The food industry is in a state of upheaval due to two forces -- shifting consumer preference for food that's good for you and the entry of one of the most disruptive companies on the planet: Amazon (AMZN) . How can investors play this shift?
Let's look at who's well-positioned to benefit:
Amazon's purchase of Whole Foods Market in 2017 and its move into private-label food products like the Wickedly Prime and Mama Bear brands show that the playing field is clearly changing.
It's no secret that consumers are shifting their purchasing dollars online. Part of that's due to convenience, but it's also because consumers are trying to stretch their disposable-spending dollars given tepid wage growth and the need to fend off returning food inflation.
However, one downside for food companies in this shift to online sales is the lack of traditional "shelf space" that can captivate shoppers into buying something new. Rather than seeing a sea of chips, cereal or soda from PepsiCo (PEP) , General Mills (GIS) or Post Holdings (POST) , online shoppers often see just one item at a time.
But the odds are that food companies will figure out how to contend with this shift. Perhaps they'll use digital couponing from Quotient Technology (QUOT) . You can also find similar efforts underway at the digital offerings from Wal-Mart Stores (WMT) , Costco (COST) and, of course, Amazon. (We hold AMZN in Trifecta Stocks, a model portfolio that I co-manage for TheStreet.)
A greater threat for traditional food companies is the ongoing change in consumer tastes toward natural, organic and/or "good-for-you" foods. This includes paleo, gluten-free or other diets, as well as growing consumer resistance to genetically modified or chemically treated food ingredients.
Grand View Research expects the global organic food-and-beverage market to reach $320.5 billion by 2025, up from $77.4 billion in 2015. At the same time, we continue to hear of rising obesity levels and the growing "War on Sugar" that are forcing foodmakers to alter their formulations. That's a positive for International Flavors & Fragrances (IFF) , another holding of the Trifecta Stocks model portfolio.
Given this shift toward healthier eating, we've seen several traditional companies acquire natural-foods makers. For instance, General Mills bought natural-foods firm Annie's in 2014, while Hershey (HSY) acquired protein-friendly jerky maker Krave in 2015.
Danone (DANOY) also bought healthy-foods maker WhiteWave in 2017, while Utz Quality Foods recently announced plans to buy healthier-snacks firm Inventure Foods. And just last month, Hershey agreed to pay some $920 million for Amplify Snack Brands (BETR) , while Campbell Soup (CPB) cut a deal to acquire snack-food company Snyder's Lance (LNCE) for about $4.9 billion. (Stocks Under $10, another model portfolio that I co-manage for TheStreet, holds Amplify Brands.)
We've seen this kind of M&A activity before in the beverage industry by the likes of Coca-Cola (KO) , PepsiCo and others. They all pivoted from soda pop and other sugary beverages to teas, juices, waters and in some cases milk-based products.
Odds are we'll continue to see a similar consolidation in the packaged-food-and-snack sector. Should M&A activity escalate further, buyers will have to pay up to acquire the remaining acquisition targets.
What Stocks to Buy
Investors looking to position their portfolios to take advantage of this shift toward good-for-you foods should consider buying International Flavors & Fragrances, spice manufacturer McCormick & Co. (MKC) and organic-products distributor United Natural Foods (UNFI) , which look well-positioned to participate.
You might also consider General Mills and Campbell Soup, which have both been pivoting their business mix in that direction.
For those looking to capture exposure to the shift toward online food sales, Amazon looks like a likely winner given its ownership of Whole Foods. So does Costco Wholesale given its Instacart partnership. Lastly, Walmart looks like another likely winner given its big push into online sales.