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Equity Research
6 January 2020
FOCUS
Barclays Capital Inc. and/or one of its affiliates does and seeks to do business with
companies covered in its research reports. As a result, investors should be aware that the
firm may have a conflict of interest that could affect the objectivity of this report. Investors
should consider this report as only a single factor in making their investment decision.
This research report has been prepared in whole or in part by equity research analysts
based outside the US who are not registered/qualified as research analysts with FINRA.
PLEASE SEE ANALYST CERTIFICATION(S) AND IMPORTANT DISCLOSURES BEGINNING ON PAGE 44.
Restricted - Internal
Global Consumer Staples
20 for 2020
Not another year-ahead document: Rather than start the year with a dry Staples outlook
report, we thought it would be more instructive to task each of the Barclays Global Staples
analysts with writing a pithy two-pager on their highest conviction ideas for the current
year. The idea could be a stock, a theme, a possible piece of M&A, management change
or anything Staples-related which could shape the 2020 debate. More than 35 ideas were
submitted, but were condensed down to the 20 most actionable.
Conviction ideas: Of the 20 that made the cut, six were single-stock ideas, with two
each from Beverages, Food and US Staples. In Beverages, Laurence Whyatt argues that
there is an attractive Heineken margin story with consensus too low (Heineken: FY20:
the year of margin expansion, 6 Jan 2020), and also Pernod where he believes that there
is a good chance that it will upgrade guidance at the H1 stage. In US Staples, Lauren
Lieberman argues that P&G’s renaissance is just at the beginning and Coca-Cola could
become the next P&G. Warren Ackerman looks at AB Foods, believing it is
misunderstood and that it could see further gains in 2020. He also looks at Nestle’s top-
line performance gaps and what needs to happen to get to 5% OSG long term.
Management change: Unilever, Reckitt, Kraft Heinz and Henkel all appointed new CEOs
in 2019. Three of the 20 ideas relate to this theme. HPC analyst Iain Simpson argues
that RB will retain its HyHo division for now, and that despite a new CEO at Henkel it still
remains the favourite to acquire the Coty Professional assets. US food analyst Andrew
Lazar makes the case that the new Kraft Heinz CEO has significant cost-saving fuel to
fund a material increase in investment to drive its ailing top line and stabilise EBITDA in
2020. After Unilever lowered sales guidance before Christmas, citing EM challenges, we
look at Chinese regulatory changes around animal testing, which may impact cosmetics.
Tobacco and Food Ingredients: Tobacco analyst Gaurav Jain argues that US cig volume
declines could surprise positively and the FDA news that Snus is less harmful than cigs is a
game-changer. Ingredients analyst Arthur Reeves makes the case that the $45bn
acquisition of Dupont’s nutrition business by IFF could spur food ingredients consolidation
and that increased outsourcing from Staples companies will drive better Ingredients growth.
Sector trends that could surprise: Agribusiness analyst Ben Theurer believes the
African Swine Flu could really bite in 2020. Warren Ackerman looks at the rapid growth
of oats in plant-based dairy, and Ewan Mitchell and Lauren Lieberman discuss the
regulatory landscape in soft drinks. The team also look at the increasing efforts that the
sector has made in recent years to stem the tide of disruptors, as well as at early signs
of life from some struggling US categories, such as yoghurt, frozen and US mass skin
care. Finally, the team assess FMCG plastic commitments and conclude that they look a
stretch, with costs likely to come in higher than expected.
INDUSTRY UPDATE
Americas Agribusiness
NEUTRAL
Unchanged
European Consumer Staples
NEUTRAL
Unchanged
U.S. CHPC & Beverages
NEUTRAL
Unchanged
U.S. Food
NEUTRAL
Unchanged
European Consumer Staples
Warren Ackerman
+44 (0)20 3134 1903
Barclays, UK
Iain
Simpson
+44 (0)20 7773 3616
iain.simpson@barclays.com
Barclays, UK
Laurence Whyatt
+44 (0)20 7773 5324
laurence.whyatt@barclays.com
Barclays, UK
Gaurav Jain
+44 (0)20 3555 2501
Barclays, UK
U.S. Food
Andrew
Lazar
+1 212 526 4668
BCI, US
U.S. CHPC & Beverages
Lauren R. Lieberman
+1 212 526 3112
lauren.lieberman@barclays.com
BCI, US
Americas Agribusiness
Benjamin M. Theurer
+52 55 5241 3322
benjamin.theurer@barclays.com
BBMX, Mexico
Barclays | Global Consumer Staples
6 January 2020 2
Contributing Authors
European
Consumer Staples
Warren Ackerman
+44 (0)20 3134 1903
Barclays, UK
European Consumer Staples
Arthur Reeves
+44 (0)20 7773 3622
Barclays, UK
European Consumer Staples
Iain Simpson
+44 (0)20 7773 3616
iain.simpson@barclays.com
Barclays, UK
European Consumer Staples
Laurence Whyatt
+44 (0)20 7773 5324
laurence.whyatt@barclays.com
Barclays, UK
European Consumer Staples
Gaurav Jain
+44 (0)20 3555 2501
Barclays, UK
European
Consumer Staples
Ewan Mitchell
+44 (0)20 3134 3724
ewan.mitchell@barclays.com
Barclays, UK
U.S. Food
Andrew Lazar
+1 212 526 4668
BCI, US
U.S. CHPC & Beverages
Lauren R. Lieberman
+1 212 526 3112
lauren.lieberman@barclays.com
BCI, US
Americas Agribusiness
Benjamin M. Theurer
+52 55 5241 3322
benjamin.theurer@barclays.com
BBMX, Mexico
Barclays | Global Consumer Staples
6 January 2020 3
CONTENTS
Contributing Authors ................................................................................................................................ 2
BIG PICTURE ....................................................................................................... 4
