Investor’s Guide to GLP-1 Drugs: Food for Thought
Author: Abhishek Ashok
July 30, 2024
In part three of a four-part series, analyst Abhishek Ashok looks at the possible impact of GLP-1 drugs on the food industry.
One of the reasons glucagon-like peptide-1, or GLP-1, drugs have attracted so much media and investor attention is that they seem to be applicable to a wide range of conditions. It should be pointed out that, among prescription medications, GLP-1s are not unique in this respect, but they do target pathologies that have become endemic to the modern lifestyle (at least in the prosperous West). Obesity and its corollaries, such as cardiovascular disease and Type 2 diabetes, are of increasingly pressing concern to policymakers, insurers, healthcare professionals and the general public. To the extent that GLP-1 drugs may be effective in the treatment of all those conditions—along with nicotine addiction and alcohol consumption, to boot—it is small wonder that they have been hailed in some circles as “miracle cures.”
How widespread GLP-1 drug adoption becomes will depend on a number of factors, most importantly affordability and access. Yet should their use continue to increase, we believe the ripple effects will likely extend well beyond the pharmaceutical industry. And clearly, one of the sectors that stands to experience the most significant of those effects is the food and beverage industry.
Food and Beverage
The simple calculus around the use of GLP-1 drugs to treat obesity is that because patients will consume less, food and beverage companies will be adversely affected. In this case, however, the simple reasoning might also be misleading. Indeed, our view is that the impact of GLP-1 on food and beverage will be decidedly mixed.
Granted, parts of the sector will very likely encounter some challenges. Many GLP-1 users report that they experience decreased preference for high-calorie and processed foods, including salty, fatty and sweet items. Therefore, it stands to reason that consumption of packaged and processed frozen foods, salty/sweet snacks, and sweet beverages will decline—by how much, of course, remains to be seen. Similarly, GLP-1 may present a net negative for alcohol and tobacco companies.
On the other hand, the extant evidence suggests that GLP-1 drugs incentivize patients to prefer certain types of foods that may see an uptick in sales as a result—for instance, fresh foods and nutritional value-added dairy and water products. That speaks to the need for GLP-1 users to ensure they are consuming adequate nutrients as their caloric intake declines. Protein-rich products, vitamins, minerals and nutritional supplements, therefore, could benefit from more widespread adoption of the drugs.
Global Diversification
It is important to avoid overstating the impact of GLP-1 drugs on total food consumption. Morgan Stanley research estimates that by 2035, the overall caloric intake for the United States population will decline by 1.5% to 2.5%—significant, yes, but in our view a manageable impact for the food and beverage sector.
Two key themes suggest how it might respond to mitigate the impact of lower food consumption. One is global diversification. Obesity rates vary globally. With the exception of a few small countries, the United States has the world’s highest obesity rate, and developed countries generally have higher obesity rates than developing nations. Meanwhile, affordability and access to GLP-1 drugs will be challenging even in developing countries where obesity is relatively high (for example, Mexico). As a result, we expect food and beverage companies with exposure to markets outside the U.S. and other developed countries to likely see less of an overall impact.
Innovation
The second mitigating force is innovation—both upstream in the “food chain,” with the formulation of oils, fats and flavours, and downstream from a packaging and labelling perspective.
We have seen how quickly the food and beverage industry can respond to extraneous challenges a few years ago, when several jurisdictions introduced higher sugar taxes. The industry quite rapidly brought to market zero-sugar alternatives to the most staple (high-sugar) beverages while retaining their flavour profile—not just popular colas, but also lemon-lime, ginger ale, root beer and so on. These innovations not only maintain or even expand the consumer base, but also can boost margins, since the retail price is the same but producers pay lower excise taxes on sugar-free drinks.
We expect producers to respond with similar effectiveness and speed to the prospect of GLP-1-lowered demand for sugary/salty/greasy products. Companies will increasingly strive to reduce fat and/or sugar content while maintaining the shelf life, taste and “mouthfeel” of their products, from candies to baked goods and drinks.
This demand for innovation may benefit upstream flavouring and chemicals companies. Innovation in the form of packaging and price pack architecture could also help upstream materials companies—for instance, packaging might change to more prominently display a product’s value-added properties, or to allow for reduced portion sizes.
We believe downstream, most retailers should realize a net gain, since their priorities are selling volume and providing the customer with variety and pricing power. Premium and larger mass retailers may benefit from an affordability perspective, since they are likely to have the shelf space and logistics networks to offer a variety of options across health and flavour preferences. They also have the scale and capability to take advantage of more targeted advertising and the more effective use of customer data. In contrast, convenience, discount and dollar store formats are more likely to be adversely impacted, owing to their smaller assortment space and lower price points.
In short, the likelihood seems to be that GLP-1 will be a net positive for the food and beverage sector overall—assuming, of course, that the drugs realize their potential as effective treatments for obesity. That is still a question mark. Affordability and access remain significant challenges even in developed countries, and their long-term efficacy is undetermined. But if GLP-1 drugs live up to the hype, they could very well spell not disaster for the food industry, but opportunity.
The views expressed in this blog are those of the author and do not necessarily represent the opinions of AGF, its subsidiaries or any of its affiliated companies, funds, or investment strategies.
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