over a new leaf. People take up jogging and yoga and try to give up
cigarettes and cut down on alcohol and "comfort foods". You tend to bump
into friends at the gym or healthy eating aisle of the supermarket rather
than in the pub. Some of these faddish changes of behaviour will not last,
but certain changes in lifestyle are more permanent.
Wander down the aisles of your local supermarket and you can't fail to
notice the increasing numbers of food stuffs aimed at the health-conscious
shopper. There's a whole host of branded products that lay claim to helping
with the likes of weight loss, lessening the risk of heart disease and
lowering cholesterol such as Yakult, Actimel and Benecol.
As health has crept up the agenda the public's appetite for these functional
and nutritional foods is creating a growing and highly profitable category
for both retailers and food manufacturers - and in the process is
potentially separating the future winners in the sector from the losers.
In the 20th century, food manufacturers concentrated on making tasty,
affordable products that were easy to store and cook. But with
obesity-related illnesses on the rise and governments limiting the sale and
advertising of sugary and salty snacks to children, food and drink companies
need a re-think.
Werner Bauer, head of research and development at Nestlé, will take up the
newly-created position of chief technology Officer next month to oversee the
acceleration of the food group's transformation into a "nutrition, health
and wellness" company. He said this century will see food playing a new role
that improves your quality of life before you need medication.
Last November, Nestlé signed a five year agreement with an institute of
technology in Lausanne to research the relationship between nutrition and
the brain. The company plans to invest over £2m a year to find ways of
creating foods that will slow or prevent degenerative diseases like
Alzheimer's. And there is plenty of demand for such products.
Dr Ralf Zink, technical director and global head of R&D at Dusseldorf-based
Cognis that develops functional food ingredients reckons that there has been
a sea change in the types of food that people are now willing to consume.
"Through food, customers are now willing to do something about their health.
Prevention is now on their minds when they buy foods whereas previously they
only bought on texture and taste," he says.
Accordingly there is a massive increase in the levels of innovation in the
food sector. And the most active in this area are the large multinational
food companies who have the ability to direct some of their R&D spending in
the direction of functional foods and new ingredients that have
health-improving characteristics.
Evidence of how seriously they are taking it is the move by Tate & Lyle
(T&L) to set up a dedicated venture capital fund. This is the first of its
kind in that it is run by external specialists and is investing purely for
T&L as a way for the company to tap into areas that it would previously have
shied away from as being far too risky.
The £25m fund will be investing between £1m and £3m in each of up to 10
companies in Europe and North America that are focused on renewable
ingredients (such as nutritional and functional foods), biofuels and
developing manufacturing innovations. It has just completed its first deal
with an investment in Cambridge University spin-out Lumora, which helps the
processes involved in testing of new food types.
Such activities represent a marked change among food manufacturers,
according to David Atkinson, managing partner at Tate & Lyle Ventures, who
describes the levels of R&D spending in the food industry in Europe to date
as "pitifully low".
Ironically, shares in Tate & Lyle suffered a severe setback last week -
falling over 15% in one day - after it announced that sales of one of its
core "value added"
products, Splenda Sucralose, would only modestly exceed those achieved last
year. The product is a fine example of how T&L has moved away from its heavy
reliance on commodity products and into higher value ingredients.
But this sugar substitute does not fall squarely into the functional foods
category so its setback is unlikely to impact the wider consumer trend
demanding healthier ingredients and food products.
With functional food now taking off Mr Atkinson believes we are now on the
cusp of experiencing a wave of serious spending by the food companies who
are desperate to develop new health-related products.
Most of this R&D activity will be performed by the large firms as the spend
levels on R&D by small firms involves a higher proportion of their sales
since the cost of a professor is the same regardless of the size of company.
This makes it more difficult for smaller companies to operate at the cutting
edge of food innovation.
One of the few quoted small players in this field is Provexis which has
developed heart health bioactive food ingredient Fruitflow. It uses this
bioactive in its Sirco branded juice drink and has also signed an agreement
with a major food company to introduce Fuitflow into food and dairy
products.
Developing such branded functional foods is a costly exercise for the likes
of Provexis especially now that the big food companies are showing an
increased interest in the area and can throw their weight around.
Nestlé is among the most proactive in this area.
