The Packaged Foods Industry: Investing Essentials

Hershey's nugget image by Luz Adriana Villa A. under Creative Commons license.

It can be easy to take for granted the sprawling industry that creates much of what we eat and transports it to grocery store shelves in neatly wrapped pouches and colorful boxes. The packaged foods industry obviously enjoys some staying power -- after all, the world has to be fed -- and exhibits some attractive investment characteristics as well.

What is the packaged foods industry?

The packaged foods industry consists of companies that enclose food in a variety of materials, including plastic, glass, paperboard, and aluminum canning, for retail sale. Packaged foods include savory snacks, confections such as chocolate and candy, staples including cereals and oatmeal, packaged meat and seafood, fruits, cheeses, vegetables, and condiments such as ketchup. The category also includes ready-to-eat packaged meals.

How big is the packaged foods industry?

The global packaged foods industry is a massive $4.4 trillion market. According to industry advisory RTS Resources, the market will expand to $5.0 trillion by 2017. The 50 largest global packaged foods companies, public and private, accounted for $558.9 billion in revenue alone in 2013, according to the website of Food & Beverage Packaging magazine.

How does the packaged foods industry work?

 Easily recognized names such as Nestle, Tyson Foods, PepsiCo (which owns the Frito-Lay snacking business), Mondelez, Hershey, Kraft, and Unilever dominate the packaged food business. These companies have billions invested in manufacturing operations and enjoy worldwide distribution of their products.

Multinationals rely on intricate supply chains to convert farmed food to the packaged products bought in retail establishments. Common foods purchased at grocery stores often have extremely complicated distribution logistics. For example, ice cream is a product that requires refrigeration from point of manufacture all the way to store cooler, necessitating delivery via a "cold chain," or a refrigerated supply chain.  

Snacks such as potato chips also demonstrate the challenges inherent in this industry. As chips are a light and fragile product, manufacturers must bear the expense of shipping chips from production plants to stores in a manner that protects the product. No one likes to open a bag of broken chips; thus, the packaging can't be simply compressed tightly together to optimize shipping costs. Some packaged-food companies take the costly step of owning their own transportation assets to protect their products in transit.

Through distribution, packaged foods find their way into a number of different retail outlets. Most prominent in developed countries are grocery stores, although in the past few years, pharmacy chains, dollar stores, and mass-merchandisers such as Costco have all increased packaged foods offerings.

In the developing world, while the grocery store concept is gaining traction, a good portion of packaged-goods items are sold in neighborhood stores and kiosks. This can create an interesting competitive dynamic, as local products compete shoulder to shoulder with multinational brands in the humblest of retail spaces.

 

What are the drivers of the packaged foods industry?

The success of packaged goods companies is very closely tied to economic growth and consumer discretionary income. Rising incomes can boost the prospects of industry leaders such as Mondelez, especially within developing markets. In developed markets, however, rising incomes have the potential to hurt corporations like Mondelez's grocery spinoff, Kraft, since consumers who feel more comfortable about the economy tend to increase visits to restaurants, thereby purchasing fewer prepackaged meals (e.g., Kraft macaroni and cheese).

Emerging markets also drive the industry. This is true particularly in Asia, where migration from rural to urban areas continues unabated, especially in China and India. As traditional diets are abandoned, consumption is becoming more "Westernized," with an emphasis on processed and packaged food. By 2015, China is expected to overtake the U.S. as the world's largest packaged foods market by volume. China's hunger for packaged food can be seen in the fact that pasta and soy products are one of the fastest-growing segments of the industry. India's packaged foods market is similarly expanding rapidly, and at a compounded annual growth rate of 20% per year, it's projected to reach a size of over $30 billion by 2015.

Beijing grocery store image by star5112 under Creative Commons license.

Mergers and acquisitions are a third driver of this industry. Mexican bakery giant Grupo Bimbo is one of the largest suppliers of baked goods in the world, with over $13.8 billion of sales in 2013. The company has generated its growth in part by acquiring leading brands in Latin America, North America, Europe, and Asia. In the U.S., Grupo Bimbo owns popular baked-goods brands Entenmann's and Sara Lee.

Investing perspective

For the investor, most of the potential in the packaged foods industry lies in its modest but stable annual growth rate of around 3%. Corporate profit margins tend to be healthy: The Yahoo! Processed and Packaged Goods sector, an index of packaged foods companies, shows an average net profit margin of 8.3%, and an average return on equity of 23.5%. The stocks of these companies, many of them long-standing and well-regarded names such as General Mills, tend to be popular with those seeking a defensive investment, perhaps to balance out more aggressive positions in a stock portfolio. Finally, prominent corporations in this industry, such as Campbell Soup and Kellogg, pay out handsome dividends. With a broad base of both growing and mature corporations, the massive packaged-food industry presents diverse opportunities for long-term investors.


Read/Post Comments (1) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 04, 2014, at 2:39 AM, shikha1321 wrote:

    Flexible packaging is a sustainable packaging solution as it makes less use of resources and materials. There is less wastage and less use of energy and water at the manufacturing level. Uflex Ltd is dedicated to the cause of reduced consumption of energy, water and petroleum based products and works constantly to achieve the same providing its customers more sustainable and ‘green’ film and laminates.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 3061771, ~/Articles/ArticleHandler.aspx, 9/30/2014 9:56:05 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Apple's next smart device (warning, it may shock you

Apple recently recruited a secret-development "dream team" to guarantee its newest smart device was kept hidden from the public for as long as possible. But the secret is out. In fact, ABI Research predicts 485 million of this type of device will be sold per year. But one small company makes Apple's gadget possible. And its stock price has nearly unlimited room to run for early-in-the-know investors. To be one of them, and see Apple's newest smart gizmo, just click here!


Advertisement