The state of the consumer (part 2): sustainability and consumer choice
The second instalment of our deep dive on the consumer focuses on consumer preferences.
Sustainability influencing consumer choice more and more
Camilla Ayling, Equity Research Analyst
Millennials and Gen Z will dominate global consumer expenditure by 2040, as they will account for 70% of spending by then, up from 48% today. It is these categories of consumers, aged 16-40, who are increasingly expressing environmental and sustainability concerns through their purchase preferences.
Survey data from Credit Suisse Research suggest this cohort of consumers are looking to substitute away from unhealthy foods, alcohol and environmentally intensive foods (such as meat). Importantly, the data also indicate there’s a willingness to pay higher prices for more sustainable products – in most cases up to 10% more.
In our view, however, the premium is not high enough at this point from a company profitability standpoint, especially when considering the elevated costs associated with sustainable products (in part due to far lower volumes). Additionally, the consumer’s willingness to pay a premium may also be eroded by the steep inflationary pass-through that all will be experiencing regardless.
Specifically with regards to meat, we do believe the desire for less environmentally intensive alternatives will lead to growth in plant-based or lab-grown protein, especially if these options become cheaper and the taste improves. However, these industries are still in their infancy, and meat will continue to be consumed as the main protein source for the foreseeable future. We like companies that have scale and are deeply embedded in the value chain (i.e. they are positioned as key suppliers to restaurants and retailers), who can help drive reductions in industry food wastage, and those focused on farm-animal welfare and safety/quality improvements.
Within beverages, consumers’ desire for healthier alternatives suggests a shift towards low- or no-alcohol drinks and low-sugar soft drinks. We think ingredient and consumer chemical companies can be a good way of playing this trend, as they help larger fast-moving consumer goods companies with product reformulations.
Private label to regain lost market share?
Kenneth Michalec, US IG Research Analyst
Unlike previous recessionary periods, when private labels have historically seen increases in their market share of around 100 basis points, private labels have lost market share since the inception of the pandemic. This has been observed across most consumer categories, including grocery, health and beauty, household care, and frozen.
We believe this trend has been driven by lower-income consumer segments switching to branded products, which benefitted from greater supply-chain resiliency relative to private-label brands (leading to greater product availability), elevated saving rates (leading to consumers trading up), and a shift in consumer preferences towards brands they trust.
With increasing inflationary pressures, the strength of the US consumer will be tested in the coming months. We expect outcomes to be unevenly distributed. Within the food and beverage space, we expect the low-income consumer to retain a large degree of purchasing power, driven by the 15% increase in the US’s Supplemental Nutrition Assistance Program in October 2021. In this environment, we believe that management teams who retain a large degree of pricing power and can navigate cost-push inflation stand to benefit.