Evidence of how seriously the company is taking the health foods market was
its purchase in December of the medical nutrition business of Novartis for
US$2.5bn, whose products include energy drink Nutrament and weight loss
beverage Optifast. In addition, in June it bought the California-based Jenny
Craig weight loss centres for US$600m as part of a move to up its
credentials in the health market and to gain a large amount of useful data
on customers.
Nestlé has also been involved in nutrition science in the area of diabetes
and weight loss, which led to the company funding primary research studies
on an extract of green tea (EGCG) that resulted in it developing US drink
Enviga that it jointly markets with Coca-Cola under the controversial
strapline "The Calorie Burner".
Chief executive, Peter Brabeck-Letmathe, recently stated that such moves are
all part of the group's "strategic transformation process into a nutrition,
health and wellness company".
Danone has also been manoeuvring itself in such a way.
At a presentation last year Philippe Guyard, sales vice president at Danone,
said the company had gone through a period of selling off parts of the
business to leave itself with what he described as "the best assets for the
next decade" which comprise businesses producing products with a health
angle such as Actimel. Indeed, Danone is seen as the poster child for the
food industry, with its strong scientific links giving its products
credibility. Actimel, the fermented dairy drink, launched in the early
1990s, now boasts annual sales of around €840m and has spawned a host of
imitators.
Among Danone's new innovations is the launch of a range of yoghurts that
provide skin benefits. They form part of a range of products that are
promoted as "skincare from within". According to Atkinson such activities
have given the company the perception in the market of being a true
innovator.
Such strategies are not surprising when you consider the attractive margins
that can be enjoyed in this part of the market. They typically weigh in at
over 15% compared with the 9% to 12% range usually found in the food sector
for regular processed foods. Although Nestlé does better than average with a
margin of 12.8%, this is still below what's achievable from wellness
products.
Not only are there juicy margins on these products but demand for them has
been on an upward trajectory.
Consider the figures in the US from research organisation Beverage Marketing
Corp that show sales in the nutrient-enhanced drinks market have shot up by
240% over the past five years - reaching a market value of US$1bn at
wholesale prices in 2006.
But despite this double whammy of hefty margins and growing demand there has
not exactly been a rush by all food companies to get involved in the health
food market. Part of this has undoubtedly been a result of the
price-conscious nature of the food sector.
Jeff Pearson, professor of molecular physiology at Newcastle University, has
had first-hand experience of how the sector has traditionally revolved
entirely around price and that this has to date held back innovation in the
industry. Pearson has been trying hard to work with some of the UK's large
food companies to incorporate the seaweed extract he has developed as a
functional food ingredient alginate with a high-fibre content. However,
talks with the bakery company Greggs and Northern Foods to incorporate this
into products such as bread have not come to anything to date.
Because of the additional few pence that it would add to the price of a
sliced loaf Prof. Pearson says the food companies have been unwilling to
invest in developing a more health conscious range of products. It is this
lack of foresight that could well separate the potential future winners from
the losers in the market as the effort currently being made by some
companies could place them in a particularly strong position for years to
come.
Among those recognised as creating the platform for growth in this area are
Nestlé and Danone, while the US food group that arguably has made the most
progress has been PepsiCo. The US group once had one of the least healthy
product ranges in the industry, with most of its business generated by two
of America's leading "junk food" brands: Pepsi Cola soft drinks and
Frito-Lay salty snacks. But PepsiCo was quicker than some of its peers at
identifying changing consumer habits, launching a series of acquisitions and
expanding into new products categories in the late 1990s. PepsiCo now owns
four of the seven most respected "health" brands among US
consumers: Quaker cereal, Dole and Tropicana juices and Gatorade sports
drink. Moreover, its portfolio would have been further strengthened had the
French government not blocked on "national interest" grounds its bid for
Danone.
For PepsiCo, the appeal of healthier brands is not limited to their strong
growth. Consumers are prepared to pay more for them. While non-carbonated
drinks account for only 35% of the group's US beverage volume, they generate
67% of the revenues. Almost every new product showcased by PepsiCo at its
recent investor conference in New York was promoted for its health benefits.
The most striking of these were crisps that, it was claimed, contained the
nutritional equivalent of a half serving of fruit or vegetable. And it seems
that investors have warmed to PepsiCo's transformation. The chart below
tracks its share price performance against its old rival Coca-Cola which
comparatively has, to date, failed to grasp the nettle and commit resources
to developing healthier products.
