In October, Walmart sent ripples through the packaged food industry when it noted that customers on weight-loss drugs were buying less food. The next day, shares of several food and beverage companies, including Mondelēz, Coca-Cola, Pepsico and Kraft Heinz, fell between 3% and 5%.
Consumer staples stocks such as these have been under some pressure this year for a few different reasons. We’ve all experienced the significant rise in the cost of food due to inflation, and investors are concerned that consumers can’t keep paying higher prices. Rising interest rates have also cast a shadow on these companies as their dividends become less attractive relative to bonds. The potential impact of weight-loss drugs only adds another question mark to the uncertainty already impacting this sector.
The weight-loss drugs at issue are medically referred to as glucagon-like peptide 1 (GLP-1) receptor agonists. They are sold under brand names such as Ozempic, Wegovy, Rybelsus and Mounjaro. Despite their sudden prevalence in the media, these medications are not new. In fact, the first was approved in the U.S. in 2005 to treat type 2 diabetes. Scientists noticed that people taking these drugs experienced reduced appetites. Further research led to a GLP-1 drug obtaining U.S. FDA approval specifically for weight loss in 2014. These treatments stimulate insulin production, delay food from leaving the stomach and target areas of the brain that regulate appetite. The end result is that people feel full for longer on less food. Many patients report losing 10-20% of their body weight, and new drugs in the pipeline could bring about even greater weight loss. Studies suggest a whole host of new health benefits, too, including a decrease in cardiovascular events and kidney disease. It’s no wonder some are calling these “miracle drugs.”
While the impact to society could be tremendously beneficial, investors are worried about the influence they will have on food companies. Early reports indicate that people are skipping meals, forgoing snacks, and eating more fruits and vegetables instead of chocolate, chips and soft drinks. We have long recommended investments in Mondelēz, Kraft Heinz, Unilever and Nestlé, all of which sell products that could be meaningfully affected. These businesses are very profitable and have attractive dividends and decent growth prospects. But could GLP-1 drugs spoil these investments?
To answer that question, we must consider how many people will end up using these interventions. The World Health Organization estimates there are two billion overweight adults in the world, including over 650 million who are considered obese. This includes data from the U.S., where nearly 200 million adults are overweight, and more than 100 million are obese. The potential market for weight-loss drugs is substantial, but what will it actually look like?
Pharmaceutical uptake is sometimes challenging because the health benefits of a drug are not always visible. For instance, you can’t see blood thinning or hypertension improving. But in the case of GLP-1s, people see the effects every time they look in the mirror, and the results can be dramatic. In theory, this may make people more inclined to stay on the drug. For those who struggle with weight loss, GLP-1s are a pretty straightforward solution – an injection once a week. This could become even easier as drug companies are working on a daily oral pill. Insurance coverage is likely to improve as well as more health benefits are confirmed.
On the other hand, the medications are very expensive, currently around $1,000 per month in the U.S. Prices may come down in time, but they will likely never be cheap. And what about side effects? Thankfully, serious side effects are not widespread at this juncture, but there will always be some risk. Most side effects are gastrointestinal: nausea, vomiting and diarrhea, which can be difficult to tolerate. Furthermore, individuals must stay on the drugs indefinitely, otherwise they are likely to regain much of the weight they’ve lost. Compliance is a common challenge for all medications. Hypertension is an interesting case study. Despite treatment being available for decades, only about 30% of the people in the U.S. with high blood pressure are treated for it. Just because there’s a solution doesn’t mean it will be applied. Fear of the unknown also presents obstacles – think of the efforts made around vaccinations. Thus far, a high percentage of people on weight-loss drugs are discontinuing use. There are also a host of personal, social and behavioural considerations around long-term use of weight-loss drugs. For example, one individual contemplating using them told us he isn’t sure he wants to risk giving up that freshly baked cookie because it brings him joy.
It is hard to say how many people will end up on weight-loss drugs and if the initial changes in consumer behaviour will persist. Moreover, it is possible that new consumer habits will extend to other members of the user’s family. It is simply too early to tell; however, we ran a few scenarios. Our base case assumes that approximately 10% of the U.S. population and a smaller percentage of the global population is on weight-loss drugs in 10 years. Many more will have tried the drugs but will have given them up for whatever reason. Under this circumstance, the impact to the revenue and earnings of the big food companies we recommend would be pretty small, and would ultimately be overwhelmed by population growth, international expansion and product innovation.
In a much more punitive scenario, let’s assume 25% of Americans are on the drugs in a decade and a few percent of the global population. Analysts on Wall Street have referred to this as a “black swan event,” meaning it is highly unlikely. This hypothetical outcome would have a more meaningful impact on food companies, particularly those that sell junk food and those with higher U.S. exposure. Notably, our analysis suggests the food companies we recommend would still grow, albeit at a lower rate. The definitive impact on each stock would be heavily influenced by the level of growth currently reflected in the respective valuation. We continually assess our recommendations in light of this potential impact and others.
It is worth noting that businesses will respond in the face of this change. A well-managed company will adjust to what its consumers want. Some have already had success with zero-sugar versions of their popular products. Others, like Nestlé, are adding micronutrients to some of their products that could appeal to people on weight-loss drugs. Some companies have developed portion control solutions. For example, Oreo Thins are a tasty treat, but on a smaller scale. Businesses can acquire healthier offerings and divest less-desired products. There are many ways in which food companies will seek to respond to GLP-1s.
These drugs could be hugely beneficial to many, which could be a great thing for society. But there is a long way to go and a lot yet to be determined. Right now, we remain comfortable with the names we recommend. In fact, they may be preferred defensive holdings in uncertain economic times. We will continue to monitor and learn about weight-loss drugs and measure the potential risks relative to the returns – as we do with all stocks.
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