The new restrictions that are set to come into place on foods that are high in fat, sugar and salt (HFSS) in the UK will drive ‘meaningful disruption’ for food makers and retailers with high levels of exposure to these categories, according to analysts at Barclays Capital. But will they dent the top line of brands operating in the space?
New rules governing the placement and promotion of HFSS foods will come into force in the UK in October 2022. They will impose media and promotional restrictions on 'unhealthy' products. Volume promotions, such as buy-one-get-one-frees and two-for-one deals, will no longer be allowed for these items. A ban will come into force on HFSS products being placed in secondary promotional locations in stores, such as end of aisle displays, store entrances and checkouts. Marketing of HFSS SKUs will no longer be permitted in digital and pre-watershed TV.
The regulation, according to Barclays analyst James Anstead, ‘could lead to the most significant in-store changes seen in decades’.
“We think that the HFSS rules could create the biggest practical upheaval that the UK food retail sector has seen in several decades. It would be surprising if such dramatic practical changes had no financial consequences, although making exact predictions would be premature at this point,” Anstead suggested.
The analyst noted that the rules are designed to reduce sales of unhealthy foods – and said he’d be ‘surprised’ if they didn’t have ‘some’ impact on HFSS revenue. However, for retailers Anstead suggested that the biggest immediate financial impact is likely to be on ‘commercial income’ – the amount received by retailers from their suppliers to secure promotional opportunities.
Andrew Lazar, a fellow Barclays analyst, explained that the changes are also likely to weigh on companies that are exposed to HFSS categories.
“In our view, this could represent a pretty meaningful disruption to the UK retail industry but also to food producers that have sales exposure in what are likely to be the most affected categories (Mondelez in chocolate and biscuit, for example) – considering that suppliers currently have a free hand to sell products wherever they want in store and use whatever promotional techniques they want, neither of which they will have to the same degree in the future,” Lazar said. “There is clearly potential for a material impact on the business models of some food producers.”
Who is in the firing line?
In the UK, the latest report from the Access to Nutrition Initiative shows 71% of UK sales at 16 of the largest food and beverage manufacturers are generated by unhealthy products.
Six of the 16 companies - Ferrero, Suntory, Mondelēz, Unilever, Coca-Cola and Nestlé – derive 80% or more of their sales from products that score less than 3.5 stars in the Health Star Rating System, the data from Access to Nutrition Initiative (ATNI) showed.
“The average healthiness of product portfolios by some of the largest manufacturers selling in the UK remains concerning, with a mean Health Star Rating of 2.2 out of 5 stars. Poor diets remain the biggest risk factor for preventable ill health in the UK and consumers need easier access to affordable, healthy diets to fight this,” Inge Kauer, Executive Director of the Access to Nutrition Initiative, said.
For Barclays’ Lazar, this exposure points to ‘consequences’ for the industry’s largest players, who are expected to step up their reformulation efforts. “We would expect to see significant product reformulation from manufacturers. A category such as cereals has seen a lot of reformulation already, so that many products can now be classified as non-HFSS. However, there are some product types, such as chocolate bars, where reformulation could struggle to ensure compliance without undermining customer acceptance of the product.”
On confectionery specifically, he suggested that recent shrinkification trend will not shield brands from the implications of HFSS rules. “A lot of the recent changes made by confectionery manufacturers have been related to reducing pack sizes but this does not help avoid the HFSS rules because the rules do not look at portion sizes and instead look at the nutrient content on the basis of per 100g rather than absolute weight.”
This leaves companies like Mondelēz International facing some significant headwinds, the analyst noted. “With roughly 8-9% of sales coming from the UK and with the chocolate and biscuit categories likely to be most impacted, we think Mondelez is likely most exposed on a relative basis amongst our coverage.”
Insight provider IRI estimates that the changes place £1.1bn in sales at risk per year. Chocolate and biscuits top its list of at risk categories, followed by savoury snacks, pizza, ice cream, cake and sugar confectionery.
Estimated sales loss due to HFSS restrictions by product category / Source: Barclays Research, IRI
Will reduce our appetite for HFSS foods?
Back to Mondelez, while the category hit is likely to be a stressor on the top line, Lazar actually believes it could actually play out to the company’s benefit. He said it is important to note that the changes will affect the whole industry and that Mondelez has the advantage of ‘very strong, established brands in the UK’.
“These regulations are not a surprise and Mondelez is likely working with retail partners to deliver against shopper needs while adhering to the government legislation,” the analyst noted, adding that a market reset of the promotional nature of the UK retail space could deliver longer-term gains.
“The UK is one of the most heavily promoted markets in which Mondelez operates and so some cooling of promotional intensity would likely bring it more in line with other markets, which could ultimately benefit Mondelez given the strength of its brands, not to mention enhance its gross margin profile,” Lazar noted.
Ultimately, Lazar doesn’t think that HFSS regulations are going to have a massive impact on UK shopper appetite for treats.
“All in, in our view, shoppers will still want to find their favourite treat or snack in store, even if the location has changed. It is true that the retailers will work with the affected manufacturers to reconfigure stores so their products can still be sold in prominent locations in the middle of aisles. And clearly people will soon figure out where the products are. But intuitively, there could be some impact as these changes go into place.”
While the UK has been the first mover when it comes to placing more stringent restrictions on HFSS products, Barclays does note that a further tightening of the international regulatory environment could be on the horizon. “At this time, we are not aware of similar restrictions in other countries though the success or failure of the above legislation could ultimately impact further adoption moving forward.”
