Companies such as Chipotle (CMG), Annie's (BNNY), and SodaStream (SODA) are courting the next major group that will define purchasing trends in the coming years - millennials. Millennials or Generation Y represent the estimated 80 million young Americans born between 1980 and 2000, and are expected to surpass the aging baby boomers in spending power, shelling out $200 billion annually by 2017 and $1.4 trillion annually by 2020. As a group they are not as financially well off as the boomers, but have shown a willingness to spend more than boomers on healthy food products along with the latest technological gadgets. According to a study by Brand Amplitude, 84% of the millennials questioned are trying to eat healthier. They are shying away from fast food and supersized drinks, and focusing on fresh and natural products with less preservatives and artificial ingredients.
As an investor it's prudent to not only understand what drives the millennials, but also what companies are courting them. And while they are not the only group of consumers that have become more health conscious, they are in fact spending more and will influence the habits of the generation after them. Below are a few food and beverage companies that are focusing on building their business using trends that are attracting millennials.
CHIPOTLE GROWS WITH THE MILLENNIALS
Millennials have chosen the fresh fare of Chipotle over the frozen patties of McDonald's and have made Chipotle the number one casual dining restaurant among the demographic, followed by California Pizza Kitchen. While a number of older established fast food chains are chasing the customer with extended menus and dollar value meals, Chipotle offers a limited menu of fresh ingredients with no preservatives, additives or artificial ingredients, honed in on what actually attracts millennials. And Chipotle's success has proven that these specific customers are willing to pay a few dollars extra for what they want. In California, three out of five 20 to 24 years olds have eaten at Chipotle in the past year making it the highest penetration rate of any casual dining restaurant, twice that of the older groups. Why is this number so important? While millennials represent about 27% of the total population, 64% eat out at least once a week, compared to 48% of the boomers.
Chipotle has experienced annual sales growth above 20% per year over the last five years. The stock has risen over 100% in YOY, closing on Thursday November 6th at $525.02 per share. Chipotle's revenue rose 18% compared to same quarter last year, coming in at $826.90 million, beating the consensus estimate of $820.28 million. On average, analysts predict that Chipotle Mexican Grill will post $10.47 earnings per share for the current fiscal year. On October 30th Bank of America Corp. set a $600.00 target price citing expected valuation to move higher into a projected EPS growth in excess of 20% in both of the next two years. On October 21st Argus raised its price target from $470.00 to $580.00 per share, while Zacks maintained a neutral rating with a target price of $535.00. Finally, analysts at Miller Tabak downgraded Chipotle from a buy rating to a hold and placed a $490.00 price target on the stock.
While I think MCD-- with its size and global outlets-- will continue to be an excellent long term stock, I foresee Chipotle-- especially with how it continues to attract the buying power of the millennials-- will continue to generate double digit sales growth, and is still a solid buy even at such high multiples.
SPROUTS AND ANNIE'S - TWO COMPANIES SELLING HEALTHY AND ORGANIC PRODUCTS
Data has shown that 30% of the millennials consume certified organic food as opposed to 15% of the boomers. According to the Organic Trade Association, 8 in 10 U.S. parents purchase organic products. 58% of the millennials surveyed rated organic produce as either somewhat or very important, and 1 in 10 said they'd pay 20% extra for organic products. According to Whole Foods Magazine, millennials want new and fresh tastes that will throw their palettes into overdrive, but are also health conscious, and are accepting of organic products.
Whole Foods Market CEO, John Mackey, acknowledged that millennials have played a part in driving the growth of its business commenting, "…We're doing very, very well with boomers and Millennials… I just think the Millennials line up well with our philosophy and our purpose-driven aspects for our company." While Whole Foods has been an excellent stock rising over 44% YTD, there is a new competitor that is also resonating with the millennials and looks to challenge Whole Foods for some of those dollars-- Sprouts Farmer's Market (SFM).
SFM went public in August with an IPO price of $18.00 per share, and has more than doubled to close on Thursday, November 7th at $46.58, with a whopping P/E of 175. Sprouts, like Whole Foods, is a specialty retailer selling natural and organic food focusing on health and wellness. One reason Sprouts may resonate more with the millennials is due to its competitive pricing structure, making it in many ways like Whole Foods, but cheaper. Though Sprouts stock price may have gotten ahead of itself, this aggressive company, which operates roughly 160 stores in eight states, has increased sales at a compound annual rate of more than 17% in the last six years. The company is also slated to expand into 13 more states. I like Sprouts and I think that its aggressive marketing will continue to increase growth at double digits for a number of years. And though it's definitely selling at a premium, if millennials continue to flock through the doors, today's price may look like a bargain by next year.
Annie's Inc. is another company with very high multiples that also caters to the health conscious consumer. Annie's distributes 125 healthy and organic prepackaged foods in over 25,000 retail locations, and has experienced a compound annual growth rate of 17%. While in the past I've had my doubts about Annie's ability to continue its double digit growth, I now see its product line where many of the products can be popped in the microwave for a quick warm healthy meal resonating with millennials, which in turn should lead to continued higher growth.
John Foraker, CEO, commented on what he sees for 2014: "We enter fiscal 2014 in a position of strength. Consumer interest in natural and organic foods continues [sic] to increase, and as one of the leading brands in our space, we are well positioned to benefit from this trend." And in discussing his customer base he commented, "Our offering is well positioned to meet the growing needs of millennial consumers."
