Sizing Up Food Industry Deals, and Stocks -- Barron's

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By Evie Liu

"Turnaround" has been this year's theme for packaged-food and beverage companies, with some turnarounds off to a stronger start than others. The industry has been beset by headwinds ranging from changing consumer preferences and rising input costs, worsened by tariffs, to more-stringent regulations favored by the Make America Healthy Again movement. Sales have been trailing at many companies, and earnings have been squeezed.

Companies are trying to regain their mojo in a variety of ways. Some are adjusting their portfolios, shedding underperforming products, and investing in higher-growth areas. Others are expanding through strategic acquisitions, hoping for more synergies through scale, while still others are splitting up in an effort to become more focused and agile.

Barron's recently talked with Robert Moskow, managing director and an analyst for food and beverage stocks at investment bank TD Cowen, about the flurry of activity. Moskow, who previously covered food companies for more than 20 years at Credit Suisse, gives a thumbs-up to Celsius Holdings' Alani Nu deal, but is less enamored of planned splits at Kraft Heinz and Keurig Dr Pepper.

He explains his reasoning in the edited interview that follows.

Barron's : As consumers feel the squeeze of inflation, some are trading down to groceries from restaurants. How has that affected packaged-food companies?

Robert Moskow: The issue for packaged-food companies is that the majority of grocery growth is coming from fresh produce such as the butcher counter and fresh fruit. When consumers try to stretch their dollars, they make their own meals and rely more on those types of food.

Packaged-food companies are trying to improve their health and wellness credentials. They are trying to reformulate their products by doing things like adding more protein and taking out artificial colors and sweeteners. But those types of efforts are often defensive more than offensive.

Is high pricing a problem for these companies?

There is a lot more conscious shopping going on, but premium products aren't dead. Consumers aren't always buying the cheapest thing on the shelf. There are high-income and low-income consumers alike who will pay a premium for products that provide enough benefits. Either they are super indulgent or super convenient, or provide some nutrition benefits.

A good example is Uncrustables from J.M. Smucker, a white-bread sandwich with peanut butter and jelly in a freezer case. There are a lot of healthier options, but the combination of the product's taste, texture, and convenience has been super successful.

The lesson is that processed-food companies can't just become healthy fresh-food companies. They would be playing a game that they aren't good at. They are going to have to get more creative at what they are good at to get past all these challenges.

Has the "protein craze" reached a peak or overheated?

No. I think it's just in the middle innings. Protein shakes have now exceeded protein bars in dollar sales, and there are more brands coming to market with different formats of protein products. Rightly or wrongly, consumers are seeking increasingly creative ways to get protein in their diet.

What are so-called functionable foods, and will they be the next growth theme for the industry?

Functional foods are usually enriched with nutrients that have a purpose such as immunity or digesting benefits. The category steers more toward medicinal rather than indulgence and general nutrition.

With the right brands and in the right categories, it could make sense. But it has to be thought through carefully. If you add the functional ingredients to a category that isn't perceived as part of the health regime -- say, adding vitamin D to breath mints -- it would be less successful.

How have tariffs affected the food industry?

Tariffs have increased packaging costs for steel cans, so a lot of canned goods have been hit. Then, there are commodities that we don't produce in the U.S., such as cocoa, coffee, spices, and seasonings, that are impacted by tariffs. Commodities were already inflationary, and tariffs are exacerbating this.

Mondelez International and Hershey have already lowered guidance for 2025 to incorporate the tremendous margin compression due to higher cocoa prices. But this is well understood by the market, and the stocks have a chance to appreciate from here. Both companies recently raised prices by 20%. We will see how volumes are negatively impacted by the price hikes.

Many food companies are restructuring their business in an effort to regain momentum. What are the keys to a successful turnaround?

Turnarounds worked well in the past when management came in with an effective plan for investing in the business, rebasing earnings expectations to fund that investment, pushing more aggressively for productivity, and having a good marketing plan to find new pockets of growth.

