Global Perspectives: Dissecting consumer shifts – health, technology, and the investment implications

Michelle Dunstan: Hello and welcome. I’m Michelle Dunstan, the Chief Responsibility Officer at Janus Henderson. And today we’re going to be talking about something really interesting. You, the consumer. We recently had an event for our clients in London on ‘From Cravings to Conscious Choices: What is shaping the consumer of the future?’

Consumers represent about half of the global economy – higher in developed markets. In the US, consumers account for almost 70% of GDP and small shifts in consumer behaviour can have an outsized impact on the economy. And that means that as an active asset manager, our investment teams need to understand what’s happening in real time in order to make the best portfolio decisions.

In this dynamic and evolving world, we’re seeing two potential trends emerge that our investment teams and our central responsibility team have spent a lot of time researching and engaging with companies on their driving, consumer behaviour and financial valuation, an increased focus on health and wellness.

And related to that, an emphasis on clean, natural and sustainable ingredients. Now many of you are saying, hold on. We’ve been talking about health and wellness for decades, and we have. We’ve also seen a number of recent hot companies that capitalised on this theme. Plant-based proteins, at home fitness, non-dairy milks, Beyond Meat, Peloton, Oatly. Each one of them was hyped as the next big thing. And each one of them was a stock market darling for a while. Then the lustre faded.

So why might it be different this time? Today I have Greg Kuczynski, our consumer research analyst, Antony Marsden, our Global Head of Responsible Investment and Governance, and Olivia Gull, one of our amazing Responsible Investment and Governance Analysts, to discuss our research and engagement and the evidence for fad versus the new normal and discuss how these issues are impacting the stock market and our portfolios.

So, Olivia, let’s start with you. We’re hearing more and more and more about the obesity crisis. Tell us about that.

Olivia Gull: Sure. So, obesity rates have been rising quite dramatically over the years. They’ve more than doubled since 1990 for adults, and childhood obesity rates have more than tripled. And the stats are particularly dramatic in markets like the US and the UK, where over 40% of US adults and almost a third of UK adults are now considered obese.

And from a financial perspective, this is putting a lot of pressure on national health care systems. So, the incremental annual healthcare costs for obese individuals range from one and a half to US$7,000 per year. So, in the UK, some research is suggesting that’s costing the NHS over £11 billion a year. So, I think referring to it as an obesity crisis is probably a fair term in this case.

Dunstan: That’s a that’s an astronomical amount of money. And Anthony, another buzzword that seems to be gaining an enormous amount of traction recently Ultra Processed Foods (UPF). What are they and why do we care?

Antony Marsden: Thanks, Michelle. Well, simply put. These are foods containing ingredients such as additives, emulsifiers, stabilisers not typically found in home kitchens. They’re made through complex industrial processes and typically are high in fat, sugar and salt. The term itself is actually very controversial, especially with food companies.

It’s not a scientific term, and it includes foods often considered healthy, such as fruit, yoghurt, or the type of whole grain bread you’d buy in the supermarket. But in the US and the UK. Now UPFs are a dominant part of modern diets, making up more than half of daily calories.

Now why should we care? There’s now a wealth of scientific research linking ups to obesity, disease and poor health outcomes. UPF consumption is being linked to significantly enhanced rates of diabetes, cancer, mental health issues, cardiovascular disease and metabolic dysfunction. And public awareness is growing with widespread and sometimes alarmist media coverage.

Dunstan: So, Olivia, back to you. GLP-1 inhibitors or agonists? Something everyone is talking about and everyone’s heard of. How prevalent are they and are they having any impact on what consumers are eating?

Gull: So GLP-1 medications, they were originally developed to treat type two diabetes patients. However, the clinical trials found that one of the significant side effects was weight loss.

So, a few years ago, the FDA approved semaglutide for weight loss treatment. And what these drugs do is they delay gastric emptying, which is slowing down the emptying of the stomach. And it also impacts the brain’s reward system, so it reduces one’s appetite and cravings. In terms of market penetration, the data is not clear on how many individuals are currently taking these drugs, as many individuals are using compounded GLP-1s, which are off license and branded versions. However, as oral pills become available and the cost decrease, it’s expected that uptake could increase to anywhere around 6 to 9% of US adults by 2030.

