Food Financials

On October 31, 2013, the Internet exploded when Kraft announced that they are reformulating some of their signature mac and cheese products to be more nutritious. They announced that they are ditching artificial dyes to make room for better ingredients.

And while boxes of mac and cheese may not be the first thing you think of when it comes to overhauling our kitchens, it is an important one. It’s a staple across the country, and food has a massive impact on us, and up until this announcement, it had been loaded with artificial colors derived from peteroleum byproducts.

Today it is estimated that 50% of Hispanic and African-American children will develop diabetes, that 1 in 90 boys has autism, and that 1 in 4 children has asthma. The Journal of Pediatrics reported that from 2002-2005, there was a 103% increase in diabetes medication for children, a 47% increase in asthma medication, a 41% increase in ADHD medication and a 15% increase in high cholesterol medicine.

Something has to change.

And while the science may be disputed, depending on who is funding the study, as to whether commonly used food dyes such as Yellow 5, Red 40 and 6 others made from petroleum pose a “rainbow of risks” that include hyperactivity in children, cancer (in animal studies), and allergic reactions, because of the problem of hyperactivity, the Center for Science in the Public Interest petitioned the Food and Drug Administration to ban the use of these dyes given that the British government and European Union have taken actions that are virtually ending their use of dyes throughout Europe.

Who knew? Why would an American company pump this stuff into their products? But the analyst in me that covered the food industry knew the answer to that one—because it’s cheaper to use fake ingredients to color food than it is to use real ones.

As I dove into the research, information began to pour out. Much of it highlighted health concerns, and associations to things like hyperactivity, asthma and allergies, but something even bigger stood out: the fact that our very own American companies were making their products differently for eaters overseas. They were using real ingredients, not these artificial colors.

In an article published by the Food and Drink Federation, a Web site that monitors food issues in Europe, Jess Halliday reported that “Asda [U.K. Wal-Mart] has pledged to remove any artificial colours or flavours from its 9,000 own label products, as well as aspartame, hydrogenated fat, and flavour enhancers such as monosodium glutamate.”

Wow. Why was the U.K. Wal-Mart rushing to make such healthy choices, when the U.S. Wal-Mart still offered the same old stuff? Wal-Mart had even been slapped by a lawsuit from the Ajinomoto, the company that now makes aspartame, which claimed that U.K. Wal-Mart’s publicizing of its aspartame-free products was a kind of defamation—all while U.S. Wal-Mart continued to use the sweetener.

Can you imagine how grateful parents in the UK must be when they read this? “[U.K. Wal-Mart] will also meet the Food Standards Agency’s salt-reduction targets–two years ahead of the 2010 deadline,” the article continued.

It struck me as amazing, given how hard fought this issue has been over there. Over in the U.K., our American companies rushed to meet government standards two whole years before they even go into effect. It begs the question, why?

According to Asda/U.K. Wal-Mart food trading director Darren Blackhurt, “We know that our customers, particularly those that are mums and dads, are becoming more and more concerned about what’s in the food they buy.” Indeed, the article continues, “consumer awareness of nutrition and food quality in the UK has soared in the last few years. . . ” Accordingly, U.K. Wal-Mart was planning to spend 30 million pounds, or about $50 million, to reformulate its product line, adding that, “in the main, taste will be unaffected.”

Pretty stunning, right? Clearly learning about this remarkable decision is sure to leave a few American parents a little hyperactive. And if you look at the decision a little more closely, you will discover that Asda/Wal-Mart was far from the only British company to respond to the Southampton Study in such a dramatic way. According to the Food and Drink Federation in the U.K., several companies—whether British-based or British division of American corporations—had started offering their customers color- and additive-free processed foods.

“We are aware of the recent publication from the University of Southampton on selected artificial colours, and we will continue to follow the guidance of regulators on this issue.”—Coca- Cola Great Britain. And in fact, on May 27, 2008, the story broke that Coca Cola was removing sodium benzoate from its products—but only in the U.K.

