1. UK Food and Staples Sector Landscape

The UK Food industry employs nearly 4 million people, and it is the largest sector in the country. The resilient performance of the industry has been overcoming the economic consequences of Brexit. The UK food and drinks industry exports nearly £22.5 billion in trade, and it has the biggest manufacturing industry, which is even larger than the aerospace and automotive industry combined. Moreover, British food manufacturers are pushing the boundaries by developing new technologies to prolong the food shelf life and leverage innovative environments to introduce new products each year.

Key Trends in the Food and Staples Sector

• Ethical Impact – Ethics driven approach is likely to prevail across the value chain. Retails and CPG manufacturers are now opting for healthier choices and environmentally friendly raw materials.
• Reimagine the Stores and Channels – The Covid-19 pandemic and digital advancements have compelled Companies to increase their online presence. Companies are now competing on customer experience and privileged insights than merely on price and product.
• Leveraging Ecosystems – Vertical and Horizontal integrations and collaborations can create new products and services. Companies can create exponential value and address new markets at multiple levels.
• Vegan Food Revolution – The demand for vegan food is constantly increasing, and thus, British food manufacturers are reducing the usage of products containing animal ingredients.

Risk Exposures to the Food and Staples Sector

• Brexit Uncertainty – Food and beverage players can face challenges related to margin pressure, strict regulatory compliance, and investment in innovation due to Brexit.
• Supply Chain Disruption – The Covid-19 pandemic and US-China spat has also impacted the availability and cost of raw materials. Further, Brexit and other uncertainties has affected the inventory patterns, which can result in lower margins and profitability.

Benchmark Index Performance

Based on the last two years performance, the FTSE All-Share Food & Drug Retailers index has outperformed the FTSE 100, FTSE 250, and FTSE All-Share index. The FTSE All-Share Food & Drug Retailers generated a return of about 16.02%; however, the FTSE 100 generated a return of around negative 0.72%, FTSE 250 generated a return of close to 9.41%, and FTSE All-Share generated a return of around 2.57%.

Figure 1: Two Years Benchmark Index Performance

(Source: Refinitiv, chart created by Kalkine Group)

SWOT Analysis

Food and Staples Sector Outlook

Overall, the UK food and staple companies are facing challenges related to disrupted supply chains and reduced consumption. Amid social restrictions, at-home consumption has surged; however, out-home consumption remained subdued. Therefore, inventory pattern is changing in order to adapt with changing demand pattern. This can have a long-term impact on the distribution network, sourcing strategies, and commodity pricing. As per market experts, the total revenue of the UK Food & Grocery sector is expected to reach   £211 billion by 2022. The Covid-19 pandemic has accelerated the shift from offline shopping to online, while the loyalty of customers increased.

Meanwhile, the online market is projected to increase to 8.9% in 2022 from 6.2% in 2019. The value of the online channel has already overtaken hypermarkets in 2020. During the lockdown, local needs were supported by convenience stores, but the overall channel performance was affected. Adjacently, the rising demand for healthier food and beverage holds the potential for a bright future.

The global trends for food companies are challenging, albeit it holds opportunities as well. As per the market analysis, the global specialty food ingredients market is valued at around USD 79.81 billion in 2020, and it is projected to value nearly USD 121.6 billion by 2025, representing the compounded annual growth rate of 6.2% between 2020 to 2025. Meanwhile, the industry is facing increasing raw material cost, and the demand for low sugar food alternatives is putting further pressure. The major drivers for change include rapid population growth, urbanization and the use of technology.

The key factors that will drive the food industry forward are:

• 80% estimated increase in North American meat substitutes market by 2025 to €1.8 billion, from 2018.
• 26% global greenhouse gas emission from food production.
• Around 35 cities, states and national government have introduced sugar tax.
• 30% rise in population by 2050.
• Growing middle-class population from 2.8 billion in 2015 to 5.3 billion by 2030.
• 70 million children are projected to be overweight by 2025 globally.
• Around 114 million diabetic adults were in China in 2017.

2. Investment analysis and stocks under discussion (TSCO, CWK, ABF, DVO)

After gaining insights into the food & staples sector, we would look at the business model of four food & staples players listed on the London Stock Exchange.

A. Tesco PLC (LON: TSCO)

(Recommendation: Buy, Potential Upside: 19.23%, Market Capitalization: GBP 17.36 billion)

Tesco PLC is a United Kingdom-based leading retailer Company. The Company serves millions of clients every week through stores as well as online space. It is listed on the FTSE 100 index.

Valuation Methodology

Our illustrative valuation model suggests that the stock has an upside potential of 19.23% over the closing price of GBX 224.50 (as on 23 February 2021).

B. Cranswick PLC (LON: CWK)

(Recommendation: Buy, Potential Upside: 16.72%, Market Capitalization: GBP 1.83 billion)

Cranswick PLC is an FTSE 250-listed food processor Company. It supplies fresh and value-added food products to UK grocery retailers and food services.

Valuation Methodology

Our illustrative valuation model suggests that the stock has an upside potential of 16.72% over the closing price of GBX 3,480.00 (as on 23 February 2021).

C. Associated British Foods PLC (LON: ABF)

(Recommendation: Hold, Potential Upside: 7.22%, Market Capitalization: GBP 19.43 billion)

Associated British Foods PLC is an FTSE 100 listed Company, which is engaged in the food processing and retailing business. The Company offers a wide variety of products and services.

Valuation Methodology

Our illustrative valuation model suggests that the stock has an upside potential of 7.22% over the closing price of GBX 2,454.00 (as on 23 February 2021).

D. Devro PLC (LON: DVO)

(Recommendation: Hold, Potential Upside: 6.92%, Market Capitalization: GBP 300.17 million)

Devro PLC is an FTSE All-Share listed food producers Company, which is a supplier of collagen casings for the food industry. It conducts its operations through three segments: the Americas, Asia-Pacific and Europe.

Valuation Methodology

Our illustrative valuation model suggests that the stock has an upside potential of 6.92% over the closing price of GBX 177.00 (as on 23 February 2021).

*All forecasted data and peer information have been taken from Refinitiv, Thomson Reuters.

*The "Buy” recommendation is also valid for the current price as covered in the report as on 24 February 2021.

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