And then the big question that we’ve been focusing on is how a GLP-1’s impacting consumer behaviour. So, there’s a lot of mixed data in the space. Some surveys are suggesting that there has been a shift towards healthier eating. However, we haven’t really seen a universal drop off in sales for unhealthy food, so there is still a question mark around if or when we might see some consumption patterns shift.

Dunstan: And lastly, I think both technology and regulatory changes are potentially reinforcing these trends. Anthony, what are we seeing in this area?

Marsden: So, on the technology side, Michelle, I’d highlight three things. Firstly, technology is empowering consumers to make informed choices, for example, via apps that can scan product barcodes for nutritional info and allow them to check ingredients and make healthier choices.

Health technology is increasingly popular wearables such as continuous glucose monitors. These allow people to monitor the impact of their food choices in real time. And finally, social media is increasingly influential, especially amongst younger generations. Influencers are helping to supercharge trends such as the recent protein obsession.

On the regulatory side, there’s a lot happening. For example, in the US, there’s been moves to ban certain food additives and introduced new labelling requirements. And in the UK, there’s a move to ban advertising for high fat sugar and salt products on TV before 9 p.m. and in other countries they’re taking even more extreme actions.

So, for example, Colombia has increased taxation for certain UPF products.

Dunstan: This is super interesting. So, we’ve got a couple of big trends, a lot more scientific knowledge about the impact of things like obesity and ultra processed foods. New drug GLP-1 inhibitors were changing. Behaviour may not be just a matter of willpower anymore, reinforcing things like social media and other technologies and regulation at the same time.

There’s a lot of data out there, and that data is either nascent and emerging or it’s muddy. Greg, this is exactly the type of area where research analysts like you like to dig in. There’s a clear controversy about the feature. That’s where we can develop distinctive research insights. So, what are you seeing in terms of consumer trends?

Gregory Kuczynski: Yeah, it’s really been a surprising couple of years since the advent of the GLP-1 prescription, since the script count really picked up in the sense that we know what the consumer intent is. When we ask them in surveys, we know that they say they’re planning on eating less junk food, or that they are eating less junk food.

But when we actually see their behaviour in reality, as measured by what we call the scanner data, which captures the point-of-sale transactions at the grocery stores, we’re really seeing, like it’s like a benign or sort of like non-existent impact on some of these junk food categories. So, for example, if you took the combination of like ice cream. Salty snacks. Chocolate. Non-chocolate candy. Like you just put that all in a bucket. Year to date, the dollar sales and those categories are up 1.6%. And then meanwhile, if you zoom into some of the areas where people say they plan on eating more, uh, frozen vegetable sales are down 9%. Salad dressing sales are down 3.5%.

So, it’s just we’re not quite seen. Uh, the, um, intended the aspirational behaviour that’s captured in the surveys actually show up in the scanner data. But, um, you know, one way that you could actually square the circle in terms of when people go on these diets and their initial phase of the diet on GLP-1, their calorie consumption is down 20-30%.

Well, at some point that weight loss asymptotes in the eating patterns go perhaps a little bit back to normal, um, especially as the gastrointestinal discomfort subsides as they get used to the molecule. And if you lose as much weight as people are losing on these drugs in that sort of new steady state post-weight loss, a lot of these people might end up actually being much more active, much less sedentary.

And it’s entirely possible that a smaller, leaner person that’s more active is burning more calories and needing to eat just as much as the state of affairs that got them into that overweight situation to begin with.

Dunstan: That’s super interesting. That stock market impact at the end of the day, that’s what we’re thinking about as investors. So, since the start of 2023 through October, the MSCI World Index was up about 70%. Consumer discretionary stocks were up in line with that about 74%. Consumer staples stocks – the food companies we’re talking about were up only about 8%. And then a basket of the exposed stocks and snacks and beverages were down 21% over that period.

Greg, what is going on here?

