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Eating at home has become a ‘more permanent change,’ analyst says

Bryan Spillane, BofA Global Research senior food and beverage analyst, joins Yahoo Finance Live to discuss trends affecting food and beverage stocks and the outlook for M&A activity going into 2022.

Video Transcript


JULIE HYMAN: Among the many, many things that have changed in 2021, two stand out. One, more people eating at home over the past two years, really. And two, prices as we know, have been going up. Let’s talk about these trends with Bryan Spillane, he is Bank of America global research senior food and beverage analyst.

Good to see you again, Bryan. I want to ask you about the at-home trend first of all. And you know, of course, people have been excited about being able to get out again this year and going out to restaurants but how sticky do you think the at-home trend is going to be? And how is that going to play out going into 2022 and beyond?

BRYAN SPILLANE: Yeah. You know, we think that there’s a more permanent change in terms of just the versus where we were pre-COVID in terms of just the amount of meals consumed at home. And I think probably one of the biggest things that we underestimated going into 2021 is just the longevity of this hybrid. Whether it’s people working two or three days from home or only a couple of days in the office, we are definitely seeing you know, just a change in behavior, a change in consumption patterns that has just lent itself to people consuming more at home. So I think that’s the first thing.

The other probably more shorter-term variable is just going to be the cost of eating at home versus the cost of eating out. And we’ve seen initially the cost of eating away from home really spike earlier this year, and now the cost of eating at home has also followed that. So the value equation between those two will be really important to watch over the next year or two. But the net of it is we think this hybrid situation is going to be with us for a while for lots of reasons. And that’s going to I think just level set more meals eaten at home going forward than was the case before 2020.

BRIAN SOZZI: Well, Bryan, how do you trade this? Do you go through the frozen food section, do you warm up to the soup aisle, how do you play it?

BRYAN SPILLANE: Yeah. It’s– so we’re looking at it in a couple of dimensions, right? One is the companies that have exposure to both away from home and at home have performed pretty well. So think about like a PepsiCo, Hershey, right, where you can buy it in the grocery store or people will buy it in a convenience store. These– because right now we’re in a position where both away from home in a lot of cases, all channels are up.

The other way to do it is also in beverage alcohol. You think about like a Constellation Brands where they’re selling beer in bars and restaurants, they’re selling beer at home as well. So you know, those stocks that have kind of a leg in both away from home and at home have been a really good way to play that. We think that’ll continue to be the case as we go forward.

JULIE HYMAN: That’s a really interesting point, Bryan, because, at the beginning of the pandemic, there was a lot of concern on the part of Constellation for example, because they weren’t selling into that, they didn’t have that restaurant channel, right, it was closed.


JULIE HYMAN: So it seems like that that– it’s interesting that you’re pointing out that that’s less of a headwind going forward because maybe they’ve expanded their at-home channel and now they’re also getting the away from home channel back up and running?

BRYAN SPILLANE: I think that’s part of it. And part of it is that you’re almost– you’ve got a register in every lane, right? You know, if someone’s away from home, you’re there to capture them away from home, if they’re consuming at home, you’ve got a way to consume them at home as well. So you contrast that with like a Campbell’s soup, which you know if you get into a– they’re more over– they’re overly people eating/consuming at home. So I think having that, that’s almost like a hedge, right? These companies that have that exposure to both channels, you know, are going to be more resilient as the consumer bounces around.

BRIAN SOZZI: Bryan, this has been a pretty good year for deals in the food space. I mean, top of mind for me, Hormel making the acquisition from Kraft Heinz of Planters earlier in the year. What companies are buyers and sellers of assets next year?

BRYAN SPILLANE: Yeah. So it’s a good point, because one thing that’s happened or where we stand today is a lot of these companies had been acquisitive a few years ago, deleveraged their balance sheets, COVID hits, people are– companies are hoarding cash, right? You don’t know what’s going to happen. But now we’ve got a couple– we’ve got companies out there that have the balance sheet capacity to do deals.

So think about Hershey’s, who just made an acquisition of Dot’s, they’ve still got the ability to do more acquisitions Smucker’s, right, is another company that has really delevered its balance sheet. I think it is in a position– and has been reshaping its portfolio in a position to do more deals. Mondelez certainly, on its front foot in acquisitions and they’ve got some equity stakes in other companies they can use to fund deals. We expect them to be acquisitive. And I think you’ll also see potentially more moves within some of the SMID-cap stocks, you know, like a Bell-Ring Brands, or Simply Good Foods, which we don’t cover but these companies may become more attractive as acquisition targets as we move forward.

JULIE HYMAN: And Bryan, finally, as we look to next year, I mean, this year the hallmark of this year for many of these food companies has really been margin expansion as they have had pricing power. What do you think is going to be the big sort of overarching theme next year? Is it going to be a continuation of that trend or what’s going to be the big thing that’s going to drive growth?

BRYAN SPILLANE: Yeah. I think– well, I think there’s two things. One is going to be with the incredible amount of pricing that these companies have pushed through over the last six months, elasticity of demand. You know, and I know we’re seeing this across other parts of the economy with the consumer but at some point, do consumers begin to push back on price increases and make changes. They’re obviously going to eat and drink, but do they trade down, do they buy less, is there any kind of change in consumer behavior with regard to reaction to price increases? Because we really haven’t seen that yet.

I think the second thing, to your point on margins, it’s going to be really important because even though these companies have raised prices, they haven’t even actually been able to protect margins in most cases. So they’ve kind of priced chasing the inflation. So I think another really important factor to watch, especially as we move into the middle of next year where hopefully cost pressures have somewhat peaked, is which companies are able to either hold or expand margins off of this and which ones might have to give back some of the pricing but I think those are the two things, demand volume elasticity, and then the ability to kind of hold or expand margins once inflation peaks.

JULIE HYMAN: Well, for sure, we’ll be checking in with you as the year progresses on both of those fronts and many more I’m sure. It’s always a pleasure to talk to you, Bryan. Bryan Spillane is Bank of America global research senior food and beverage analyst. Appreciate it, Bryan.