00:00 Speaker A
Well, the new administration is getting to work on its Make America Healthy Again agenda. Health and Human Services Secretary RFK Jr. advocating for a ban on several food additives. Here with more on the shift in the American food system is Bernstein senior research analyst, Alexia Howard, and Yahoo Finance’s Brooke DiPalma, also joining us in on the conversation. Welcome to you both. Alexia, I will start with you. So, RFK Jr., our new head of the HHS, investors have been trying to think through all the different ripple effects, Alexia, and the implications. You ask in a recent research note, you say you ask, how could RFK Jr.’s crusade against food additives play out? It’s a big question, Alexia. I’m curious, how do you answer that? What what have you been telling your clients?
01:44 Alexia Howard
Sure, I know it’s a great question. I think what’s really interesting here is that, um, RFK Jr. arrived on the scene fairly suddenly. This time last year, we probably weren’t imagining that he would have been head of the HHS uh, today. Um, we had a very similar situation 15 years ago when we had a a slow wave of health and wellness concerns that came out. Uh, this time around it’s much more abrupt. And I think what we’re seeing is that at the state level you got individual states really pushing hard and pushing fast to put some of this legislation through, uh, and that’s what’s going to put pressure, I think, on the federal level, uh, to try to get some of this legislation pushed through at a national level because the companies themselves don’t want a patchwork of legislation that’s different, uh, across different states. So, I think this is going to be pretty dramatic and, uh, and actually have a real impact on the ingredients in this space.
03:09 Brooke DiPalma
Alexia, in the past we saw consumers push back to changes within ingredients. What makes you confident that this time around could be different and that these CPG brands could win over consumers with these alternate ingredients?
03:49 Alexia Howard
Sure. Yes, I think last time around, uh, I think the most famous example was Trix, uh, and General Mills removed a lot of the artificial bright colors, uh, the neon colors of Trix, and sure enough, the the kids didn’t particularly like that change and we went back to the artificial flavor uh, artificial colors once again. I I think this time around, what’s interesting is we we seem to have more media coverage, a better understanding amongst consumers about the links between uh, diet and long-term chronic health conditions. Um, there’s a lot more interest in longevity as a result of books like uh, Dr. Peter Attia’s Outlive or um, uh, good energy that came out last year. So, I’m not saying it’s going to be a slam dunk and it’s going to be really easy for all brands, but I think the uh, uh, the groundwork is set for this to actually have a meaningful impact more quickly and uh, be more receptive amongst consumers to some degree.
05:20 Brooke DiPalma
The coming ban of Red Dye 3 is happening, and also states, as you noted, are putting forth that legislation to ban other ban other additives. How how do a does a company prepare for something like this? And what sort of cost does it take to switch up these ingredients in their R&D?
06:01 Alexia Howard
Sure, I think that, um, they a lot of the companies have seen this before when we had the GMO labeling, the genetically modified organism labeling bill in California back in 2012. There was a bit of a scramble then because there was a lot of media coverage of genetically modified organisms in food. Also also some coverage on the uh, uh, the dye, the artificial dye side of things and preservatives as well. So, many of the companies, particularly those that have overseas exposure, already have quite a lot of experience on reformulation. We had to get rid of trans fats, uh, not so long ago, for example. Um, it’s not it’s usually really more a matter of time and having, um, the wherewithal to actually go through the process of reformulation. It’s not necessarily going to add a huge amount of incremental cost. Um, maybe there’s a little bit upfront uh, and there could be some incremental costs associated with some of these, uh, these um, uh, color changes. Um, but I think the real concern for the packaged food companies is more the more potentially the consumer reaction. Um, either way, I think we would all take a step back and say, you know, having thousands upon thousands of ingredients that haven’t necessarily been properly vetted uh, all of them um, is a bit of a concern, and so moving in a direction of cleaner labels, simpler ingredients probably is the right thing to do at this point.
08:37 Speaker A
Alexia, is there a food company that does it right, in your opinion, that could serve as a kind of model, uh, for others?
08:56 Alexia Howard
Um, I think a lot of the what I would call challenger brands that have bubbled up over the last 10, 15 years, uh, are examples of that. Uh, I mean, there was a company, for example, called Simple Mills that was uh, recently bought out by Flowers Foods that I don’t cover, but a lot of those skinny pop popcorn, Dave’s Killer Bread, um, those those brands that have bubbled up that really started, um, probably more at a premium level in terms of of cost, but, um, also with a very clean set of ingredients, those are the ones that are really, uh, really paving the way. And we are seeing, um, some of the larger food companies actually make moves in that direction, for example Hershey, uh, not obviously, not the uh, uh, the health and wellness brand that you’d uh, necessarily think of, but 15 years ago, they actually went through the process of eliminating a lot of the artificial, um, components to the basic Hershey bar, so it’s actually now a reasonably clean label uh, product, uh, at least as far as the basic uh, bar is concerned.
10:40 Brooke DiPalma
Alexia, I quickly want to hit on McCormick. I mean, their CEO said that they’re seeing a tick up in reformulation activity here. Do you see McCormick getting a boost? And then on the flip side, how much of tariffs is going to impact a company like McCormick that imports from something like 80 plus countries?
11:16 Alexia Howard
Sure, so it’s uh, yes, there’s two sides here, obviously. I do like McCormick a lot uh, at this point because I think this reformulation super cycle that’s propagated by RFK Jr.’s Make America Healthy Again agenda will really benefit the flavors business for McCormick. Um, again, if we go back 15 years to that parallel situation, um, we we saw a lot of the flavors companies, um, IFF, Shivadan, Kerry Group, all do reasonably well during that period. And I think if we do see a an abrupt start to a reformulation cycle, then companies like McCormick could benefit from that this time around because they’ve really developed their flavors capabilities over the last 10 years and should really be able to play in that. Now, obviously, as for the tariff side, as you rightly said, they uh, McCormick imports 80 uh, from 80 different countries around the world. Uh, they have 14,000 ingredients that they’re bringing in from various different places. So, yes, um, the tariff is situation is going to hit them. Um, obviously, Mexico should be fairly safe. That’s where we get cholula and a lot of the hot peppers, but for rest, the rest of the ingredients around the world, at least at the moment, we’re talking about a 10% tariff, and so, uh, I would imagine that in many cases, we’ll probably see their cogs inflation move from a low single digit expectation this year in terms of how their um, ingredients and overall cost base, um, actually shifts up more to a mid to high single digit kind of effect. Now, the interesting thing here is I think it will affect smaller players like private label store brands uh, disproportionately harder because their margins are lower, and so I imagine that the entire industry will be taking up pricing a few percentage points uh, to basically accommodate that, and then the good news is that we did collectively learn to cook from scratch in the early stages of the pandemic. So demand for spices and seasonings remains very robust, uh, and the category itself, hot sauces, anything to do with heat, uh, definitely seems to be doing very well right now.
14:48 Speaker A
Alexia, Brooke, thank you both so much for your time today. Appreciate it.