Kuczynski: Yeah, it’s the snacks and beverage performance that we’ve seen in the last two years. It’s a multi-decade historical degree of underperformance. It’s very unusual to see a group lag the market by this much, and certainly the GLP-1 dynamic perhaps not as much in terms of like the impact on the fundamentals, but the fear factor bleeding into the market and putting pressure, compressing valuation multiples. That certainly played a part in what we’ve seen in the relative underperformance these last two years. But there are a lot of other confounding variables, as there always are in the stock market, that make it difficult to sort of identify and attribute all of that underperformance just to the GLP-1 issue.

So, you have to remember the starting point of where we were, and I would actually draw that point. It’s like from October of 2023 when we saw the underperformance really began. That’s when we had the first sort of panic in the market, uh, stock market reaction about GLP-1 trends. But that was also when the tech sector was on its back, before they had gotten religion on cost cutting and margins.

And so, it was in the it was in the midst of the inflation wave post-Covid. And all of these consumer branded goods companies had been remarkably successful in passing through pricing to protect against inflation. So, you had a sector that was incredibly overvalued relative to its own historical standards.

You had people hiding out in these sectors as safe havens. And so, since then, we’ve just seen a lot of this unwind. All of that pricing power is just becoming relevant. As inflation has subsided, the tech sector has roared back. You’ve had that augmented by AI trade across the tech sector, but also just all of the industrial and power and energy production bank shot plays. And meanwhile you’ve got a consumer staples sector where there’s pricing is above zero and volume is zero to down. And there’s a lot more exciting things to invest in the economy right now.

So, like that explains probably the vast majority of the underperformance more than just the GLP-1 factor in isolation. But these things always overshoot. So, I don’t think that we’re at a point where we can say that, like, sentiment can’t get worse, especially as we look ahead to 2026 with the oral form factor coming into the market. But it’s been a rocky time for consumer staples, branded goods analysts.

Dunstan: So, all of you engage regularly with our portfolio companies. How are the companies themselves talking about these issues, and how has that discussion evolved over the past year or two? As GLP-1, UPFs, the obesity crisis has really taken a forefront?

Yeah. So, we engaged with the companies on every quarter, 1 to 2 times a quarter, essentially. The reality, they say what you would expect them to say. They’re all sort of talking their own book companies that you would expect to be beneficiaries of GLP-1 trends, companies like Danone, they’ll talk up the benefit to the yoghurt category, the confection players, the junk food categories like salty snacks and PepsiCo with Frito-Lay North America. They’ll sort of downplay the dynamic. McDonald’s doesn’t worry about GLP-1.

From my perspective, one of the philosophies I haven’t invested in is that it’s just it’s very dangerous to rely on company commentary. We are talking to the companies, but our investment thesis is always underpinned by independent third-party former executives or industry experts, trade show conversations and just the hard data.

And so that’s what I’m looking at. And that data has just simply been murky. It’s hard to draw any firm conclusions at this point.

Dunstan: Antony, Olivia, anything to add? Anything that you know has really come to light in your research or your interactions with the companies? I would agree with Greg that companies initially when we were speaking to them about these themes, they were more in denial or quite defensive about talking about GLP-1s and UPFs.

I would say more recently the tone has shifted a bit, maybe because they have to address these themes. And it’s moved more from defensive to opportunistic, which you could argue is maybe more marketing than anything else. But we have seen some M&A [mergers and acquisitions] like, you know, whether it’s the norm that sort of doubling down on their nutrition strategy.

And then in terms of our engagement, we’ve sort of engaged with a lot of companies across the consumer value chain from the ingredients manufacturers. There’s been a lot of discussion on reformulation and how they’re sort of seeing opportunity taking out preservatives or nitrates from foods, and then also all the way to the other side of the spectrum, engaging with the supermarket names who are at the forefront of sort of consumer behaviour.

They’re sort of investing a lot more in private label innovation and things like gut health and high fibre. But yeah, it’s been I’d say those that are more at the opportunity side of the spectrum are much happier to talk about this theme rather than those that are more in the firing line. And, and there’s a lot more risk to their business.

Dunstan: Great. Anything to add?

Kuczynski: Yeah, it’s actually so I live in large and mega cap consumer land. We’re not really I’m not personally looking at the smaller cap companies that might be sort of pure play. Ideally positioned to capitalise on a GLP-1 influence.

