Junk food nation increasingly lifting “workout” shakes

There’s been a change in America’s eating habits, especially around snacking. It brings up many questions about what’s driving the shift and whether it’s due to structural changes in how and what people eat or whether it’s cyclical and related to a squeezed consumer who is less willing to spend $5 or $6 on a bag of chips.

 

We offer an edited discussion on the topic with Peter Galbo, who covers U.S. Food Producers at BofA Global Research.

 

Question: Pete, how structural are these changing habits? Consumers have loved chips, cookies and soda for decades. Is this just a near-term blip and we revert back to the way it always was, and if not, what gives you confidence that these could be long-lasting changes?

 

Peter Galbo: In terms of the structural vs. cyclical argument, it’s no secret that snacking companies took something like 30% price increases over the span of a three-year period between 2021 and 2024, and that had a material impact on the ability of consumers to buy the products. If your bag of chips went from $2 to $3 or from $5 to $6, that’s a big incremental step up. If we were going to fall in the cyclical camp in saying that this is truly a cyclical problem, then a decline in price or the snacking companies taking prices down promoting more would in theory cause a response and you would have your answer on that side.

 

From the structural side, the argument is that GLP-1s (glucagon-like peptide-1 weight loss drugs) are impacting people and not giving them an ability or desire to continue to eat snacks every day. It probably is still too early, even though we’re 18 months into the GLP-1 frenzy — it’s just still not a big enough percentage of the population. But what I do think is happening, and this could make the case that it is more structural, is: let’s say if your bag of chips went from $4 to $6. You’re now the consumer. You’re picking that bag up off the shelf. You’re maybe considering, “Hey, do I really want this in my basket this week? Can I afford to have this?” And maybe as you’re standing in the aisle, you flip the bag over and you start to look at all the ingredients that are in it, and you’ve been now hit in the face with headlines about healthier eating, and so the value equation isn’t there for you anymore and you’re making the decision of “This isn’t really that good for me.” It’s almost like the two cyclical vs. structural are conflating together at the current moment, and until we get a price response from the companies, we’re going to not really be able to find out what the answer is.

 

Question: There’s recently been an obsession with protein. Why is that the case and what does it mean?

 

Peter Galbo: I think protein as a whole or higher-protein diets is not a new concept. We were even starting to see a move in terms of a higher-protein diet for consumers pre-COVID. It probably actually got disrupted a bit over that period as we were all eating more at home and eating more comfort foods that made us feel good. But now five years later, we’re normalizing back to some of the older trends. Something like 70% of consumers that have been surveyed say, “I want to add more protein to my diet on a day-in, day-out basis.” And when we look at diet trends, a high-protein diet is often the one that ranks as the most common selection. If the rule of thumb that people are striving for — and this is not necessarily a scientific guidance — but that people are looking for in terms of trends is, “I want to consume my body weight in grams of protein on a daily basis.” For simplistic math, if you’re a 150-pound person you’re trying to eat or consume 150 grams of protein in a given day, that can be really hard to do. That’s a lot of protein, it’s a lot of eggs or it would be a lot of chicken, and so you’re looking for ways to supplement your diet to get to that level.

 

What that’s given rise to is these ready-to-drink protein shakes. These were traditionally meal replacement products that are almost shifting into becoming beverages and have created a new category — products like Core Power or a Premier Protein that have between 25 and 40 grams of protein per serving in a somewhat calorie-efficient way, 150 and 250 calories. And so, as you’re trying to be efficient with your calorie consumption, this is an offering to help you achieve that goal. As it pertains to GLP-1 users, I think this is where there’s been a bit more of a niche. These are consumers who are looking to actively lose weight, but they’re trying to hopefully maintain muscle mass or maintain muscle strength. And so they need protein to help offset some of the fact that they’re reducing calories, and protein is a more satiating item. It keeps you full for longer and these products have helped to fill that role for a lot of people.

 

You’re also getting protein additions in all sorts of other categories, and we saw this in boxes of macaroni and cheese that have the protein content listed on the front. It’s cereals that are now telling you they’re enriched with protein, so it’s pretty prevalent everywhere and that’s really a trend that, again, started in 2019, probably took a bit of a hiatus during COVID and is now back and seemingly more prevalent than it was even before.

 

Question: Protein shakes are not cheap. They’re a lot more expensive than a can of soda. Without getting into company specifics, are some of the beverage companies looking at this as a positive because it could be a boost to ASPs (average selling prices) if you’re drinking one of these instead of another drink that might be a lot less expensive?

