Ozempic, weight loss drugs fears settle into longer-term risks for food companies

New wardrobes. Salad fests. Gas financial savings.

As the recognition of Novo Nordisk’s (NVO) Ozempic (permitted for Kind 2 diabetes) and Wegovy (permitted for weight reduction) rose, buyers frantically debated the prospects of shoppers overhauling their total existence — whilst proof remained scant.

“We’re seeing no influence as we speak with GLP-1s and two, that no person has any concept what the influence goes to be sooner or later,” McDonald’s CEO Chris Kempczinski informed Yahoo Finance over the telephone.

However, doomsday predictions, together with different headwinds, have tanked the inventory costs of meals makers like Kraft Heinz (KHC) and Hershey’s (HSY). The S&P 500 Client Staples Index is down 5% yr to this point, in comparison with the broader index’s 20% achieve.

Alternatively, the game-changing medicine, also called GLP-1s, have propelled Novo Nordisk to turn into considered one of Europe’s Most worthy corporations. On Monday, the drugmaker was named Yahoo Finance’s 2023 Firm of the 12 months, after its inventory clocked a 41% achieve on the yr.

However the preliminary panic surrounding meals shares is probably going unwarranted, in line with a number of sources Yahoo Finance talked to, together with Novo Nordisk’s CEO Fruergaard Jørgensen.

“It is actually fascinating for us to mirror on how huge an influence we’d have,” Jørgensen informed Yahoo Finance in an unique interview.

“There is no doubt that with the intervention we see now with the GLP-1 medicines, you see [there’s a] vital shift in client conduct … a few of these classes can be impacted,” Jorgensen added.

Classes he talked about embrace medical expertise corporations and drink and snack companies, amongst others, all of that are estimated to see slower income development resulting from rising GLP-1 use.

Nonetheless, the influence will occur “over a few years”, because the drug turns into extra broadly accessible, per Jørgensen. At present, lack of insurance coverage protection and a provide scarcity have restricted adoption of Ozempic and Wegovy.

Debating weight reduction drug influence will proceed for the subsequent decade

Noise surrounding weight problems medicine ramped up over the summer time and reached a fever pitch within the fall, as Wall Road salivated on the prospect of a brand new $100 billion market.

But as buyers take a while to mirror, many are realizing the preliminary fears of the medicine’ disruption of enterprise are “overblown,” Arun Sundaram, CFRA senior fairness analysis analyst, informed Yahoo Finance over the telephone.

“The market is beginning to understand … this isn’t having a fabric influence on meals consumption as we speak,” Sundaram mentioned. “That is going to be a long-term development … [It’s] not simply going to be a 2023-2024 phenomenon, that is most likely going to go on for the subsequent decade. There’s a variety of time for corporations to react and adapt to altering spending environments.”

Meals corporations have weathered quite a few weight-reduction plan developments — suppose Atkins, Keto, Paleo, Whole30, South Seashore — and lots of have moved in the direction of providing more healthy and extra numerous choices lately.

To underscore the purpose, gross sales of dry items are up 7.6% up to now 12 months, whereas frozen ready meals are up 5.8%, in line with information from NielsenIQ. McDonald’s, lengthy synonymous with greasy burgers, clocked an 8.1% achieve for same-store gross sales in its Q3 outcomes and is planning a document restaurant enlargement regardless of weight reduction drug proliferation.

CEO of Novo Nordisk Lars Fruergaard Jorgensen is seen during the 6th edition of the

CEO of Novo Nordisk Lars Fruergaard Jorgensen is seen throughout the sixth version of the “Select France” Summit on the Chateau de Versailles, exterior Paris on Could 15, 2023. LUDOVIC MARIN/Pool through REUTERS (POOL New / reuters)

Nonetheless, decreased urge for food and cravings might change individuals’s snacking habits and create an influence on quick meals.

Manufacturers that generate substantial gross sales from snackers or aren’t related to mealtime — similar to Jack within the Field (JACK), Yum! Manufacturers-owned Taco Bell (YUM), Dutch Bros (BROS), and Starbucks (SBUX) — might at some point really feel the hit.