Change in consumer trends and habits for my large and megacorp companies. This is just it’s sort of a pure net negative. Very few of them have portfolios that are positioned appropriately. If we really do have a world where consumers eat less of this product and where we see what 20-30% of the population at some point on these drugs, if the promise of these drugs is as grand as what is promised and the costs continue to come down.

So, and one of the things that the companies will talk about is like just there’s an opportunity to perhaps rotate the portfolio if you want to get on the right side of the trend. Well, what that exercise entails are you sell now very out of favour, declining brands at very low valuation multiples, and then go chase small high growth brands at very high valuation multiples.

So, selling low and buying high is not always a particularly productive approach to value creation. So, what that means for our portfolio positioning is that there’s just a very high bar, um, on putting new capital behind the names that are theoretically, potentially in the firing line of these drugs.

Dunstan: Great. Last question for all three of you. What’s next? What other consumer trends are you looking at? What do you see in the coming year?

Kuczynski: Well, maybe I’ll throw in a couple. Thus far, a lot of the GLP-1 conversation has been focussed on the impact on food and beverage categories. But the research is underway. There’s a lot of anecdotal early clinical work that would indicate that we can perhaps use GLP-1 to address a broad array of addictive behaviours.

So, what are the implications for alcohol? What are the implications for gaming? Are there implications for just the compulsive, impulsive shopping that drives a big chunk of sectors like let’s say, apparel. So that’s sort of the next phase of conversation that I think we’re going to be having in the GLP-1 bucket of the world.

But in terms of like some larger structural trends beyond GLP-1s, there’s been a lot of focus right now on agentic commerce. And as the open eyes of the world, but their way into the search and product discovery process, if they own the top of the funnel, just what are the downstream consequences?

How does that impact retailers like Amazon or Walmart, who have an important profit stream from retail media networks that are perhaps just intimidated by the AI search process? And what does it mean for brands who’ve calibrated all of their marketing efforts to a different legacy media and product search discovery model?

So, it’s just it’s sort of It tosses all the cards up in the air and it’s a jump ball. And it’s again, for large companies, it’s potentially more of a risk than an opportunity in the near term, just in the sense that when you’re a small, nimble, pure play noodle world brand, a lot of these companies are native to something like a TikTok shop or and certainly they’ll be brands that are native to an AI driven search process.

So those are some of the areas that I’ll be thinking about going forward.

Dunstan: Olivia, I know you spend a lot of time with our consumer team and our health care team. What are what are kind of some of the trends that you’re seeing or what you’re looking at next?

Gull: I’d say just one or two things to add to what Greg said, because I agree that the, um, the use of GLP-1s on a broader range of addictive behaviours is going to be really interesting. I’d say in terms of what we’re seeing, protein has been a big buzzword recently. We might see more of a shift to fibre being the new buzzword.

That’s sort of going to be seen across all different food categories. Greg mentioned, uh, alcohol as an addictive behaviour. That’s also going to be really interesting to monitor the data around maybe generational shifts or maybe, you know, if people are drinking less, although it’s still again, the data is not clear on that.

And then I guess on the technology side, we might see companies sort of leveraging health data and offering more personalised nutrition recommendations. So that could also be an interesting opportunity in the future. Um, yeah. Those are just a handful of others.

Dunstan: And Anthony, any final words?

Marsden: A topic I’m following closely is microplastics. I mean, there’s a there’s a bunch of research studies out there now showing that people are consuming ever increasing quantities of microplastics and that this consumption is potentially connected to poor health outcomes. I think it’s probably only a matter of time until consumers actively seek to limit their exposure, and the focus will then switch to the most important sources, such as food and beverage, packaging, cookware, personal care products and furnishings. So that’s just one topic I’ve got my eye on right now.

Dunstan: Great. Thank you. Greg. Olivia Antony, thank you for your insights on this super interesting topic. It is one that touches everyone’s lives here. We all eat, we all drink, we all participate in the consumer market. And as you can see, all of these issues are fundamentally reshaping some of the valuations and trends that we’re seeing.

So, thank you for listening. Goodbye.