The economic and social upheaval brought about by the coronavirus resulted in a swift increase in at-home eating, which was a boon to branded food makers like Conagra (CAG 0.86%). Although there's likely to be some near-term pullback in demand as the world learns to live with the coronavirus, Conagra's research suggests that the future will be pretty bright for the industry. Here's what it found.
Out with the old, in with the new
The so-called Silent Generation is shrinking as these elder statesmen reach their final days. Baby boomers are coming up behind them, and while a massive cohort, they too are declining in number. Then there's Generation X, a relatively smaller group of people that are now in their 50s. Together this trio is the old guard, which made up a touch under 50% of the population in 2019.
Image source: Getty Images.
Although the Silent Generation's disposable income is relatively modest, Baby Boomers and Gen X have more free cash than younger generations. That makes it materially easier to treat oneself to a meal outside of the home. Moreover, given the life stage these two generations are in, costs for things like raising a child are less onerous at the group level. Indeed, many of the children from Gen X parents are already out of college and on their own. But as noted, these generations are on the wane and are expected to shrink by 3% between 2020 and 2030.
Coming behind them are Millennials, Generation Z, and Gen Alpha, which together make up roughly half the population. This trio is set to grow 16% between 2020 and 2030. This group has less disposable income given their younger age. Moreover, only around half of Millennials at this point are making more than their parents, vs. rates as high as 90% for the Silent Generation. They also have material costs ahead of them as they start families of their own.
The biggest mover
This is the backdrop that investors need to get their heads around: A large and growing population of consumers that have less money as they face their highest-spending years. Given that trend, it shouldn't be too shocking to hear, according to Conagra's latest earnings presentation, that "younger consumers are seeking to optimize the value they get for their food spending" and "as they trade out of away-from-home to at-home, they are opting for more national brands and premium products." Conagra believes those two key points will lead to a bright future for food makers like itself, even as inflation heats up.
Backing that up, Conagra notes that consumption out of home for the broader population dropped 6% during the pandemic. However, for Gen Z and Millennials, the figure was 8%. Meanwhile, food sourced within the home (cooked at home and not taken out from a restaurant) increased 2.7 points for the broader population but 3.9 points for Gen Z and Millennials. Basically, in the face of the pandemic, the younger cohorts ate out less and cooked at home more than others.
On top of that, branded food product consumption by Gen Z and Millennials rose one point. That was more than double the improvement from Gen X and 10 times greater than that of the Baby Boomers. Branded food product consumption among the Silent Generation declined slightly. The younger groupings are eating at home more and buying more branded products, which is very good news for Conagra and its peers.
Conagra believes it has seen a 0.2-point improvement in its sales thanks to these trends. That's not huge, but it beats the average 0.1 point decline of its top 15 peers. Notably, branded food is a notoriously competitive space. So even tiny gains are worthwhile. The company highlighted that it had success increasing prices and, at the same time, increasing volume when looked at over a two-year period (which helps adjust for the pandemic-driven demand boost in 2020). If this trend continues, Conagra looks particularly well-positioned to benefit from shifting consumer trends.
Broader implications
Conagra presented this information because it believes the story makes its stock more attractive. However, long-term investors should step back and think about this from a bigger perspective. If these trends benefit Conagra, they could benefit other branded food makers as well. The key is to actively build businesses in key areas, like snacks, frozen food, and "healthy/fresh" products.
Conagra isn't the only company operating in these spaces. Competitors such as Kellogg, Hormel, and Mondelez, among others, are also trying to expand in these areas. Armed with Conagra's research, you should take a second look at the food names in your portfolio and perhaps reassess other names you have been considering.
