The better for you snack including potato chips, tortilla chips, popcorn, and cheese snacks and pretzels is a fast growing sector. Brands awareness gives existing companies huge advantages in benefiting increasing demands for their snacks and as well generates extra cash flows.

Sector’s current, trend, causes behind trend, and future

Current and Trend

• The growth in demands for high quality and healthier snacks has been faster than regular salty snacks.
• Boosted by organic demands for better for you snacks, higher than average profitability may cause more intensive competition by increasing M&A activities and investment.

 

Causes behind the trend

• As it happens in other sectors of food industry or personal consumption industries, shifting to premium products of consumers’ preference has been the trend in their choosing products with higher quality, better taste, and more benefit to their lives. We usually can see radical reasons behind this shifting from changes in economy including people’s wealth accumulation and increase of income and changes in consumers’ behaviours.

 

Industry Future

We think the growth in demands for better for you snacks will continues because we cannot see any fundamental changes in economy trend and consumers’ preference or alternative products in near future. We also think the competition may become more intensive since the margin is higher than industry average and enter barriers is relative small. However, trying to predicting sales and betting on sales is always dangerous thing to do. It is enough to know the trend of a industry for near future and let us focus on our relative analysis.

General Financial Performance of Companies In the Sector

This has been a growing sector with fast pace in the past several years as indicated by its annual increase in sales volumes and presenting a bigger growth rate than it is in other segments of salty snacks sector. Growth got its highest level in 2015 after the sales volume increased by 40% that year. While have slowed down since then, the annualized growth rate of sales volume still reached 20% and 16% in 2016 and 2017. The reasons behind this trend are simply that today’s consumers are inclined to have more, healthier, and better tasting snacks. The radical reason behind consumers’ behaviors is, as it always is in food industry, that improved productivity and enlarged global trading have brought consumers increasingly  accumulated wealth and as well increased disposable incomes so that today’s consumers have bigger flexibility to choose premium products, which have higher quality, better taste, healthier benefits and certainly more expensive prices, than they had otherwise.

Strong consumers’ preference help bring increases in sales volume, which we think is the major driver for companies in this sector of US market to be able to keep their perfect performance in terms of profitability, including more than 50% gross margins , more than 20% operating margins, and about 10% cash inflow as percentage of sales.

Because brands awareness is one of the keys for companies to keep market shares, which can be driven by spending on advertising and sales forces, we can see increasing SG&A spending of companies in this sector as sales grow.

Obviously, while it is not possible for the existing companies in this sector to continue to gain 40% growth year and year under the increasing competition, we are still seeing a growing sector and the realized brands will certainly bring owners of brands huge potentials to generate cash flow in next several years. We think it may be not unreasonable that the sector has average enterprise price/EBI ratio of above 35 (2017).  

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