You are viewing the content for Thursday 2 February 2006

Why lower food profits may be the only option

CONSUMERS may have paid a huge price, while swelling the profits of food companies.

Unhealthy foods are part of the world’s worrying obesity problem, but they have been making processors fat too - at the bank.

There is plenty of evidence that companies have chosen the route of high profit margin, but low health.

It explains why the giants of the carbonated soft drinks industry turned their backs for years on the sales growth in the water category - because they were put off by the comparatively lower profitability of water.

"Moving down the value chain, or seeing a reduction of their operating margin, is hardly ever seen as an attractive option for industry players, except when growth prospects are too good to ignore," said Arnaud Langlois of J P Morgan in his "Obesity - Reshaping the Global Food Industry" presentation to the United Nations last October.

His report pointed out that the profitability of most food products normally considered to be healthy, such as water, dairy, soy, fruit and vegetables, is well below average.

Such arguments pose a difficult choice for shareholders in food companies - earn high profits from possibly unhealthy products, or deliver healthier products at lower profit margins.

Now, reducing the fat in potato crisps, or making lower-calorie chocolate bars, may no longer be enough, as governments are pushed to take action against obesity.

And it could be too late for companies to jump on the food health train; new EU rules due next year to combat obesity may make it too expensive to launch wholly healthy products.

The rules could spell trouble for makers of calorie laden soft drinks, ice cream, confectionery and snacks, and ready-to-eat cereals, fruit juice and medicated confectionery could also fall victim to the anti-obesity drive, because of their high sugar content.