But if this innovation by certain companies is to really pay off and create
long-term value for investors then the current move by consumers towards
healthier food stuffs has to be more than just a passing fad. We believe
this to be the case and that functional foods have long-term sustainability.
What could also benefit the manufacturers that have developed functional
foods is that they end up wresting some power back from the major
supermarkets because a product that is backed with Intellectual Property
(IP) rights gives the manufacturer a defendable franchise.
For must-stock products this makes the manufacturer a particularly
attractive proposition to the major retailers.
And according to Atkinson the levels of IP-backed food products and
ingredients are increasing as innovations become more advanced and food
companies, not surprisingly want to protect their work and their creations.
If food companies are able to successfully manage this and are willing to
commit funds to pushing the boundaries of functional foods, then the
prospects for the future could be rosy as we might only be at the start of a
long-term trend by consumers, to put increasing amounts of healthier foods
in their shopping trolleys.
Regards,
Glynn Davis and Brian Durrant
for The Daily Reckoning
Bill Bonner, in Paris:
We run backwards through life.
Like old hippies still wearing the beads they put on in the 1960s, we hold
onto the familiar props that shaped our lives and ourselves. We give up our
illusions and fashions reluctantly. And we imagine things, not as they are,
but as they were when we first got to know them.
How else can you explain it, dear reader? The typical investor imagines that
he is investing in the era he just left, not the era he is entering. Aging
professors still read Sartre and Marx...and imagine they are the
intelligentsia leading the class struggle. And poor George Bush imagines
that he is John Wayne in WWII! None seem aware that times have changed.
"Embrace the suck," say the grunts in Iraq. Down on the ground in
Mesopotamia the idea of fighting for freedom and democracy must seem pretty
hollow. The suck is everywhere, according to news reports. Near as we can
tell, the whole place sucked even before the arrival of US liberators. But
then came a new chance for liberty - the ballot box - and a civil war.
Thirty-four thousand Iraqis were killed in 2006.
"I think," said President George W. Bush, "the Iraqi people owe the American
people a huge debt of gratitude."
Over the weekend, the 'Army of Heaven' went up against US backed troops. The
heavenly soldiers lost 250 troops, if you can believe the reports. We'd be a
little hesitant to do battle with an 'Army of Heaven,' but it didn't seem to
matter to our allies. In fact, the press didn't seem to know what Heaven
these fellows were fighting for. Were they Shiites? Sunnis? Unitarians?
Nobody seemed to know. All reporters could say was that they were
'militants' which seems like a strange way to describe a group of people in
a country where everyone is armed and ready to kill.
All we know is that a lot of ammunition was shot off and many people
embraced the suck widely and terminally, if not wholeheartedly.
And now, even our military leaders have picked up on the fashion of the
times. They speak of using 'stop losses'
in Iraq – just as they would on Wall Street. The whole world has moved
toward finance, dear reader – it is the Next Big Thing.
Meanwhile, back in America, there is a different kind of suck to embrace.
While the rich are getting richer, the poor are getting their houses
repossessed. Which sucks.
But probably not as much as you might think. Because the poor never really
could afford the houses anyway.
According to the weekend news, 1.2 million houses were foreclosed in 2006,
up 42% from the previous year. And even at the top of the market, a little
softness in property prices is creeping in. Billionaire Kirk Kerkorian put
his mansion in Beverly Hills on the market last year for $25 million. Now,
he's cut the price to
$18 million. He must be getting desperate.
But the real problems are not among billionaires, but among paupers who
can't make their housing payments.
They lose their houses and the people who lent them money take a loss.
Again, this may suck, but at least there is some rough justice to it.
The Orange County Register reports...
"Many of Orange County's boldest lenders are struggling to stay in the black
– and in some cases to stay in business – as their customers miss housing
payments in record numbers.
"These lenders, experts say, exercised poor judgment in a bid to maintain
loan volume last year. They lent money to borrowers with spotty credit,
known as the sub-prime market, without proper regard to their ability to
repay, experts say.
"'What's become clear is a whole bunch of people signed up for loans or were
sold a loan they really couldn't afford,' said Richard Eckert, an analyst
with Roth Capital Partners in Newport Beach."
No, dear reader, the 1950s and 1960s dream of home- ownership hasn't worked
out as planned.
And now, even capitalism's biggest supporters are wondering why this boom
doesn't seem like the ones we used to have...and why so many of today's rich
are not the same sort of rich people we used to admire.
