Five Things to Watch in European Food and Drink Stocks in 2020

(Bloomberg) -- A stellar start to 2019 for food and drink stocks largely fizzled out in the second half of the year, and Unilever’s recent sales warning has left a cloud hanging over the sector outlook for 2020.

Despite a lackluster few months, the Stoxx 600 Food & Beverage index is still on course for its best year since 2009, with a 27% gain slightly outperforming the region’s main gauge. But after what Citigroup Inc. described this month as one of the worst staples earnings seasons of the past 20 years, investors have become unsettled, not helped by this month’s announcement by Unilever that revenue will be in the lower half of its guidance range in 2020.

In beverages, beer stocks were hot in 2019, led by a surge in Carlsberg A/S, but 2020 may be a better year for spirits, which are ripe for a rebound thanks to elements such as emerging-markets growth and continuing high levels of cash returns, according to Citi analyst Simon Hales. Brewers should get a boost from the UEFA Euro 2020 soccer tournament starting in June, in particular sponsor Heineken NV.

Below are five things for investors to watch in 2020:

More M&A (and an IPO?)

Expect staples giants to continue reshaping their portfolios after Nestle SA’s divestment of U.S. ice cream and Herta meats, and Anheuser-Busch InBev NV’s Asian IPO in 2019.

Unilever’s new Chief Executive Officer Alan Jope must make “sharper decisions” on this front, and the company’s food & refreshment brands could be the focus of disposals, according to Jefferies analyst Martin Deboo. Nestle also may shed more assets, with Buitoni pasta in the U.S. being one potential candidate, says Vontobel Holding AG’s Jean-Philippe Bertschy. Meanwhile, JAB Holding Co. is mulling an initial public offering of its coffee business in Amsterdam, which could raise as much $3.4 billion.

In beverages, Aperol maker Campari SpA is still scouting for acquisitions and AB InBev also may return to M&A after making inroads on debt, with the buyout of Castel Group an often-touted target. Still, a dearth of big M&A candidates may be a bigger problem for beverage companies, according to Sanford C. Bernstein analyst Trevor Stirling.

Healthy Munching and Booze

After January’s introduction of a vegan sausage roll by Greggs Plc and a new plant-based burger by Nestle, healthier eating (and drinking) will remain a focus in 2020.

Consumers, companies and investors alike are showing increased interest in environmental, social and governance issues and healthier lifestyles, and this continues to accelerate, according to Eddy Hargreaves, an analyst at Investec Wealth & Investment Ltd.

Stocks to watch include Kerry Group Plc, whose flavors and fragrances might help food and beverage companies develop new products with less sugar, according to Berenberg analysts. They also give a mention to sports nutrition leader Glanbia Plc and to AB InBev and Molson Coors Brewing Co. for their low-calorie beer offerings.

Drinks such as Diageo Plc’s Ketel One Botanical (vodka infused with natural fruit essences, no artificial sweeteners and no added sugar) are gaining traction in the U.S. because of their low-calorie content, while no- or low-alcohol beer remains popular in Europe, says Berenberg analyst Javier Gonzalez Lastra.

China and More China

The outlook for a China-U.S. trade deal may have brightened, but the threat of U.S. tariffs will continue weighing on the likes of Remy Cointreau SA and Pernod Ricard SA. There are direct potential impacts such as tariffs on single-malt Scotch whisky, which would disadvantage single malts compared with other spirits, but there are also indirect tariffs as companies pass the higher input costs onto consumers, according to Liberum analyst Nico Von Stackelberg.

“It’s a bit like having a higher oil price,” he says. “The net impact is less money in the wallet after all essentials are paid for.”

Social upheaval in Hong Kong will also remain a drag for these and other stocks. China is a key growth engine and executives will continue strategizing on how best to grow there after deals such as Heineken’s partnership with China Resources Beer Holdings Co. in 2019.

There’s another new threat coming from China in the form of local premium brands that finally seem to be taking off there, Berenberg’s fivGonzalez Lastra said. “Consumers appear more open about embracing Chinese champion brands,” he said.

Hard Seltzers, Gin and Cannabis

Analysts are wondering whether the mania of U.S. millennials for low-calorie, low-carb hard seltzers, a mix of water, alcohol and fruit flavors, can ever catch on with Europeans too. Questions also linger on whether the current gin craze in Europe will last and whether rum could be the next big thing.

One thing’s for sure: in 2020 investors will continue closely tracking developments made on cannabis-infused drinks. A joint venture between Tilray Inc. and AB InBev is currently introducing cannabis-infused teas in Canada, soon to be followed by carbonated soft drinks also containing pot, according to Bryan Garnier & Co.

Last but not least, one product that’s nowhere close to falling out of favor is chocolate, but even in this field innovation matters: Barry Callebaut AG’s ruby chocolate recently won U.S. regulatory approval.

Premiumization

U.S. Nielsen data has been closely watched among Fevertree Drinks Plc analysts this year as they gauge the growth potential for premium mixers in that market. The acceleration of growth in the second half of 2019 bodes well going into the new year, according to Berenberg.

Meanwhile, Pernod Ricard SA has been ramping up its purchases of premium liquor brands. The Paris-based company bought the owner of the TX American whiskey and bourbon brands in August, as well as the Malfy Italian gin brand in April. Jefferies called Pernod “one of the few remaining change stories within beverages,” with the shift toward premium spirits continuing to be strong, while Citigroup upgraded the stock to buy this month, predicting a pick-up in trading momentum in the last three quarters of fiscal 2020.

--With assistance from Phil Serafino.

To contact the reporters on this story: Albertina Torsoli in Geneva at atorsoli@bloomberg.net;Lisa Pham in London at lpham14@bloomberg.net

To contact the editors responsible for this story: Beth Mellor at bmellor@bloomberg.net, Paul Jarvis, Namitha Jagadeesh

©2019 Bloomberg L.P.