“Kraft Foods UK has no products aimed at children that contain the ingredients highlighted in the FSA [Southampton] study. . . . [W]ith our recent Lunchables reformulation in the UK, we reduced fat and salt, as well as removed artificial colours and flavours. Without compromising quality, taste and food safety, we will continue to see where we can make changes and still meet consumer expectations.”—Kraft Foods UK

“We know that artificial colours are of concern to consumers, which is why, in 2006, Mars began a programme to remove them from our products. . . in November 2007, Starburst Chews became free from all artificial colours. . . . in December 2007, Skittles were made free from all the artificial colours highlighted in a landmark study by Southampton University. . . We have already removed four colours mentioned in the Southampton study from Peanut and Choco M&M’s, and are in the process of removing the final one so they too will be free from these artificials during 2008.”—Mars UK

“Nestlé UK does not manufacture children’s products that contain any of the additives investigated by the FSA [Southampton] research. . . . and from September 2007, the UK’s favourite kids’ chocolate brand—Milky Bar—is to be made with all natural ingredients.”—Nestlé UK

“We are committed to replacing all artificial colours in our sweets. We note the Southampton University findings, but we had begun this process already because we are continually listening to our customers.” —UK Cadbury Chocolate division

Every time I read over those quotes, I find them absolutely stunning. Why are companies that operate in the U.K.—including our very own U.S. companies—so eager to take out the artificial colors there and so completely reluctant to do so here? Why are they willing to spend the money to reformulate their products there while refusing even to consider such a change-over here?

Maybe the answer can be found in a BBC report on Asda/U.K. Wal-Mart, “Explaining its decision to halt the use of artificial colours and flavours, Asda said it was acting because ‘mums and dads are becoming more and more concerned about what’s in the food they buy.’” An Asda/U.K. Wal-Mart press release elaborates: “Reformulation was hard work, but it was a labour of love.” Well, why can’t they perform that same labor of love over here? Is it too much to ask for what they have overseas?

After all, we’re not asking them to reinvent the wheel—they’ve already removed these ingredients from their products elsewhere. So why can’t our children get the same protection? Why can’t they serve up the same products to us?

Thankfully, Kraft is stepping up. For the last twenty years, parents and eaters have been calling for this change. In no way is that more obvious than in the work of Annie Whitley, a mom who wanted to feed her kids mac and cheese without the junk and fake food colorings in it. Her passion was so strong that a company was built up around this vision, and Annie’s was born, a company that has since gone public. Her concerns were addressed by science out of the Center for Science in the Public Interest. Recognizing the importance of the studies being conducted overseas (and the industry funded nature of the studies being conducted here), they got down to the scientific research, publishing reports like “Rainbow of Risks” in an effort to inform parents.

Perhaps Kraft saw the writing on the wall when another mom stepped forward with a petition to the makers of M&Ms to get the fake food colors out of those products, too. It continues to go viral here. New companies like UNREAL are showing it can be done, which begs the question: why are we still doing it the old way when these new and improved solutions are available to us?

The answer is: we don’t.

The people that have been on the frontline of our children are owed such enormous gratitude for this work. Courage is contagious, and it’s time for a tsunami of bravery by industry. Consumers are ready, executives with young children are ready.

Consumers have incredible power when it comes to creating changes in our food system. Annie’s successful IPO in 2012 demonstrated it, as well as Chipotle’s recent announcement to source ingredients that are not genetically engineered. Their stock soared to record highs on the announcement.

The list of artificial and fake ingredients in our food is long, but our own American companies have removed these ingredients, from artificial growth hormones, to growth promoting antibiotics, to ingredients even used in yoga mats, from the products they sell overseas. They can do the same thing here.

As people around the country lend their talents to this food awakening, one thing is clear: the days of cloak and conceal are over, and food companies that step forward and embrace this changing consumer demand for less junked up food will be rewarded both in the media and in the marketplace.

The incentives are aligned, the question is: which company will be next?

Almost 20 years ago, I was in business school. I knew I wanted to be an equity analyst. I was recruited by Enron and Exxon but was fascinated by the ever-changing marketplace and the management teams I’d met during my internship on the fixed income side of things.

I received a full scholarship to business school and graduated as the top woman in my class. “We wanted to make sure you could talk…” was essentially how the interview started. And friendships and mentorships began.

I covered small and mid cap companies, met management teams of companies going public, people like the execs of Goldman Sachs, Meg Whitman of Ebay, and others. As well as the management teams from the large cap side, attending their meetings whenever I could, convinced there was much to be learned from those that had successfully navigated the massive landscape of small scale to industrial. We met with the management teams from Kroger, Home Depot and others.