"In capitalism, the most fundamental building block is trust," writes Ben
Stein. "When yeoman farmers sent their savings to banks in London and
Glasgow and Paris, they had to be able to count on it not being stolen.
That was what allowed capital to be accumulated and deployed, and for the
entire world economy to take off.
"When I see what the top dogs at all too many corporations are now doing to
that trust, I feel queasy.
Outrageous — yes, obscene — pay. Greedy backdating of stock options, which
in my opinion is straight-up theft.
Managers buying assets from their trustors, the stockholders, at pennies on
the dollar, then forestalling competing bids with lockups and insane breakup
fees.
"These misdeeds and many, many more are hammer blows at the granite
foundation of trust we built in the 1940s and 1950s.
"It's built on man's notion that he can trust his neighbour with his money,
and that if the neighbour misbehaves, the law will chase him and catch him,
and that the ladder of law has no top and no bottom.
More news...from Adrian across the Channel:
---------------------
Adrian Ash, tending the sick at home in Kent:
- It all seems so long ago now, gentle reader. But remember the start of
this month, when you couldn't get out of bed for tripping over some fool or
the other forecasting the 'End of the US Dollar'...?
- You might have found one or two analysts saying just that in your
favourite free daily reading, of course.
But just as everyone else started to share our prognosis for the world's
greatest ever experiment with paper- based money, the imperial Dollar has
coughed...sat up in bed...and started cracking jokes with the nurses.
- Okay, the greenback's current levels would have looked terminal a few
years ago. But the Dollar refuses to die.
Take the Two-Dollar Pound, for instance. Last week saw Sterling hit a new
15-year high above $1.990. But the magic $2 mark still looks as elusive as
ever.
- "I was and, to some degree still am, a fan of the $2 story for 'cable',"
says Tom Tragett, editor of the Forex Profit Alert. "But I have to say that
I am very disappointed that having taken out the 2006 high
(1.9850-ish) early this month and trading to 1.9920, we didn't at least have
a look at the 2.000 mark..."
- "My long-term chart really doesn't have any major resistance (apart from
psychological 2.00) until around 2.02," says Tom "and then major resistance
around 2.08- 2.1000." So why the hold up?
- Tom Tragett: "It is perhaps down to something as simple as too much press
coverage and the fact that everyone and their dog is talking about it.
Perhaps when all the pundits have forgotten about it and the public have got
bored with it, then it will happen."
- Ditto the Euro. Just after rising to $1.330 late in December, the
Esperanto found itself walking on thin air at the start of 2007. For as
Dollar interest rates threaten to rise – and Sterling rates have risen to
shock all the pundits - the European Central Bank (ECB) is simply shrugging,
despite rising inflation and soaring money supply on the Continent.
- Cue the Euro to tumble versus Sterling – all the way down to a four-year
low beneath 65.5 pence. It's now dropped four cents to trade below $1.300 to
the Dollar, too. Now this week the US Fed meets to vote on Dollar interest
rates for the first time this year. What to expect? What to do?
- "Although gold is not strictly a currency in the same way as, say,
Sterling is, the way it trades against the Dollar means it may as well be,"
says Tom Tragett. He advised his subscribers to go long of gold last week.
"If currency traders see a good opportunity to trade gold, they should take
it."
- Royal Bank of Canada now trades gold as a currency, we note. Instead of
employing commodity traders to deal in the metal, RBC runs its gold trades
off its currency desk.
- What's more, gold at these prices is showing greater strength versus the
rebounding Dollar than other currencies. "Despite weaker than expected
existing US home sales released last week," notes Tom, "the US Dollar
managed to strengthen across the board. But although the Dollar has
certainly recovered over the past two days, it has yet to make a lasting
impression versus the European currencies. Gold meantime broke above £330
and €500 per ounce."
- Gold slipped in early European trade today, dipping back beneath $645. But
the professional market continues to rate gold as a 'buy' this month.
Twenty-two out of 42 traders and analysts surveyed worldwide by Bloomberg
just before the weekend advised buying gold. Twelve said to sell, and eight
were neutral.
- Why the worrying trend towards a bullish consensus for gold? Oil and the
US Dollar continue to loom large in most analysis. Gold is characterised as
an anti- inflation hedge, and by definition it's the anti-Dollar, too –
priced as it is, in Dollars.