1) Large Cap Staples – The Empire is fighting back ....................................................................... 4
2) Signs of life in challenged categories ............................................................................................ 6
3) Food Ingredients – Further consolidation likely in 2020 .......................................................... 8
STAPLES MEGA CAPS HAVE MORE ROOM TO RUN ............................. 10
4) Nestle – What needs to happen to get to 5% OSG .................................................................. 10
5) The resurgent P&G – We think it’s just the beginning ............................................................ 12
6) The Coca-Cola Company: Is this the next P&G? ....................................................................... 14
CAN THE NEW BREED OF CEO’S DELIVER? .............................................. 16
7) RB to retain HyHo for now ............................................................................................................. 16
8) Henkel to buy Coty Professional assets? .................................................................................... 18
9) KHC supply chain opportunity – Continuous vs episodic ....................................................... 20
10) Heineken’s margin outperformance in 2020 .......................................................................... 22
11) AB Foods to outperform in 2020 ............................................................................................... 24
12) Pernod to raise guidance at 1H 2020 ....................................................................................... 26
SIGNS OF LIFE IN THE TOBACCO SECTOR? ............................................. 28
13) US cig volume could surprise to the upside ............................................................................ 28
14) Snus and Modern Oral to stand out from the rest of tobacco on regulation .................. 30
SECTOR TRENDS TO WATCH OUT FOR ................................................... 32
15) African Swine Flu to really bite in 2020 .................................................................................... 32
16) FMCG outsourcing to drive Ingredients companies’ top-line acceleration ...................... 34
17) Changing Chinese animal-testing rules could change the competitive landscape for
cosmetics ................................................................................................................................................... 36
18) Oats – The hot new trend in plant-based dairy in 2020 ....................................................... 38
19) Health & Soft Drinks: Either self-regulate or be regulated ................................................... 40
20) FMCG 2025 plastics targets are a stretch and costs could be higher than expected .... 42
Barclays | Global Consumer Staples
6 January 2020 4
BIG PICTURE
1) Large Cap Staples – The Empire is fighting back
Looking to 2020, we continue to expect CPG manufacturers to fend off disruptor brands
by embracing shifts in consumer preferences and working to adapt quickly. It is well
understood, in our view, that the pace of industry disruption has picked up over the years as
upstart brands leverage lower barriers to entry, big innovation wins from large CPG players
have been few and far between, and consumers have been more accepting of new, smaller
brands given their ability to address changing trends and resonate with consumer
principles. Indeed, the rapid nature of technological advances in digital marketing, the rise
of e-commerce and the consumer desire for convenience through DTC (Direct-to-
Consumer) have all made it easier for smaller companies to disrupt the CPG industry.
Further, brand loyalty has been declining as younger consumers are more willing to
experiment, corroborated by a Nielsen survey in which one third of consumers claimed they
are less loyal than they were 5 years ago (see Nielsen BASES Breakthrough Innovation List
For 2019 Announced Today, Forbes).
As such, we’ve long looked for a sense of urgency across our coverage universe to see
companies pursue aggressive change in the context of increased threats from smaller
upstarts. In fact, recall that in our 05/01/18 note “A Year After The Sphere (of Despair)”, we
stated that while incremental pressure was becoming more evident in results, in our view,
many CPG companies were still not being honest with themselves about the future
implications of staying within their comfort zone.
We concluded that companies needed to be more proactive when it comes to developing
and executing on transformational, sustainable initiatives that could prove critical to
preserving long-term competitiveness in the marketplace, despite near-term costs and
potential margin impacts.
With this in mind, 2019 closes out a full year in which we have heard incumbents talk about
investing in top-line growth, and prioritizing dollar profit growth over margin expansion (as
the latter can be still achieved with a declining sales base). We believe incumbents have
finally woken up, so to speak, and are embracing the shifts in consumer preferences and
working to become quicker to adapt. When we initiated on EU Food in April-19 our note
was called ‘disrupting the disruptors’ and we think this thesis has broadly played out (full
note here). Nestle, for example, has reduced its speed to market from concept to on shelf,
from more than two years on average (18 months ago) to less than nine months now.
