By Nick Cherney, CFA
Nick Cherney, CFA, explains how thematic investing allows investors to tap into opportunities presented by broad macroeconomic trends, such as the growing organics market. By investing in the companies and agricultural operations that are bringing natural products to the marketplace, investors can put their money into the things they're passionate about.
As Americans become more aware of the environmental and health benefits of organics, they are presented with an opportunity to align their investments with their lifestyle choices. By investing in the companies and agricultural operations that are driving organic innovation and bringing natural products to the marketplace, investors can put their money into the things they're passionate about. This approach - known as thematic investing - focuses on broad macroeconomic themes, enabling investors to take part in transformative forces that could permanently alter our lives and behaviors, creating opportunities shaped by meaningful change.
With many Americans focused on living healthier and more natural lifestyles, organic foods and products have been steadily moving into the mainstream. By 2014, 85% of Americans were already buyers of organic products, according to a Consumer Reports survey, with nearly half (45%) doing so at least once per month.1 As a result, the U.S. organics industry increased nearly 13-fold, from $3.6 billion in 1997 to more than $45 billion in 2017.2
Demand for organics is growing internationally as well. The U.S. exported roughly $550 million worth of organics in 2016, up from $412 million in 2011, and the global organic food market is projected to achieve a compound annual growth rate of 16% through 2020.3
But the organics market isn't limited to food - it also includes personal care goods such as cosmetics, hair and skin care products. The global organic personal care industry is expected to reach almost $16 billion in revenue by 2020. Some research indicates that skin care alone may see a compound annual growth rate of 9.8% from 2014 to 2020.4
The increasing global demand for organic products is creating a noticeable shift in supply, offering an opportunity to invest in organic farming.
Certified organic farming has been expanding in the United States for years, particularly for fruits, vegetables, dairy and poultry. Farmers with certified organic operations use production practices with environmental benefits, such as water management practices, no-till, habitat maintenance for beneficial insects and biological pest control. Generally, organic operations are required to consistently demonstrate that they are protecting natural resources, conserving biodiversity and using only approved substances.5
The environmental benefits of organic agriculture have become increasingly apparent to consumers and farmers alike. As of April 2017, there were more than 24,000 certified organic farming operations in the United States and more than 3,000 farms transitioning to organic products.6 As organic agriculture continues to grow exponentially, it is clear that we've only just begun to scratch the surface of organic farming and markets.
The growth of the organics marketplace and the opportunity it represents has not gone unnoticed. The evolution from niche to mainstream is illustrated by the growing interest among major consumer goods companies in gaining a foothold in this potentially lucrative market.
One barometer of this interest is merger & acquisitions (M&A) activity. Developing winning products and identifying attractive market segments can be a painstaking endeavor, often undertaken by nimble first movers who have spent years honing their offerings. Given the rise in demand for organic products, established food and consumer products companies realize they can no longer ignore this segment. Rather than take the trial-and-error path of product development, established companies are instead buying their way into the organics space. This was the impetus behind French company Danone's (OTCQX:DANOY) 2016 acquisition of WhiteWave Foods, a maker of organic dairy, plant-based and other agricultural products. In addition to the $12.3 billion price tag, Danone's appetite for increasing its organics offerings is evidenced by the 23% premium it paid for WhiteWave based on the company's pre-deal stock price.
Distributors are also seeking to make inroads with organics-focused consumers. Amazon's (AMZN) $13.6 billion purchase of Whole Foods Market in 2017 caught the retail food sector by surprise, not only due to the e-commerce giant moving aggressively into the brick-and-mortar segment but also by expanding the potential organics market to Amazon Prime members, which numbered 80 million at the time of the deal. Similar to Danone's WhiteWave acquisition, Amazon was willing to pay nearly a 20% premium for Whole Foods stock.
While these particular deals grabbed headlines, smaller M&A activity continues as the industry consolidates and legacy consumer products companies take steps to defend their overall market share. The increasing consumption of organic products alone can make a compelling investment thesis. The likelihood of M&A activity continuing as the industry matures, however, may serve as an additional catalyst for investment returns, if one uses the premiums paid for recent deals as a metric.
Organic farming operations and companies that advance these causes by bringing naturally derived foods and products to the marketplace should continue to benefit, as consumers' affinity toward these products shows no signs of waning. As consumer and investor interest in natural products continues to grow, more companies may be willing to focus on organics, which could expand the marketplace and the impact these goods can have on individuals' wellness - and, potentially, on their investment portfolios.
1 Consumer Reports. As of March 2014.
2 Organic Trade Association, National Restaurant Association. As of April 2017.
3 TechSci Research, Organic Trade Association. As of April 2017.
4 Grand View Research. As of August 2015.
5 Organic Farming Research Foundation. As of January 2018.
6 Organic Trade Association. As of May 2018.
First published on 06/03/19 at https://greenmoney.com/the-growing-organics-market-presents-a-natural-investment-opportunity. Neither Janus Henderson nor any of its subsidiaries are affiliated with GreenMoney.
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