 

Peter Galbo: It’s been a huge mix driver for a lot of companies. So when we look at the sales lines of companies as they report earnings, you’ll have a volume number, you’ll have a price number and then usually attached either to price or to volume, depending on the company, you have something called mix. When you have these higher average-selling-price products or higher price-per-ounce products, they can be a real mix driver, and in some cases it’s been upwards of a double-digit contribution to their mix over time. These are higher-priced products for these companies, but they are also significantly more expensive to produce, so the margin isn’t necessarily that much better, but it definitely helps in their top lines.

 

Question: Over a year ago you put together a collaborative note on GLP-1s and the broader impact. There’s a lot of read-through to other categories, but the conclusion then was these drugs aren’t really impacting volumes yet, but they might as penetration of GLP-1s increases. Of course, since then penetration has risen. It’s probably been helped too by the fact that there are some lower-priced offerings out there. What’s your latest thinking on the impact, and how soon or how far away are we from GLP-1s really having significant impact on snacks?

 

Peter Galbo: Yeah, there’s been so many confounding variables that have happened over the past 18 months, particularly as consumers have been stretched budgetary-wise. There are definitely places where we see it show up and you have frozen-meal companies that are trying to offer GLP-1-friendly portions of frozen meals to take advantage of the trend. Where I take a little bit of solace in the fact is, look, the restaurant companies aren’t necessarily talking about it as much anymore. And just given how much calorie consumption comes from the food-away-from-home channel, it’s a little bit odd to us that it would only impact food companies and not impact restaurant companies just given how much of the calorie consumption happens away from home. There is some thought that if and when an oral medication becomes available that will help expand the TAM (total addressable market) of GLP-1s a bit more and then maybe we could see a step change function. But remember that we’re also seeing people cycle off the drug. They’ve hit their target weight and so they don’t want to be giving themselves an injection anymore, and so they will move away from the product. There are still people who are discovering side effects that will then go off the product and they return to some of their pre-GLP-1 habits. Still too early, obviously hard to quantify, but I would say as we think about order-of-magnitude impacts, it’s probably not the number-one reason why volumes have reacted the way that they have over the past year and a half.

 

Question: Pete, when you think about clean eating, what do you think spurred this inflection? Was it COVID or was it something else?

 

Peter Galbo: I touched a little bit on this in the beginning just around the fact that the protein-heavy movement had started in 2019 or had been around at least in 2019, and that was something that was pretty prevalent. COVID probably reversed some of the trends because we were all more than happy to eat things that made us feel good for a few years as opposed to healthier eating. I think what’s happening today, aside from GLP-1s, is this idea that healthier eating is seemingly much more prevalent. Healthier eating has existed in the U.S. for decades, but now it’s much more in your face. You have a targeted campaign at making America healthy again and whether or not there’s any sort of legal change that happens or rules change that happens, that kind of pushes the U.S. in that direction, consumers are basically seeing that in the headlines. I’d go back to the chip example of, “Hey, I’m going to actually look at the packaging and look at the ingredient list,” and they’re just voting with their dollars.

 

Question: I did want to talk about what’s embedded in these stocks. You’ve talked about a lot of headwinds — many of them are structural, such as the snack industry that maybe hasn’t even seen much of the GLP-1 impact yet — but some of that could still be ahead and then there are other issues that they’re facing. How are these stocks trading on a multiple basis versus history? To what extent is this in these stocks already?

 

Peter Galbo: There are a number of headwinds and you probably can’t parse out what GLP-1 impact is having vs. the impact of lower spending from lower-income consumers is having. But I think for protein companies or companies with a narrative that’s tied to protein consumption, you’re seeing the multiples reflect that in a relatively meaningful way and that they’re trading at significant premiums. Their growth is faster. They’re actually growing volumes, which is a scarcity in the packaged food world these days, and they’re getting the credit for that. Whereas not just snacking companies but food companies, where volumes are really weak, are trading at particularly low multiples. But for your standard packaged food company, the multiple is still relatively weak and certainly is relatively weaker than where you would think it would be in times of concerns around a possible economic downturn. With that being in mind, a lot of it would seemingly be baked in. We would hope that there would be a case that the fundamentals don’t or can’t necessarily get worse than they are today. We haven’t really seen the stocks go down that much on bad news. Maybe that’s what we need to see.

There are probably a few related things converging here to depress snack volumes. If an already-squeezed consumer is faced with paying $5 for a bag of chips that may not be good for them anyway, it’s easy to put down that bag of chips in favor of something cheaper or with more benefits. And if a consumer is loading up on protein, they may be quite full and less interested in snacking anyway — that’s basically the point. And within staples, there are companies benefiting from this protein wave and some that are getting negatively impacted by it. But the stocks of those on the losing end of these trends are often not going down, even on bad news. That suggests a lot is already in these stocks. But if there’s not much growth ahead, it also suggests there may not be much upside either.