Will Weight-Loss Drugs Kill the Snack Food Industry?

Are Obesity Drugs Affecting Stock Prices?

“Everybody looks so great. When I look around this room, I can’t help but wonder, ‘Is Ozempic^® right for me?’” quipped host Jimmy Kimmel at the 95^th Annual Academy Awards ceremony in March 2023.¹ The next day, Google metrics showed that web searches for Ozempic, the brand-name drug shown to help users lose weight, reached peak popularity on the search engine. “What is Ozempic?” was the question on searchers’ minds.

“Why is Ozempic affecting our stock price?” might be the question on some CEOs’ minds now.

Ozempic and other weight-loss drugs have shaken the stock market, similar to how generative artificial intelligence reshaped the market in early 2023.

The stocks of companies that developed so-called GLP-1 drugs, specifically Novo Nordisk and Eli Lilly, have been lifted for obvious reasons. But stocks in other industries have been affected for less obvious reasons. The impact on prices depends on the logic for guessing how an easier path to losing weight might change a company’s business model.

Some of this reasoning may seem far-fetched, like the notion that airlines could save money on jet fuel if passengers were slimmer. With food and beverage stocks, the thinking is more straightforward: If Ozempic and similar drugs make people eat and drink less, the companies selling food and drinks will have more trouble selling their products.

But we think the reality is more complicated than that.

While we believe these drugs pose a risk worth watching, it’s too soon to know how meaningfully they will affect food and beverage companies over the long term. It’s challenging to distinguish the impact of GLP-1 headlines from company- or industry-specific issues when assessing how much food or beverage stocks have been affected. However, we believe the market may have overreacted.

Food and beverage companies have a history of innovating their products to suit shifts in consumer trends and preferences. Some have global portfolios, meaning they sell their products worldwide and carry brands specific to certain markets. This limits their exposure to developed markets like the U.S., which has a high obesity rate and access to GLP-1 drugs.

Moreover, the market has reacted as though GLP-1 use will soon become common and long-lasting when evidence suggests that factors like cost, insurance coverage and adherence rates may not live up to the hype.

Are the Impacts of GLP-1 Drugs on the Snack Food Industry ‘Overblown’?

Early in October 2023, Walmart's U.S. CEO John Furner told Bloomberg that Ozempic and similar drugs had caused its customers to buy less food, based on the retailer’s ability to analyze customer buying habits.² The article’s headline read, “Ozempic Is Making People Buy Less Food, Walmart Says.”

Around the same time, the Wall Street Journal published an article that suggested big food companies and their investors had to confront the possibility of people eating less as weight-loss drugs proliferate.³ It quotes a 50-year-old woman taking Eli Lilly’s Mounjaro^® who said she now buys fewer groceries and better manages her tendency to overeat to deal with stress.

“I still have a fully stocked kitchen, there’s chips and pretzels in there,” she told the newspaper. “I don’t find it tempting.”

Snack company Mondelēz International was among the food companies whose stocks declined in the days following the publication of these two articles.

While Mondelēz is based in Chicago, the maker of snacks ranging from Clif Bars (“healthy”) to Sour Patch Kids candy (less healthy) makes most of its money overseas. Mondelēz made 30% of its net revenues in North America for the first three quarters of 2023.⁴ This means the company has less exposure to the U.S., which leads the world in obesity rates and is the likeliest to have early uptake of GLP-1 drugs.

Either way, Mondelēz CEO Dirk Van de Put seems tired of talking about GLP-1s, calling the topic “overblown,” and insisting the drugs would have no short-term impact on company results.⁵

“But long term, even using the most optimistic forecast, we believe the impact will be very modest to our volumes in our categories,” Van de Put said during a November 2, 2023, earnings call. “We’re talking about 0.5% to 1% volume effect 10 years down the road.” That assumes, he added, significant adoption rates of the drugs.

Meanwhile, Pennsylvania-based confectioner Hershey generates more than 90% of its sales in North America. This puts the company squarely in the crosshairs of investors concerned about GLP-1s’ effect on snack makers.

What Hershey has going for it, though, is a long history of responding to changing customer preferences. Even before the GLP-1 craze, the company launched a “better-for-you” strategy to address the broad shift to healthier no- and low-sugar snacks.

Will GLP-1s Become More Accessible?

The New England Journal of Medicine recently supported Van de Put’s view in an editorial about a study showing that weight-loss medication Wegovy^® also reduces the risk of heart attacks and strokes in people with preexisting cardiovascular disease.

The editorial notes that, despite the benefits, GLP-1s “come with a significant cost to both patients and to society and the current pricing … which makes this treatment inaccessible for many.”⁶

Cost is among several factors that could slow the adoption of GLP-1s despite their appeal for helping people lose weight beyond changing their lifestyles.

Ozempic’s list price is $970 for a month’s supply, while Wegovy goes for $1,350.⁷ That’s more than most people will likely want to pay out of pocket. And insurers have reservations about covering these drugs, with most currently choosing not to cover them.