- But outside influences aside, the gold price looks good on its own merits.
"Mine production's been falling for some time," noted Jonathan Barratt,
managing director at Commodity Broking Services in Sydney, earlier today.
"At the end of 2006, we actually only had a very minor surplus in terms of
demand and supply. This year that might become more crucial when we don't
have enough supply to meet the new demand and production's falling...
- "That should say gold trades by itself and continues to trend higher."
- On Tom Tragett's technical reading of the gold chart, meantime, last
week's break higher put a stop to the 9- month downtrend beginning in July.
On the Daily Reckoning's longer-term take, we like gold at any price below
£300 per ounce today.
- Simply take the Dollar price and divide by the current Sterling exchange
rate. We'd buy the dips if we weren't already so 'long' of gold that it
hurts...
[Editor's Note: Want full details of a major move in the currency markets
that could strike any day now? Tom Tragett has spotted a 35-year old
currency trend nearing its end. The switch-over could prove more than
dramatic.
Read on now – here:
http://www.fsponline-recommends.co.uk/fpa35years?d1fpac1e
Spread betting may not be suitable for all customers.
Trades recommended in Forex Profit Alert have a high level of risk to your
capital. You may lose more than your original stake or deposit. Consult
your Financial Advisor if unsure. Fleet Street Publications Ltd.
Customer Services: 0207 633 3600.]
---------------------
And more news from Bill:
"If that trust disappears — if the system is no longer a system for the
ordinary citizen but only for the tough guys — how much longer can the
miracle last?"
*** Yes, dear reader, the times they are a'changin.' One age gives way to
another. One delusion is followed by another delusion.
Once people killed for religion, then they killed for politics...and now
what? This is the Age of Mammon, we believe. People will lie, cheat and
steal for money.
Will they kill too? Will they go to war over money?
According to some analysts that is why they always went to war.
But now, if you are hip, you are interested in money – not politics, nor
religion. Only retrograde, dimwitted, or culturally by-passed people are
interested in politics or religion now. Hilary Clinton, with her 'politics
of meaning'...the neo-cons with their dreams of world domination...the Army
of Heaven...the Marxist university professors...Osama bin Laden – they are
all reactionaries; relics of previous enthusiasms. Diehards, with the
illusions of previous generations that they refuse to give up.
We were sitting with Elizabeth, having breakfast at a café on Sunday.
"You know, our ideas don't come from out of nowhere,"
she remarked. "That new book you are working on, for example, the ideas
would have seemed extremely cynical - almost unbelievably cynical - 50 years
ago. But then, the book couldn't have been written 50 years ago. You can
write it now because we have lived through a time when we've seen almost all
the ideas we and our parents had – at least, about public life –
discredited.
"We grew up worrying about Communism taking over the planet...and then the
Berlin Wall just fell down. We marched in anti-war protests in the '60s. And
when the Vietnam War was over, we assumed that never again would any
government be stupid enough to do that again...and here we are!
"We believed in federal poverty programs and later found that they did more
harm that good. And even the war on drugs seems to have become a nightmare.
It's no wonder we are so cynical about what government can do. And cynical
about ideas in general. Our parents read Dr Spock...and took it seriously.
"Our parents didn't believe in breast feeding; they were told it was
old-fashioned and unsanitary. And then it turned out that it was actually
important for other reasons. Very important for the child's immune system,
apparently, and maybe for the emotional well-being of the child too. And
then, we lived through all those fads – such as taking out tonsils (who gets
tonsils taken out now?). And we all dressed in those silly clothes from the
'60s. And went to discos in the '70s. And believed all kinds of things that
turned out not to be true.
"We're now embarrassed by those things...and try to make sense of out them."
Every generation has its particular experiences. Each learns lessons.
"That's probably why people are so fixated on money now," Elizabeth
continued. "Because they feel a little silly proposing to change the world
with politics...or join a religion. They've seen too many disappointments.
And they've grown cynical. Smart people now go to Wall Street or the City,
not to Washington or Westminster.
Nor to Rome, for that matter. Money is all that is left."
Yes, dear reader, it is time for Mammon to have his day.
And then, people can be disillusioned with him too.
Then, where will they turn?
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The Daily Reckoning PRESENTS: As health has crept up the agenda the public's
appetite for functional and nutritional foods is creating a growing and
highly profitable category for both retailers and food manufacturers...
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