On November 7th Annie's reported net sales of $58.7 million for the second quarter 2014, with adjusted net sales of $57.9 million, an increase of 24.0%. Consumption grew an estimated 22% in the second quarter, representing further acceleration versus prior growth trends. Net sales growth in the second quarter was led by meals, which benefited from continued strength in mac & cheese and initial shipments of new family-size frozen entrees. Net sales of snacks and dressings, condiments, and other products were also strong, growing double digits on a YOY basis. Net income for the quarter came in at $5.6 million, or $0.32 per diluted share, compared to $3.8 million, or $0.21 per diluted share, same quarter 2013.
Annie's has a market capitalization of $802 million, the stock closed on Thursday, November 7th at $47.48 per share, and has a very high P/E of 73. But this is still a company with plenty of room to grow and recently revised its 2014 revenue guidance, anticipating revenue at the upper end of its estimate of 18% to 20% growth. And while I now believe with the health conscious consumer that Annie's stock will continue to rise, I would like to see a dip in the stock price before entering.
MILLENNIALS REJECTING SUGAR DUE TO HEALTH CONCERNS
The soda industry is feeling the power of millennials as they are rejecting sugary sodas in favor of water, coffee, and (non-sugar) energy drinks. U.S. consumption of soda has steadily fallen over the past eight years, as refined sugar and high fructose corn syrup are being spurned by millennials. These trend-setting consumers want the energy boost, but not the negative health effects, that come with consuming too much sugar. This is a major concern to the soda bottlers as soda represents nearly 25% of the U.S. beverage market, and diet soda's share of the overall soda market is at around 30%.
However, not all soda bottlers are experiencing a drop. Companies like Reed's Inc., a small beverage bottler that sells its craft natural and organic sodas including Virgil's root beer, have bucked the downward trend and have done well with millennials looking for a natural flavored soda. Reed's, which also sells a zero calorie line of natural sodas sweetened with stevia, saw revenue increase 28% in the third quarter to $10.1 million up from $7.9 million same quarter 2012. Stevia, a natural zero calorie sugar substitute extracted from the leaves of the South American stevia plant, has gained immense popularity with both millennials and boomers looking for a natural zero calorie alternative for sugar, HFCS, and artificial sweeteners.
SODASTREAM COURTS MILLENNIALS
SodaStream has taken note of the buying power of the millennials by pushing its "free the world of disposable bottles" slogan via its carbonation system that allows users to make soda at home. The company purposely has set goals and marketing methods to directly align with the attitudes and behaviors of millennials who are looking for less artificially flavored beverages, but also want to be "green" and make a difference. The company has teamed with college students to get the word out about SodaStream, and the product is marketed to young families as an alternative to the sugary drinks found in a store. SodaStream syrups do not contain HFCS and have less sugar and calories than typical store-bought soda. The company also has a line of zero calorie natural sugar free sodas with no additives or preservatives, sweetening the product with stevia.
SodaStream is a $1.3 billion market cap company, and though the stock is down almost 15% in the last month, it still is up over 50% YOY. SodaStream continues to post good growth numbers in Europe, but is weaker than expected in its key growth market of the U.S., up 12% for the quarter, though the company maintains high hopes. SodaStream's quarterly revenue rose 28.5% on a YOY basis. On October 31st Deutsche Bank set a $58.00 price target and a hold rating on the stock. While Stifel Nicolaus downgraded the stock from a hold to a sell, placing a $40.00 price target. In August, Longbow Research initiated coverage and set a buy rating and a $79.00 price target. SodaStream stock closed on Thursday, November 7th at $54.62. I like that SodaStream stock has pulled back 15%; it gives the stock a better entry price, and I can see the stock moving upward again.
ORGANIC STEVIA SLATED TO COME TO MARKET SOON
Millennials like organic and sugar free products, and one company-- Stevia First (OTCQB:STVF)-- is developing both with an organic stevia to be produced on an industrial scale. Organic food sales are growing at 10% annually compared to non-organics, which are growing at only 3%. And stevia is the hottest sugar free substitute on the market today with sales estimated to reach $1 billion by 2015. While stevia farms have expanded at an accelerated rate in order to meet current and future demands, there is currently no large production of organic stevia grown for the market. On November 6th Stevia First announced it succeeded in planting, cultivating, and harvesting its organic stevia in California. And to distribute its product, which it hopes to hit the market sometime in 2014, the company recently entered into its first distribution agreement signing on with GAB Innovations, a North American distributor of premium natural health care products.
And while organic anything resonates with a large portion of the millennials, there is need for a secure pipeline of conventional stevia as the alternative sweetener market is expected to grow into a $13.7 billion industry by 2018. Today the supply comes from small farms scattered across the globe, and supply issues may hamper the development of stevia as the alternative sweetener of choice. Stevia First appears to be solving that issue by developing a microbial-based fermentation process using low-cost sustainable carbohydrate feedstock, like corn, that produces enzymes that convert into better-tasting and more valuable steviol glycosides. The result produces a larger quantity of high value stevia while shaving down the costs by as much as 70%-- and its product can be produced anywhere under any soil or climate conditions. As Stevia First gears up for distribution of its products, its stock has risen over 30% in the last three months. Though the fermentation process is natural, but not organic, if successful the big soda bottlers using stevia may be able to lure the millennials back with a natural zero calorie sweetener instead of sugar or HFCS, which is why I'm keeping an eye on the developments of the company.
Millennials will have an enormous impact on the food landscape over the next decade, and they will influence the generation after them, and the successful companies of tomorrow. Businesses that take note of millennials shopping habits and invested in technology, social media, green initiatives, and healthier products should reap the rewards, as will investors.
I think Chipotle will continue to be an excellent investment, as should Annie's and SodaStream. Though the supermarket business is very competitive, I still see Sprouts, even with its high multiples, proving to be a good buy as it has found a niche and is doing an excellent job filling that niche. And while I do like the future of the smaller companies mentioned; they do carry an added risk, so caution is advised.