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Hermes: How to play emerging global consumer trends

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Shifts in consumer trends present opportunities for investors to access new areas of global growth. Hermes Sourcecap portfolio managers Martin Todd & Chi Chan (pictured) have identified new trends in global food ingredients and e-payments – and the European stocks at the vanguard of this change.

Capitalising on changing consumer appetites

Consumers are demanding healthier meals with natural ingredients and fewer additives. We see Kerry Group, a global leader in taste and nutrition, as a major beneficiary of this trend.

Globally, obesity has more than doubled since 1980, with 39 per cent of adults now overweight. This rise has been met with increasing awareness around the damaging effects of modern diets. A Mintel study shows 59 per cent of Americans now believe foods with fewer ingredients are fundamentally better for them, while 43 per cent say that ‘free-from’ foods, including gluten-free and fat-free foods, are healthier. 

No compromise on taste

However, consumption remains a complex dynamic. Consumers want to eat more healthily, but are not willing to compromise on taste. Consumers have also begun to favour the removal of artificial ingredients from foods, known as 'clean labelling’.  While these demands put pressure on suppliers, they make commercial sense: over a quarter of baby boomers and millennials are willing to spend more on foods with health and wellness benefits. Coinciding with the preference for healthier food is demand for more variety in terms of international cuisine.

Kerry Group capitalises on all of these trends. The company has the technical capability to reduce excessive fat, sugar and salt without compromising taste. It can help companies achieve clean labels by sourcing and processing natural ingredients with similar properties to existing ingredients. The company also sources or produces the specific ingredients required for new cuisines and flavours.

These capabilities have enabled Kerry to evolve from a commodity ingredient supplier into a trusted partner in major food brands' product development. Its technological progress should help it to grow faster than competitors and improve profitability. The business aims to increase its current 9.2 per cent earnings-per-share growth into double-digits by the end of the 2013-17 period. We have held the stock across all of our portfolios since February 2014.

The E-payment companies vying for cash’s crown

Cash is no longer king. This year, cashless payments should overtake those made with notes and coins in the UK for the first time, reflecting the US, where 47 per cent of transactions are made with cash.[1] The shift is also apparent in less developed economies. Worldwide, cashless payment is forecast to grow 7.5 per cent per annum between 2015 and 2019.

Barriers to entry

Cashless payment is more complex than at first sight. Traditional operators, such as Mastercard and Visa, and innovative new providers, such as Apple and Alibaba, appear to dominate the space, but in reality they offer only the “front-end” of the process. The infrastructure used to service these payments is increasingly complex as it becomes a greater target for malicious attacks. The cost of building this infrastructure is a key barrier to entry so front-end providers have built their technology around the existing infrastructure, consolidating the position of “back-end” providers.

While back-end operators are largely unconcerned by the threat of new players in their market, there is still significant competition and fragmentation, with smaller providers active in specific regions. As a result, larger players have opportunities to grow by entering and consolidating their positions in more markets by acquiring them.

Wirecard and Worldpay are two of the largest operators of cashless payments infrastructure and primed to consolidate these positions and benefit from high barriers to entry. We have held Wirecard across all strategies since the beginning of 2015: it is the dominant provider in the Europe ex-UK market and has a growing position in Asia. Our holding in Worldpay, a global business operating in 146 countries with an overall market share of 4.5 per cent, was initiated in the Hermes Sourcecap European Alpha Fund during the stock’s London IPO in October 2015.

Both companies initially grew in their now-mature home markets, Germany and the UK respectively. They are currently expanding e-commerce operations and, by investing in increased security, mitigating some of the market's concerns. This has helped procure new business, as they have allowed sites to process more payments with fewer errors. For example, WorldPay has enabled leading internet retailer, ASOS, to raise its payment-acceptance rate from 88 per cent to 93 per cent. 

Wirecard’s revenues grew 24.8 per cent in 2014 while its earnings (EBITDA) increased by 37.3 per cent, reflecting the relative reduction in costs afforded by greater scale. Meanwhile, Worldpay’s net revenues have grown by an average of 9.7 per cent a year since 2012 and the company recorded transaction growth of 16 per cent in 2014. With rich opportunities for consolidation in the cashless payment industry and e-commerce forecasted to grow, we believe these companies are structurally and economically well-placed to grow significantly in the near and long term.
 


The views and opinions contained herein are those of Chi Chan and Martin Todd, Hermes Sourcecap, and may not necessarily represent views expressed or reflected in other Hermes communications, strategies or products.

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