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The last two years have seen a highly variable landscape in the food and beverage sectors. Packaged goods companies such as Kraft Heinz, Unilever and PG have done well as more people ate at home, and continue to do so. According to an analysis by the trade publication Food Dive, the industry is seeing an explosion of construction, as companies seek to add RD facilities and manufacturing capacity to meet this new demand.
Beer, wine and spirits companies are also doing well, due to some of the same forces. Despite the buzz around the “sober curious” movement, retail alcohol sales have increased over the past two years, more than offsetting the drop in sales at bars and restaurants. Companies such as Boston Beer and Brown Forman, which own some of the most recognized names in beer, spirits, wine and hard seltzer, are posting strong results.
However, while manufacturers of food products and booze have generally benefited over 2020 and 2021, restaurant companies have been subject to both dramatic hits and misses, with an emphasis on the latter. A sobering research report released by Baron Small Cap Fund in May of 2021 predicted that “…about 15% of restaurants in the casual dining space will be shuttered forever”. Facing an existential moment, a number of companies got creative. Some flourished by expanding both online ordering and drive-through sales. Digital transactions at Chipotle, for example, grew more than 100% year-over-year, and many market watchers believe that such digital ordering and other initiatives started during the pandemic will become permanent features of the industry.
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A reader might be asking at this point why, in such a challenging and uncertain environment, to invest in food and beverage — sectors that were already sensitive to changes in commodities, wages and the economy broadly before the tumultuous last 24 months? A few foundational strategies increase the chances of success:
1. Invest in what you know and understand
As Warren Buffett famously said, “The important thing is to know what you know and know what you don’t know”. This is especially important during uncertain times like these. It simply helps that I love food and wine, and so follow companies in the field closely.
2. Invest in leaders, not just companies
Weak leaders ruin great businesses, while great ones engineer corporate turnarounds, among other triumphs. Take Chipotle CEO Brian Niccol. He spent 13 years at Yum! Brands where he held senior roles at Pizza Hut and Taco Bell. Prior to that, he spent a decade in branding and marketing at PG, the company that arguably wrote the book on consumer marketing in this sector. He helped Chipotle successfully navigate a series of food-borne illness crises that would have spelled demise for a company without his brand of leadership. He also pushed drive-through and off-premise (including digital) sales at a critical time. Ok, sign me up with him.
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3. Know a fad when you see it, and avoid it at all costs
The truth is that while tastes in clothing and shoes may change with the seasons, when it comes to food, people like what they like. This is why I look for companies that have either been around a while or appear to have staying power.
Think about some of the most successful examples in the space. Sam Adams beer was launched in 1984, McDonalds was founded in 1955, Starbucks in 1971, Longhorn Steakhouse in 1981 and Chipotle in 1993. Why does endurance matter? Because the food and beverage business is tough — is challenged by low margins, is highly competitive and economically sensitive — and the companies that survive through various economic cycles tend to have a product, a loyal customer base and formula that matters.
4. Don’t be a snob
Let’s face it, the products and companies in this space that have delivered the greatest returns tend to have broad appeal. As much as I prefer the higher-end establishments and products, they tend to be more susceptible to market whims and changing tastes.
5. Aim for the long, slow braise versus a quick sear
Choose investments carefully and then stick with them. Because some stocks are particularly beaten down right now, this might be the best time to do your homework, pick the right one and then be patient.
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