Lex: Obesity
Published: Dec 26 2003 19:20 | Last Updated: Dec 26 2003 19:20
The time for New Year resolutions is only days away. Most of these good intentions, however, will come to nothing. Take weight loss. While millions of individuals will have eaten to excess over Christmas, few will stick to diets or gym regimes for more than a month or two. No wonder there are now more obese than malnourished people in the world.
The obese are a huge potential market for the pharmaceuticals industry. In 1995 the World Health Organisation estimated there were 200m obese adults worldwide. Five years later, there were 300m. Many of these are in developing countries - 115m at the last count.
But there is no magic solution. As the prevalence of obesity grows and the cost of treating related diseases rises, a combination of lower calorie intake and increased exercise will remain the best cure.
No company has come up with widely effective drugs, reflecting the complexity of treating obesity. But, indirectly, obesity already contributes to spending on drugs. Research is focused on three areas: appetite suppressants, fat-absorption inhibitors and agents that will affect the way cells metabolise and store fat. The last has not yet yielded any drugs; the first two have, but with mixed results. The side-effects of the best-known fat absorber, Roche's Xenical, can be unpleasant. This remains, however, the most likely area of growth. Other fat-busting drugs are undergoing trial. The issue remains who will pay for them. Healthcare providers still consider lifestyle an important issue when viewing obesity. Companies believe patients will be willing to pay a considerable amount themselves.
While there may never be a simple pill to eliminate obesity, the pharmaceuticals industry will keep trying. But the biggest impact of the ballooning obesity problem will be felt by food producers, who provide the fuel for individuals to pile on the pounds.
Litigation and regulation
Like the smoke that clings to your clothing after a night out, the effects of litigation have resisted the tobacco companies' best efforts to shake them off. Obesity-related lawsuits, however, have so far made no headway. Food companies have the advantage that, unlike tobacco, their generic product is a vital necessity. Cases will also be difficult to prove, given the range of foods eaten by individuals and other lifestyle factors which affect weight. But lawyers will not give up easily. One risk is that embarrassing documents about marketing or food formulations could one day emerge. If there are victories, the states in the US could even attempt to recover the huge medical costs associated with obesity, as they have with tobacco. Such outcomes remain a distant prospect. But even if litigation itself is a limited risk in the short-term, it will have a broader impact on the food producers.
Cases will continue to generate huge publicity, further focusing the minds of the public and governments on obesity. Regulation is already set to increase. The WHO wants governments to consider using taxes to discourage people from eating too much sugar, salt and saturated fat. There will be particular pressure on the marketing of high-calorie products to children. Soft-drinks companies are already coming under attack in the US and UK over their use of vending machines in schools. That will have little real effect on their profits. But if food companies fail to shape up, they could face more draconian measures, such as restrictions on advertising to children. They are also likely to face more stringent nutritional-labelling requirements.
Regulation will take time to implement, and can be managed by food companies. More important is whether the wave of publicity translates into a shift in consumer behaviour.
A new outbreak of bovine spongiform encephalitis in the US could also affect consumption patterns. Beef consumption in the European Union fell 7.4 per cent in 1996, when a link was confirmed between BSE and variant Creutzfeldt-Jakob disease, with hamburger chains especially hard-hit. Customers voting with their mouths are likely to do more to shape the industry than regulation ever will.
Eating habits
Nice idea, shame about the timing. Given the recent surge of interest in obesity, Unilever's purchase of Slim-Fast in 2000 should have proved a master stroke. Instead it has served as a reminder of how exposed food companies can be to changes in customers' eating habits. Dieters globally have spurned Slim-Fast while flocking to the low-carbohydrate Atkins diet. Slim-Fast's formula has succeeded in slimming down Unilever's own revenue line.
Atkins might prove to be a fad, but wider changes in eating habits could prove more enduring. Soft-drinks groups in the US have already seen volumes stagnate, while sales of bottled water and other, healthier drinks, have gone from strength to strength.
Most companies are reacting to health concerns. PepsiCo and Kraft, for example, are taking steps to remove trans-fats from snacks. Research and development costs are likely to rise as groups look to change formulations and develop new healthy products. European groups such as Nestlé and Unilever already spend heavily on such areas. Yet, obesity has not yet had a material impact on share prices, and other issues must be considered in judging company performance. For example, a recent uptick in McDonald's operating performance might be related to the introduction of healthier menus. But the fast-food group has also improved other areas of its business.
The composition of food groups' portfolios will become more important as obesity looms larger in the public consciousness. Those with heavy exposure to soft drinks, such as Coca-Cola, confectionery, such as Hershey, or both, such as Cadbury Schweppes, could find their growth prospects suffer. These trends will take time. But in the long run, groups with "healthier" portfolios - such as Danone with bottled water and dairy products - could find themselves rewarded with higher growth. |
