Pepsi/obesity drugs: snack pack will withstand economies of scales

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Capitalism may be crassly summarised as follows: getting consumers to buy too much of things they may not really need in the first place. Packaged food companies have built strong and trusted brands over decades. They have done so by selling crisps, chocolates and sweetened drinks that have contributed to surging mass obesity, particularly in the US.  

But their gig may be up. Drugs of the GLP-1 group suppress appetite with remarkable effectiveness. Weight loss success stories have resonated in Wall Street and the C-suite. Walmart executives recently said that consumer spending was slightly lighter following the use by some Americans of GLP-1 drugs such as Ozempic and Wegovy.

On Tuesday, snacks and drinks group Pepsi reported solid earnings and raised its annual guidance. It simultaneously dismissed concerns that consumers are becoming less hungry. Still, stock prices are largely comprised of so-called terminal value — the present value of cash flows from distant years. 

Consumer food companies have typically enjoyed stock price- to-earnings multiples of greater than 20 times stemming from their apparent stability and defensiveness. This is now subject to a novel and potentially grave threat.

Pepsi shares are already down 15 per cent for the year. Like other food companies, it first benefited from coronavirus pandemic-era home eating and then from the ability to pass input price inflation on to consumers. Through the first three quarters of 2023, Pepsi’s overall organic growth rate was a juicy 12 per cent, even as volume growth was slightly negative. 

The company remains confident that it can keep growing through the megatrends of urbanisation and global growth. It aims to satisfy changing consumer tastes with healthier products and smaller servings.

Investor worries about the impact of weight loss drugs on snack companies are overdone. Cigarette makers and oil and gas drillers are surviving bigger existential threats remarkably well. Tails remain long. Foodmakers can console themselves with the knowledge that drugmakers face their own nemesis: the patent cliff.