We explore the trend of consumers directing a larger portion of their food budget toward higher-quality options.
As part of our investment approach, we look for opportunity that arises from the structural changes going on in the world. One of the most powerful, consistent, and underappreciated changes of the past several decades is that quite simply, people around the world have gotten a lot richer.1 And history has shown that as people get richer, one of the first things they do is to spend up on better-quality, more nutritious foods for themselves and their families.
This simple fact has a host of investment implications across the developed and emerging worlds. In emerging markets, the rise out of subsistence living for billions of people has provided the discretionary income to be more selective about what they eat. In developed markets, consumers are directing more of their food dollars to things that not only taste good, but which are also nutritious and free of harmful additives. We believe this massive structural change in consumer preferences has created very tasty growth opportunities for a number of companies.
Growth opportunity #1: Consumption of farmed fish may continue to rise
If you talk to a random sample of people around the world, they’d probably tell you that overall, they’re eating a lot more fish than they have in decades past. The numbers back this up. In the 1960s, the average person ate just 21.8 pounds of fish per year, according to a United Nations report.2 Fifty years later, the level of fish consumption had doubled to more than 44 pounds.2 However, this huge increase creates major concerns about sustainability and overfishing of the world’s oceans. Indeed, over the past several years, the growth rate of the world’s wild catch has plateaued, 2 leaving consumers searching for other ways to satiate their appetite for fish.
Since the 1960s, the proportion of the global fish catch originating from fish farms has expanded from practically nothing to exceeding the total volume of fish caught in the wild in recent years.2 The world’s largest supplier of farmed salmon, a fish that is nutritious but notoriously hard to farm, is a company called Mowi. Based in Norway, a country whose fjords provide the perfect growing conditions for this fickle fish, Mowi sells more than 440,000 tons of salmon to more than 70 markets around the globe.3 The company has been a major advocate of sustainable approaches and a developer of innovative techniques in the field of fish farming. In an era when there are major concerns about feeding the world’s growing population and overfishing of the world’s oceans, we expect a continuing tailwind for this farmer.
Shrimp is the most popular fish consumed around the world, but salmon actually overtook canned tuna to take second place in the U.S. in 2018.4 Salmon is popular globally as well. It is hard to believe before the 1980s there was no salmon sushi in Japan, but after a successful push by Norwegian salmon producers to sell their farmed salmon in Japan, salmon sushi and sashimi are now available everywhere. Salmon is both nutritious and tasty, and it’s been described as a “gateway fish.” This helped Japan’s sushi gain popularity globally.
As people eat more fish, they also want a way to verify its quality and origins. Seafood fraud is a major problem across the food industry. A recent study from Oceana, a conservation group, showed that 21% of seafood samples they tested from restaurants, markets, and stores were something other than what the label said.5 The most common form of fraud sees an expensive fish, such as sea bass, replaced by a visually similar but much cheaper fish like giant perch or Nile tilapia. This is where the Luxembourg-based Eurofins Scientificcomes in. The company has a broad-based diagnostics and testing business; one of its services is a DNA-based technology that distribution companies can use to identify fish samples. A label can then be used to prove that a premium fish is fresh and exactly what it is supposed to be. As a result, suppliers, restaurants, and consumers don’t have to worry that a lower-quality substitute is pretending to be something it’s not.
Growth opportunity #2: Higher-quality ingredients are in demand
Shake Shack is a chain of restaurants that has capitalized on consumers’ appetite for a “better burger.” The beef they use is free of antibiotics and hormones, their custards are flavoured with real sugar, and even the bacon that tops their famous Smokeshack burger is made without MSG or nitrites. I believe this attention to quality ingredients makes a real difference to the taste of Shake Shack’s food, and people have demonstrated they are willing to pay a premium price for a more premium experience than what the biggest names in fast foods offer.
Since its origin 20 years ago as a single hot dog cart in New York’s Madison Square Park, the chain has grown to encompass more than 250 locations all around the world.6 Whether in downtown New York or in the Tokyo airport, long lines of customers appear to be a regular sight outside of Shake Shack locations, and we think they can continue their growth while maintaining their distinction from the more common burger establishments that seem to be on every corner.
The global appeal of burgers shows that people may have the same tastes worldwide, even if they historically have had very different cuisines. And it is not surprising that burger restaurants are where innovations like plant-based meat have seen much success. There are many different companies making meat from non-animal sources, and Novozymes can help this process to get the right texture and taste by providing specialized enzymes.
Growth opportunity #3: The at-home cocktail trend may boost the appeal of premium mixers
Luxury liquor is one of the fastest-growing segments of the alcoholic beverage industry, growing at a 9.2% annual rate over the past five years.7 When it comes to consuming these premium spirits, I believe customers have increasingly demanded a premium mixer to go with them. This trend has been a strong tailwind for Fevertree, a British company that makes high-quality seltzers, tonics, and sodas. Their beverages come in smaller cans and bottles that are pre-measured to be the ideal size to make a premium mixed drink. This market is one of very few where the luxury brand actually has a higher market share than competing non-luxury brands. For many people, paying a small premium for a quality tonic to mix with their gin is the type of affordable luxury that can become a regular part of their lives. The pandemic has increased the consumption of at-home cocktails,8 and we expect it to continue for some time to come.
Growth opportunity #4: Cooking technology innovations can transform the foodservice industry
During this pandemic, a French neighbour of mine began baking at home and started a service delivering hot-out-of-the-oven French baguettes. It reminded me that there is no better comfort food than freshly baked bread, but not everyone has the luxury of an unemployed French neighbour, and neighbourhood bakeries have shut down in many cases. Rheon Automatic manufactures automatic bread machines. I can see a future where every corner deli has the equipment needed to make fresh bread daily for everyone to enjoy.
Innovation in cooking technology allows restaurants, cafeterias, caterers, and schools to cook healthy food quickly, efficiently, and in small spaces. Rational has a line of combination ovens that can roast, poach, bake, steam, and more. The appliance is programmable, so you can cook without constantly watching the food, and repeat the same process accurately each time. Rational recently came out with a new appliance, the iVario, that can shallow-fry, deep-fry, pressure cook, and more, in a shorter time, using less energy.
The bottom line: Consumers may be willing to pay for premium quality
Of course, higher-quality food, of course, often comes at a premium price, but consumers have made it clear they’re willing to pay more to achieve a better-quality experience, in my view. That willingness may also provide some protection from the impact of competitive pricing for these companies, an important characteristic for the types of long-term investments we’re interested in.
As investors, we are always looking for trends that can drive sustainable, long-term growth for companies. We believe the trend of consumers directing a larger portion of their food budget toward higher-quality — and higher-margin — options is here to stay.
1 Source: Our World in Data, “GDP per capita, 2018”
2 Source: U.N. Food and Agricultural Organization FishStat Database, 2019. Most recent data available.
3 Source: Mowi.com
4 Source: Intrafish, “Here are America’s most-consumed seafood species,” Rachel Mutter, Feb. 24, 2020
5 Source: CNN, “Fish fraud: What’s on the menu often isn’t what’s on your plate,” Jen Christensen, March 17, 2019
6 Source: Shakeshack.com
7 Source: Fever-tree, “Annual report and notice of annual general meeting 2020,” April 19, 2021
8 Source: Fever-tree, “FY20 preliminary results,” March 18, 2021