April 19, 2015 Millennial Insights Millennial Munching Equity Research A generational shift reshaping the future of food The Future of Food is with Millennials The nimble Fast Casual victor Jason English Baby Boomers capture headlines with population Winning with Millennials lies at the intersection of (212) 902-3293 [email protected] statistics, but declining consumption with age “real food” and convenience in restaurants. Nimble Goldman, Sachs & Co. makes this generation less relevant for food spend entrepreneurs can win while legacy QSRs may lose; YUM (Sell) and MCD (N) seem vulnerable. than some might believe. The future of food is with Karen Holthouse Millennials – the largest US generation and one in SBUX (CL-Buy) stands out as best positioned as (212) 934-4252 [email protected] the early stages of household formation and the only incumbent restaurant at the intersection Goldman, Sachs & Co. transition to parenthood. We expect Millennials to of ubiquity, convenience, and quality. account for more than 75% of growth within the Stephen Grambling, CFA food vertical over the next decade. Packaged food’s expensive uphill climb (212) 902-7832 [email protected] We expect manufacturers to suffer from Goldman, Sachs & Co. Share of stomach to shift to at Home unbalanced growth and reinvestment to realign Millennials will reshape the future of food. The portfolios. HSY (N) faces unique challenges of a Adam Samuelson fading sweet tooth while CPB (Sell) suffers as meals combination of family formation and a desire for (212) 902-6764 [email protected] transparency favors food at home, which will from cans fade. MJN (Buy) is best positioned on Goldman, Sachs & Co. capture disproportionate growth, favoring rising motherhood while TSN (CL-Buy) and GIS retailers and manufacturers over restaurants. We (N) are also comparatively better positioned. adjust select price targets as a result. Matthew J. Fassler (212) 902-6740 [email protected] Fresh, convenient, and PL win in retail Goldman, Sachs & Co. Uneven growth hurts the incumbents Food retail can win on a food at home shift and While not necessarily dinosaurs destined for less private label stigma. COST, TGT, and KR (all extinction, legacy food is challenged by distrust, Neutral rated) appear well positioned with strong lower loyalty, greater variety seeking, and product fresh food and private label positions while TFM offerings misaligned with Millennials. (Sell) falls on important value and PL attributes. Goldman Sachs does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. For Reg AC certification and other important disclosures, see the Disclosure Appendix, or go to www.gs.com/research/hedge.html. Analysts employed by non-US affiliates are not registered/qualified as research analysts with FINRA in the U.S. The Goldman Sachs Group, Inc. Global Investment Research April 19, 2015 Americas: Food Contents Framing the Millennial – share of spend as the largest generation rises 2 Stock call outs: Best and worst positioned 7 Millennials are growing up 9 Millennials have unique eating behaviors 19 Implications for Food Manufacturers 34 Implications for Restaurants – trends do not favor the incumbents 56 Implications for Food Retailers: Millennial mass appeal elevating competition 62 Risks table 66 Appendix: Additional Nielsen Data 67 Disclosure Appendix 77 Related research The Future of Finance, Part 3: The Socialization of Finance (March 13, 2015) Americas: Restaurants: Resume at Neutral; CL-Buy SBUX, Buy BKW/CMG; Sell PNRA/YUM (December 7, 2014) Millennial brand insights 2014: Fashion Beauty and Retail (October 17, 2014) Millennial Summit and Love List Countdown (October 1, 2014) Millennials: The Housing Edition: Out of basements and into homes (August 4, 2014) Millennials, food, & fitness: Commercial impact of the generation that gets their wellness on the daily (May 12, 2014) Goldman Sachs Global Investment Research 2 April 19, 2015 Americas: Food Framing the Millennial – share of spend as the largest generation rises Millennials are the largest US generation and will account for the vast majority of food industry growth over the next decade, both for food at home and food away from home. While Baby Boomers capture headlines with population statistics, declining consumption with age makes this generation less relevant for food spend than some may believe. We think the future of food is with Millennials, and we expect them to account for the majority of the growth within the food vertical over the next decade. Capturing this growth is a sizeable opportunity for food manufacturers, retailers, and restaurants, but some players are better positioned than others. We see the following key drivers to the rise of the Millennial generation. Millennials are growing up Millennials have been notably slower than prior generations to marry, have children, and form households. While later than expected, we believe their transition to independent households is a question of “when” not “if” because Millennials still display a desire to experience these life events. As household formation grows and Millennials begin to take root and form families of their own, household size will rise as a result, and overall food consumption will also rise. We expect Millennials to account for 75% of packaged food industry growth through 2025; however, given unique behavioral tendencies, we expect growth to be uneven. As a result, we see differing implications for our coverage across packaged food, food retailers, and restaurants. Millennials exhibit unique behavioral tendencies compared to prior generations While food consumption for Millennials will be similar to prior generations in some ways, data suggests unique behavioral tendencies of this age cohort will leave some players better positioned than others. Following are four key trends we see for this age cohort. Health redefined Millennials are becoming increasingly more health conscious as they age, though they are defining health differently than previous generations. Millennials encourage living an overall healthy lifestyle rather than dieting as older generations do. As such, Millennials favor natural and organic offerings, suggesting avoidance of ingredients perceived to be artificial or unnatural (e.g., refined sugar), and highly value transparency resulting in a desire to have full information about food products and clear, easy to read labels. We expect this behavior to only rise as female heads of household enter motherhood. More than just health for themselves On top of seeking healthy and transparent foods, Millennials have stronger social consciences and believe sustainability is important. Brands of private companies who give back to a cause tend to resonate with Millennials. Changing taste palates – more variety, adventure, and ethnic foods Millennials eat more fresh meat, with a clear preference for poultry, partially as a greater focus on health drives a shift towards less processed meat. Also, the combination of being a more ethnically diverse generation and growing up in a world where options are Goldman Sachs Global Investment Research 3 April 19, 2015 Americas: Food plentiful is leading to fragmentation of food choices and more adventurous appetites, making Millennials more willing to try new flavors and types of cuisine. Snacking and eating meals throughout the day is on-trend, though sweet snacks still suffer. Millennial trends The data also shows two other trends that resonate with Millennials: a lowered reluctance to purchase private label products, and a high desire for convenient products. Growth will be uneven as a result Food at home potentially will be the best positioned Increasing household and family formation will lead to larger household size and, as a result, higher food at home consumption. Further, the food- and health-aware nature of Millennials, and in particular Millennial parents, may prove to accelerate food at home consumption even more than income levels and aging into household formative years may suggest. Smaller brands have an advantage Smaller brands have greater agility to better address the “real food” movement, cater to Millennials’ social consciences, and cater to flavor adventure seekers. In both restaurants and packaged food manufacturers, winning with Millennials lies at the intersection of “real food” and convenience. Nimble entrepreneurs can win while many legacy QSRs may lose in restaurants. In packaged food, small private companies have resonated with Millennials while large legacy companies must reinvent themselves and their brands. Private label is maturing and becoming more mainstream Millennials are increasingly value conscious following a prolonged period of economic uncertainty, and also grew up in an era when private label was more than a “cheap” generic option. As such, Millennials are more open to buying store brands. Food retailers with heavier private label and fresh/health and wellness portfolios are poised to win. Big brands do not have to be dead Millennials may trust big food brands less but some of them are still buying their brands. Legacy players can stay leaders if they evolve quickly and appropriately. In order to succeed, however, legacy companies will need to invest to keep up, likely pursue M&A, and rebase