I have seen a lot of rebasing of margins and commitments to get volumes back. But I haven't seen much investment to drive growth by improving affordability or through breakthrough innovation. Companies are spending a lot of energy trying to fix the problems of the past before they are in a position to create a vision for the future.

Part of the challenge is that all these companies raised prices during the Covid-19 pandemic, but consumer perceptions of their intrinsic value didn't catch up. Now, they have to discount those prices, which gets in the way of the bigger-picture thinking.

How is PepsiCo's turnaround going? What should the company do in response to Elliott Investment Management's activism campaign?

Not so great. PepsiCo is using tactics like smaller pack sizes at lower price points to make consumers feel as though there is less money coming out of their pockets. It hasn't really worked. The company talked about reviving the healthier versions of its products, but it's an uphill battle.

In response to the activism [Elliott recently disclosed a $4 billion stake in PepsiCo and highlighted steps it thinks the company should take to increase value], it would be good if management could give investors a vision for what the margin structure of Frito-Lay [PepsiCo's food segment] could look like, and how much they could reinvest in the business.

There have been past proposals to split PepsiCo's beverage and food businesses. Would that help the company become more focused and create more shareholder value?

Not necessarily. Although I have seen focused businesses succeed more often than diversified ones, I see reasons for Pepsi's beverage and food businesses to be together. [With the combination,] you get a lot of scale around key merchandising events at retail and in terms of advertising. If executed properly, having them together is still value accretive.

Kraft Heinz announced in September that it will split into two companies, one focused on faster-growing sauces and condiments and the other on grocery staples. What do you think of this plan?

It isn't a terrible idea. I never really understood the value of putting Heinz and Kraft together in the first place. There is value in creating a more focused business in sauces and condiments, but I'm confused as to why they added other categories such as macaroni and cheese. I don't see the synergies there.

If Kellogg's split-up taught us anything, it's that value can often come from making a stand-alone business attractive to an acquirer. [Kellogg split into two companies in 2023, both of which were later acquired by other companies.] By making the sauces and condiments business so big [with approximately $15.4 billion in 2024 net sales], they made it harder for an acquirer to come in.

Splitting up seems to be a trend. What is your view of Keurig Dr Pepper's plan to acquire coffee company JDE Peet's and then split up the business?

I'm glad to see management take steps to split up the business, but the path they are taking is unattractive. Shareholders wanted them to carve a path to reduce their exposure to coffee. Instead, they got an acquisition that triples the size of the coffee business. That was poorly received by investors.

I don't see much synergy between the businesses that are being combined. There is no real synergy in procuring coffee beans. In terms of marketing insights and customer relationships, there is also not much overlap when merging the U.S., European, and emerging markets.

Elsewhere in the beverage business, Celsius Holdings has acquired Alani Nu. Will the energy-drink company continue to grow despite weak consumer spending and more competition?

Celsius has made a savvy strategic move by acquiring Alani Nu at a good price. There are a lot of scale benefits: The new distribution agreement they struck with PepsiCo will take Alani Nu to the next level by giving it the full potential for distribution in convenience stores.

The energy-drink category has bounced back from an unusual lull last year. Celsius has introduced more-exciting flavors and limited editions. It is also marketing its core brand to a broader audience better than ever before. Advertising during National Football League games was a brilliant move.

All the energy-drink companies have done well in growing the category by introducing good-tasting, indulgent, sugar-free versions of their products. And the whole category has benefited from that. They aren't exactly taking each other's sales, at least at the current stage.

Which companies and stocks are you most bullish about among those you cover?

McCormick is a leader in the flavorings industry that is capitalizing on the growing segment at grocery stores. When people cook from scratch, they need spices, seasonings, and flavorings. Younger consumers, especially, are more engaged in recipe development and seeking adventurous flavor.

(MORE TO FOLLOW) Dow Jones Newswires

October 17, 2025 21:30 ET (01:30 GMT)

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