14 Mar 2022 3 min read

The state of the consumer (part 2): sustainability and consumer choice

By Camilla Ayling , Kenneth Michalec

The second instalment of our deep dive on the consumer focuses on consumer preferences.

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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.

  • The other blogs in the series cover:
    • Online retail and reopening dynamics, which can be read here.
    • Grocery cost inflation and consumer income levels, which can be read here.
    • Supply chains, which can be read here.

Camilla Ayling

Portfolio Manager – Active Equities

Camilla is a Portfolio Manager in Active Strategies in London at LGIM. Camilla joined LGIM in 2019 from Rathbones, and prior to that she worked at Barclays. Camilla was featured in Citywire’s 2019 ‘Top 30 under 30’ list and was awarded Investment Analyst of the Year at the 2020 Women in Investment Awards. Camilla graduated from the University of Bath with a BSc (Hons) degree in Economics. Camilla is a CFA charterholder and also holds the Investment Management Certificate, the PRI’s Foundations in Responsible Investments qualification and the CFA Certificate in ESG Investing.

Camilla Ayling

Kenneth Michalec

US IG Research Analyst

Kenneth is a US investment-grade reseach analyst at LGIMA, based in Chicago.

Kenneth Michalec