An October 2023 employer survey found that while 81% of the respondents believed GLP-1 drugs would interest their employees, only 25% covered the treatment, but 43% intended to cover it in 2024.⁸

Insurance plans will likely require insureds to enroll in health programs and have specific body mass index readings or other health characteristics before approving coverage for GLP-1s.

And then there’s Medicare, which doesn’t cover the use of drugs to treat obesity due to a 2003 law establishing Medicare Part D. This provision leaves GLP-1s out of reach for many elderly Americans.

There are also questions about how long people taking GLP-1s will stick with them. Prime Therapeutics, a pharmacy benefit manager, surveyed people taking GLP-1s for weight loss and found only 27% continued taking them after one year.

A separate study published in the journal Diabetes, Obesity and Metabolism found that two-thirds of those who take weight-loss drugs regain excess weight after they stop taking the medications.⁹

These barriers are part of why food companies think they can adapt to a world with GLP-1s in the near term. Various analyses suggest the actual headwinds to food companies may be less pronounced than the market’s reaction seems to indicate.

Forecasts Expect Limited Uptake of GLP-1s

A recent Bernstein Research article said that while it remains difficult to predict the extent to which people will take GLP-1s, the impact on calories consumed appears to be muted.¹⁰

“If over the next 5 years, the (percent) of U.S. adults using these drugs for the long term scales to 10%, we would only see a 2.5% reduction in calories consumed over this time frame, for an annual headwind of 0.5% per year,” Bernstein said. “Of course, this could be higher if tolerability and willingness to trial these drugs scales up meaningfully further and faster than this.”¹¹

A research note from Morgan Stanley said food companies could manage a low single-digit impact on calorie reductions from GLP-1. That’s partly because of the industry’s ability to innovate with its products and reshape product portfolios to meet changes in consumer demand and preferences.¹² For example, food companies could offer low-calorie versions of their products or sell products in smaller package sizes.

The Morgan Stanley report also suggested that GLP-1s might create additional headwinds for companies selling snacks and confections, potentially motivating them to develop healthier alternatives for their usual lineups of salty or sugary snacks.¹³

How Will GLP-1s Affect the Beverage Industry?

People don’t generally consume beverages to fill up or quell hunger pangs. They pour a glass of fruit juice because it goes well with breakfast or open a can of beer to relax or ease a social interaction.

These dynamics, and others, make it more challenging to assess the impact of GLP-1s on the beverage industry.

We see GLP-1s as a potential risk factor for the beverage market. But we see these drugs affecting beverage companies less than other sectors for one primary reason: Beverage companies tend to have global product portfolios.

Heineken, for example, makes less than 10% of its sales in the U.S., while nearly 60% comes from emerging markets. Anheuser-Busch Inbev also has a large share of sales to emerging markets. This means most of the demand for these beer companies comes in areas where obesity rates are lower, and people are less inclined to consider trying GLP-1 drugs, even if they become available in the next few years.

Keurig Dr Pepper (KDP) has more exposure to the U.S. than Coca-Cola and PepsiCo and has underperformed those two companies. We suspect GLP-1s might have contributed to KDP’s underperformance, but the company has also struggled to grow its coffee sales, making it hard to separate the impact of GLP-1s.

As with food stocks, we think beverage companies have time to adapt to potential headwinds from GLP-1 drugs. This can be achieved by promoting smaller portions or healthier alternatives to their standard products. Soft drink makers can offer low- or no-calorie versions of cola. And beer brewers can promote non-alcoholic or reduced-calorie beers. These options have already become some of the fastest-growing parts of their product portfolios.

To highlight the complexity and diversity of the presumed effects of GLP-1s on beverage companies, consider the case of energy drink maker Celsius. Its stock has surged on the assumption that it will benefit from a “fitness dividend” because it markets low-calorie, low-sugar drinks targeted at the fitness market.

The fitness connection is meaningful because a significant portion of the weight loss that these drugs achieve comes from muscle and lean body mass. As a result, patients interested in managing body composition, not just body weight, do well to exercise while taking the drugs.

Add the fact that weight loss with these drugs accelerates when paired with exercise. This suggests the possibility that the drugs might paradoxically encourage exercise rather than eliminate the need for it.

Weight-Loss Drugs’ Impact on Food & Beverage Stocks: Our Perspective

It’s too soon to know how GLP-1s will affect food and beverage stocks. We certainly think it’s something to monitor.

However, we also believe that, in many instances, the stock market has assumed the worst possible impact of GLP-1s on various businesses. Right now, we see muted effects on the food and beverage companies we follow.

This is a classic example of headline risk. The market latches on to a supposed trend and overreacts. However, these reactions tend to gloss over the nuances of how new variables can affect different companies over time.

They can also overlook how management teams often adapt product lines to meet changing market conditions, particularly for consumer-facing businesses. That’s why we believe in the importance of company-by-company analysis and security selection.