cost that puts on the healthcare system.
5. What has been the backdrop for M&A and other corporate activities that you are seeing in the sector?
Given the uncertain consumer and interest rate environment, strategic corporate activity in public markets is quite muted currently. Many of our companies are fine-tuning their portfolios (both buying and selling assets/businesses) but there is little major M&A activity ongoing. It is notable that there seems to be a disconnect in valuation expectations between private and public markets. Many of our clients tell us that they are still willing to grow their businesses via M&A but given the financing environment, and the fall in public market valuations, prices for assets in private markets appear to be elevated. Despite the strong long-term prospects for products that play to health and wellness and premium trends, in the current cost-of-living environment, some more niche brands and categories seem to have stalled (e.g. plant-based meat alternatives), with pressures on revenues, input costs and financing costs/availability. This could create some opportunities for consolidation going forward once the external environment stabilises.
6. What does the outlook look like for the sector for the rest of the year?
Notwithstanding the resilience shown by the sector so far, we continue to maintain a cautious view on the outlook for the consumer over the next 6-12 months. Firstly, we believe it is far too early to think that the headwinds from inflation are behind us. Yes, they might be easing, but in our view labour inflation is going to result in the headline level of food inflation remaining elevated for longer. We also believe that the energy crisis that was the talking point in mid-2022 hasn’t disappeared and therefore we will continue to keep a close eye on how the energy markets unfold heading into the crucial winter months. Finally, while the interest rate cycle appears to be approaching its peak, rising mortgage costs will continue to put the squeeze on consumer wallets. With this in mind, we prefer companies that have the least exposure to commoditised categories and the most volatile input costs (especially labour), we like those who have demonstrated the most pricing-power and ability to mitigate cost increases with the least volume impact.