To be sure, in our view, speed alone does not necessarily translate to success. However, as
large CPG players embrace the notion of “fail fast” and work to address changing consumer
needs while leveraging their scale and resources, we expect the tide to continue to turn.
We are encouraged by the many ways in which CPG manufacturers have chosen to
reinvest to make their brands more consumer-centric, which is beginning to manifest in
improved fundamentals.
In marketing, we’ve noticed a broad-based emphasis across our coverage universe on
investing in data and analytics to better predict consumer trends and subsequently to launch
more on-trend innovation such that new products can be brought to market faster and more
effectively. We’ve been particularly encouraged by the speed at which large manufacturers
have identified the importance of purpose, particularly evidenced by brands that also have a
social mission (e.g., P&G through its Always #endperiodpoverty campaign and GIS through
Nature Valley’s partnership with the National Parks Foundation).
Barclays | Global Consumer Staples
6 January 2020 5
FIGURE 1
A few remarks from large CPG manufacturers which we believe shows an industry wide move to disrupt the disruptors
Company Notable Quote
CL
"We're now getting far more agile with our innovation in our consumer innovation centers around the world to be more predictive
of what things are going to become, more sensing going on to what's happening in the marketplace and an agile way of working
through our innovation in our cross-functional teams to bring new products to market faster, and the early results that we're
seeing, particularly coming out of the testing that we're doing in Latin America, moving from about 18 months or greater to 6 to 1
2
months and in some cases, even faster than that." CEO Noel Wallace 04/09/19
CPB
“Probably nowhere we need to step up our game more is in the world of innovation...if you think about the old CPG model, you'd
embark on these long consumer research programs, market structures, a year, 2 years of defining insights...If you follow that
model
today, 4 disruptor brands are going to beat you to the space and probably 2 or 3 private labels...There is no reason why larger CPG
companies can't compete with disruptor brands. But we've got to play differently. The power of our scale and the clarity of our
brands should be an advantage” CEO Mark Clouse 06/13/19
KO
"In the past, we would see ourselves more like the set piece battles. You prepare for a long period of time for a product launch, you
try and make it perfect and go for it. It means it took a long time, and you did relatively few of them, and you bet big on whether it
will work or not. The future is not going to be like that. We must be more agile, get things to market quicker, maybe smaller, test,
learn. If they don't work, they don't work. Move on. If they do, take them to the next stage." CEO James Quincey 11/16/17
MDLZ
"First, we need to become more consumer-centric than ever before. This is a time of big change in consumers' eating habits. What
they eat, how they buy, why they buy and where they buy, we need to be on top of this and follow where the consumer is leading
us" CEO Dirk Van de Put 09/07/18
PG
"Superiority and productivity are critical but insufficient to keep us ahead in a world with constantly changing retail environment
quickly evolving consumer needs, media ecosystem transformation, revolutionary changes in technology. We must and are leading
the constructive disruption of our industry across all areas of the value chain. Each of these drivers are required to win in the highly
dynamic and competitive environment -Superiority, productivity and constructive disruption." CEO David Taylor 09/05/19
UN "Big brands we believe are here to stay. But they’ll only be big if they tap into big needs and trends.” CEO Alan Jope 12/13/17
Source: Company transcripts, Barclays Research
In fact, Clorox highlighted a study that shows that their brands with purpose grow ~3x
larger than brands without. This has been echoed by Unilever which said that its ‘brands
with purpose’ are growing 70% faster than the rest (up from 50% faster a year earlier).
Companies are continuing to reshape their portfolios through traditional forms of M&A,
VC investments/partnerships, and by cultivating new brands in-house. Across the Staples
universe, in 2019 we saw robust deal activity at all levels (e.g., EPC and Harry’s, Coty and
Kylie, EL and Dr. Jart, PEP and PopCorners, and HSY and One Brands), and we continue to
expect companies to capitalize on acquisitions that seem attractive. However, we’re also
encouraged by less traditional changes in the innovation model. Several companies have
minority stakes in upstart companies (e.g., CL’s investment in Hubble, HSY’s investments in
Blue Stripes and FULFIL, and MDLZ’s investment in Hu) and continue to source new brands
via their venture capital arms where assets under management are rising fast.
While incumbents still have heavy lifting ahead of them, we sense there will be more of
an uphill battle for the smaller disruptors. Clearly retailers have had a growing appetite for
new and exclusive brands, as they work to drive traffic across all channels. If large CPG
incumbents can provide products that meet consumer needs, invest behind them in
advertising and brand building, it could make the case tougher for putting smaller, less
proven brands on shelf. In fact, as many retailers work to adapt their brick and mortar stores
for a click and collect environment, we would expect brands which have strong velocities at
scale to be particularly advantaged. It’s also becoming increasingly difficult to launch and
support small brands, in our view, particularly as digital marketing is becoming more
costly, some categories are reaching levels of saturation, and as large CPG players
choose to partner with retailers and make the bar for claiming shelf space much higher.
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