(Bloomberg) — The bad news keeps piling up for the makers of everything from snacks to chocolate and booze.
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The latest blow took the form of comments from Walmart Inc., which said this week it’s already seeing an impact on shopping demand from people taking Ozempic, Wegovy and other appetite-suppressing medications. That sent shares of food and beverage companies sliding.
The S&P 500 Consumer Staples Index fell 0.5% on Friday, extending losses after its worst session since January just a day earlier. Modelo maker Constellation Brands Inc. and Kellanova, the company behind Cheez-It and Pringles, dropped on Friday, while Oreo maker Mondelez International Inc. closed at the lowest level since November. The consumer staples gauge suffered its worst week since May, with retailers Walmart, Costco Wholesale Corp. and Kroger Co. also declining.
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“When Walmart mentioned it, I think the concept of weight loss drugs having a broader effect on a wide range of companies really took hold in investors’ minds,” said Steve Sosnick, chief strategist at Interactive Brokers.
In Europe, food and beverage companies also came under pressure. Chocolatier Lindt & Spruengli AG and Anheuser-Busch InBev SA slid, while Nestle SA dropped 2.5%, the most since May.
To be sure, consumer staples stocks have been falling for some time, especially as inflation squeezes household incomes. The industry also tends to pay hefty dividends that look less appealing for investors compared with 5% interest at money market funds. In a note to clients on Friday, Barclays Plc analysts argued that rising interest rates, not weight loss drugs, have fueled the recent drop in consumer staples stocks.
The S&P 500 Consumer Staples Index has significantly underperformed the broader market in 2023, and it’s trading at the lowest level in a year after three straight weeks of losses.
Given the rapid popularity of this new class of weight loss drugs and an early warning from one of the biggest retailers, it’s been enough to spark another round of selling. A recent survey conducted by Morgan Stanley found that patients tended to cut back on meals and snacks while taking weight loss drugs, and also consumed less alcohol and carbonated drinks.
Still, there’s some skepticism about whether the medications will actually cause major changes in consumer buying habits. Investors like Richard Saldanha, global equity fund manager at Aviva Investors, caution against reading too much into the stock-market swings.
“Whilst we know that these drugs do tend to result in suppressed appetite, we think the moves in the share prices do feel somewhat overdone,” he said. “It is far too early to make sweeping conclusions on what this might mean for consumer habits.”
Last month, Nestle’s outgoing Chief Financial Officer Francois-Xavier Roger played down fears the new drugs would hit big food companies, saying the dropout rates were high and that most of Nestle’s categories are protected.
Confectionery, milk and milk products and prepared dishes and cooking aids represent around a third of Nestle’s sales. Shareholder groups criticized Nestle this week for not being ambitious enough in making its portfolio healthier.
Meanwhile, Kellanova Chief Executive Officer Steve Cahillane said earlier this week that the snacking company was studying Ozempic’s potential impact on dietary behaviors so it could respond if needed. Conagra Brands Inc. also said on its earnings call this week that it’s prepared to adapt to potential changes in consumer eating patterns such as a shift to smaller portion sizes.
Bank of America Corp. analysts on Friday said that in the food and beverage space, alcohol, snacking and non-alcoholic drink companies are most at risk with a broad adoption of GLP-1 drugs, a category that includes Ozempic.
“Weight management products (shakes, frozen meals) could also be at risk if their function is no longer relevant,” the analysts wrote in a note to clients. They added that it’s too early to clearly understand the long-term impact on consumption for patients who use the drugs.
PepsiCo will be the first major company in the group to report third-quarter results next week. Sosnick at Interactive Brokers expects Wall Street analysts will be questioning food and beverage companies in earnings calls this quarter about the potential impact of weight loss drugs on their businesses.
“I would find it hard to believe that at least one analyst on each of these calls would not ask him about it,” he said. “It’s too much in the zeitgeist right now.”
–With assistance from Dasha Afanasieva, Jeremy Herron, Janet Freund and Rheaa Rao.
(Updates share-price moves throughout and chart. Adds Barclays commentary in the sixth paragraph.)
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