It was all about managing shareholder expectations, cost benefit analyses, marketing campaigns and influencing consumer demand.

Why am I writing about this now? I have been reflecting on my old job a lot lately. The portfolios we managed, the brands we knew. I can not help but think about the companies that I covered as an analyst and the brands that we were raised on. They are iconic. Coca Cola, Kraft, Burger King and others. But as the health of our families are challenged, and the landscape of childhood changes, will these brands become obsolete?

Today, 41% of us are expected to get cancer in our lifetimes—1 in 2 men and 1 in 3 women. It wasn’t that way fifteen years ago. If these companies fail to adapt to this changing landscape of health, ditching ingredients and products that mounting scientific evidence shows are causing harm, will an analyst who takes my old seat on the desk in fifteen or twenty years even know their names? Or will they go the way of the fax machine, found on occasion, but replaced by newer technologies that meet the demands of a changing marketplace?

Because the truth is that as the landscape of health changes, so does the landscape of food. And what we are seeing is an exploding demand for clean products: products that are allergen-free, free from artificial dyes, artificial growth hormones or other ingredients that were created in a lab to drive shareholder return.

We are also seeing early adopters define the marketplace. You only need to look to the initial pubic offering of Annie’s last year, which saw the biggest opening day gain for any company of any sector in any industry, in almost a year. Others have followed and could trigger a string of IPOs. The New York Times is writing stories about venture capital money is flowing into the clean food sector. How is it possible that amidst all of the new technologies that Wall Street got the most excited about a bowl of mac and cheese? One that wasn’t hopped up on junk, junk that just wasn’t in our mac and cheese when we were kids: things like artificial growth hormones, genetically modified ingredients engineered to produce their own pesticides, food dyes made from petrochemicals.

Maybe because our future economic growth depends on the health of our society.

Companies like Annie’s, UNREAL and others are reinventing food. They are removing synthetic ingredients created in laboratories to mimic the originals. Ingredients that we thought were awesome advances in technology, that drove enormous shareholder return, until we realized that there were hidden costs.

As consumers wake up to the fact that we are now bearing that costs of these artificial ingredients, externalized costs that come to us as our food supply is increasingly hopped up on ingredients that are fake, companies and entrepreneurs that are not afraid to let go of the past and embrace the future are listening. They are inventing smarter products, free from artificial ingredients, genetically engineered ingredients and other things that simply did not exist when we were kids. They are returning food to its cleanest form, and many are trying to do it in a way so that it is affordable to all Americans, not just those that can shop in specialty grocery stores or afford organic foods.

Why? Because the bottom line is that what food companies do to affect their bottom lines affects ours, too. Sometimes it is in the form of health care costs associated with diabetes, asthma, allergies or obesity. Or the costs that come from treating a child who has cancer. It may not be direct, but mounting scientific evidence continues to show that it is happening. And while, in the short term, companies may be able to externalize these costs, our society can’t. We eat them, in one shape or another.

For the health of our loved ones, our families and the future of our country, we have to address this.

As venture capital firms invest in these clean food entrepreneurs, they are investing in so much more than a start up. They are investing in a better food system for all of us, helping farmers break their dependency on oil-derived chemical inputs to providing online resources and apps that help us make sense of what is happening to our food. They are investing in solutions that help address our growing health care crisis: clean, safe food for all Americans. They are investing in the future of our country.

And as patriotic as it may be, it is also intelligent investing, especially in light of the escalating rates of cancers, allergies, autism and other conditions that are stealing parts of our hearts and forcing us to read labels like never before.

Because just as the big food companies see the short term artificial financial boost of swapping out real ingredients replacing them with artificial ingredients, small food companies are seeing enormous demand when the opposite happens: when they swap out the artificial junk and restore food with real ingredients.

And as the success of the clean food sector continues, from farmers growing crops without the genetically engineered chemical operating system to companies like Annie’s, White Wave and little ones like UNREAL that are fighting like crazy to manage their cost structures so that you will get a chance to eat their products, perhaps an analyst sitting at my old desk fifteen years from will only know these newer brands.

There’s a growing chance that his or her portfolio of food stocks will only represent this new sector of the food economy, if the sick food economy becomes obsolete.