“Should you’re on considered one of these medicine, it is a lot simpler to decide to not decide up your greenback soda and fries at two within the afternoon or to not eat a few of these extra fried meals at lunch,” mentioned Stifel analyst Chris O’Cull.

Restaurant chains like Olive Backyard (DRI), Texas Roadhouse (TXRH), or Chili’s (EAT) are much less uncovered, as individuals taking the medicine are nonetheless more likely to exit with their mates, mentioned O’Cull.

In the meantime, Morningstar analyst Sean Dunlop believes “the influence goes to be financially immaterial” on quick meals corporations, as they’ve greater fish to fry in 2024, together with a pullback in client spending and declining foot visitors.

Morningstar estimates that by 2030, 3.5% of the US inhabitants can be taking GLP-1s. Even in a “bull case situation” the place 7% of the inhabitants is on weight reduction medicine, and assuming that calorie consumption for sufferers drops by 30%, it nonetheless solely interprets to a roughly 2.1% influence to same-store gross sales throughout the restaurant trade.

Such outcomes are “hardly sufficient to justify sweeping issues” relating to quick meals’s future, Dunlop mentioned. Extra health-conscious manufacturers, like many quick informal chains, could find yourself benefiting.

“Names like Chipotle (CMG), Cava (CAVA), Sweetgreen (SG) can be proportionately higher positioned,” he informed Yahoo Finance.

No influence on meals sellers, for now

Persistent demand for the medicine might convey extra shoppers into retailers which have pharmacies, per Sundaram.

This spells excellent news for Walmart (WMT), Goal (TGT), Kroger (KR), Albertsons (ACI), and Costco (COST).

The inflow of “more healthy” buyers selecting up their prescriptions might present a lift to different departments, together with “the meals division, attire division, different basic merchandise departments,” Sundaram added.

Kroger Well being president Colleen Lindholz informed Yahoo Finance she believes the precise influence from the medicine is not going to be a discount in meals purchases, however reasonably a shift to more healthy meals.

“It simply is smart that individuals are going to commerce as much as contemporary meals, issues which can be higher for them, as a result of they’re feeling good about themselves they usually’re feeling good about being wholesome total,” Lindholz mentioned.

However packaged meals like canned soup or chips possible will not be impacted within the close to future, consultants contend. Many executives have mentioned there was no proof of a change in conduct amid the early adoption of the medicine.

PepsiCo (PEP) reported a document third quarter, the place CEO Ramon Laguarta mentioned “the influence is negligible in our enterprise” on a name with buyers. Constellation Manufacturers (STZ) CEO Invoice Newlands informed Yahoo Finance he did not see any indicators that weight reduction medicine are lowering demand for beer.

And it will hardly be Halloween or Thanksgiving with out sweet and dessert. Hershey’s CEO Michele Buck identified the emotional nature of meals, “and the function that [it plays] in moments of celebration and pleasure,” on the corporate’s Q3 earnings name. The chocolate maker recorded an 11% year-over-year bounce in income.

Quantity declines in meals solely resulting from GLP-1 medicine can be onerous to pinpoint, Mizuho Securities managing director John Baumgartner informed Yahoo Finance. New adjustments in meals habits might be resulting from tightening funds or different components, regardless that some will attribute all of it to weight reduction medicine.

As there are no GLP-1 associated dangers exterior of the US at present, Baumgartner’s prime picks embrace European frozen meals maker Nomad meals (NMD) and Oreo maker Mondelez (MDLZ), which has robust worldwide development.

He’s additionally excessive on Kraft Heinz, as shoppers search for more healthy components at worth costs.

On the finish of the day, the meals trade has been resilient, and the businesses’ share costs account for a lot of danger components.

“You have seen a lot of crazes on this trade, a lot of fads, and actually type of priced into the shares … till you begin consuming by IVs, or we do not want meals in any respect anymore, and also you’re getting power from solar and photosynthesis, I really feel like there’s going to be demand for meals,” Baumgartner mentioned.

Brooke DiPalma is a senior reporter for Yahoo Finance. Observe her on Twitter at @BrookeDiPalma or electronic mail her at bdipalma@yahoofinance.com.

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