20 Vol /01 Vol 19 Cleaner Livin INVESTMENT THEMEg 2019 Thematic Report www.tematicaresearch.com 2019 Cleaner Living Thematic Report 2019 Cleaner Thematic Living Prepared First Quarter, 2019 TEMATICA RESEARCH, LLC (571) 293-1977 [email protected] Cleaner Livin INVESTMENT THEMEg 01 | THEME INTRODUCTION 3 02 | COMPONENTS OF CLEANER LIVING 5 03 | TAILWINDS & HEADWINDS FOR CLEANER LIVING 6 04 | BUILD IT OR BUY IT: M&A ACTIVITY IN SPACE 9 05 | THE TEMATICA RESEARCH SCORECARD 12 06 | TEMATICA RESEARCH THEMES 15 07 | CLEANER LIVING SCORING TABLES 16 TABBLE OF CONTENTS OF TABBLE 08 | CLEANER LIVING SCORING DETAILS 36 09 | ABOUT TEMATICA RESEARCH 150 10 | INDEX 151 © 2019 TEMATICA RESEARCH® Tematica Research is a trademark of Tematica Research, LLC. All Rights Reserved 2019 Cleaner Living Thematic Report: An Introduction to the Cleaner Living Theme Cleaner Living Healthier Food, People, Homes, Offices & Planet The investment themes we’ve developed at Tematica Research® look to capitalize on the changing landscapes of economics, demographics, psychographics, technology and other factors that are altering consumer behavior leading some companies to alter how and what they do, while others ignore the changing consumer winds or are simply too late to respond effectively. These changes in consumer preferences mean a pronounced shift in how, where and on what consumers spend. Tematica’s Cleaner Living investment theme focuses on the shifting consumer preference for food, beverages, personal, home care and lifestyle products and services that are better for you, your body, your home, workplace and the environment. This shift is, in turn, forcing companies to reposition their product and service portfolios to capture this evolution in consumer spending preferences. While we are still in the relatively early innings for this thematic shift, some companies are further along in their transformation than others. But as more consumers seek healthier and environmentally friendly options, we’re seeing an increase in the number of companies looking to accelerate their transformation within the Cleaner Living theme on either a “build it” or “buy it” basis. This shift in preference for healthy, natural products and the eschewing of artificial chemicals, sweeteners, sugar and other synthetics in all aspects of our lives is one of the basic 2019 Cleaner Living Thematic Report Thematic Living 2019 Cleaner building blocks for Tematica Research’s Cleaner Living investing theme. 4 What is Cleaner Living Components of the Cleaner Living Investment Theme To be included in the Cleaner Living theme, a company must derive a significant portion of its operating profit from providing services or selling goods from one of the following categories: CLEANER EATING CLEANER DINING The companies providing natural, organic, non- Restaurants that have moved towards healthier GMO and even gluten-free foods, as well as fare on their menus and adopted a more natural products that specifically avoid using preservatives, food menu with the elimination of GMO’s, trans- artificial sweeteners, saturated fats and chemicals. fats, artificial ingredients in their food offering. CLEANER PERSONAL CARE CLEANER HOMES Natural skincare & makeup, toxin-free toothpaste, The use of cleaning products with more naturally shampoos, soaps and baby products with more derived active ingredients, free from irritating natural ingredients and fewer or no preservatives. chemicals, artificial colors and fragrances; low VOC For example, clean products would be those that paints, rugs, furniture, and mattresses; products get the “Clean at Sephora” seal of approval. and technology focused on the purification of water and air in your home. CLEANER PERSONAL PLANET Products that have high recycling content or are made through environmentally friendly processes such as from sustainable resources. This includes products and technologies designed to use less material and energy to reduce their environmental impact compared with incumbent technologies. This includes things such as biofuels, wind and solar power, electric vehicles, solid-state lighting and other renewables. “Being a leading global food company means being responsible stewards of natural resources. If we want to be around for another 150 years, we must reduce our environmental impact from field to fork to end of life. This begins by being aware of environmental risks and managing them with incredible care and consideration.” Jerry Lynch, Chief Sustainability Officer, General Mills 2019 Cleaner Living Thematic Report Thematic Living 2019 Cleaner 5 Cleaner Living: Tailwinds & Headwinds The Tailwinds for the Cleaner Living Theme are Pronounced: ■ According to Grand View Research, the global organic personal care market size is projected to reach $25.11 billion by 2025, as demand for organic skincare, haircare, oral care, and cosmetics drives consumers to look for natural and organic labels. Persistence Market Research has shown that with the year-on- year growth in organic beauty, the global market should be worth just under $22 by 2024. Those figures suggest approximate growth of 8-10% per year, which means there are significant opportunities to gain consumer wallet share for the organic beauty market at the expense of non-clean products. ■ In 2017 the global herbal supplements market size was valued at $5.26 billion and is anticipated to grow at a compound annual growth rate of 6.2% through 2025, according to Grandview Research. ■ Research firm Technavio forecasts the global market for organic food and beverages will grow at 14% per annum on average through 2021 – well ahead of the 2-3% revenue growth that is typical of grocery and other food stores which provides yet another opportunity for those companies servicing consumers’ evolving preferences. ■ Data from Hexa Research estimates that the U.S. Organic Food Market will be 2019 Cleaner Living Thematic Report Thematic Living 2019 Cleaner worth $70.4 Billion by 2025 6 © 2019, Tematica Research, LLC Like Many of Our Investment Themes, There is a Also Corresponding Headwind for the Cleaner Living Theme. You may think that, in this case, the headwind to Cleaner Living would be our Guilty Pleasure investment theme, which focuses on those little treats and would-be harmless vices that we as consumers like or need to have from time to time even though there may be a form of guilt associated with indulging. To some degree that is certainly the case. After all, under most circumstances, when people just can’t resist the temptation of a Guilty Pleasure, it’s not avocado ice cream that breaks their will power. In the case of Cleaner Living, however, the most prominent headwind centers on companies opting not to shift away from using GMOs, sugar or exposure to pesticides and other chemicals such as synthetic fragrances, preservatives, parabens, petrochemicals, and harsh cleaners due to costs or other factors. As we have seen several times over, the inability or unwillingness of a company’s management team to respond to the changing landscape means it fails to address incremental revenue and profit opportunities as demand for its legacy potentially fades. Consumers Seek Cleaner Living in All Aspects of Their Lives Shared earlier were a handful of data points and forecasts that, in our view, showcase the change in consumer spending patterns toward natural and organic products. There are other aspects of this shift, such as electric cars that limit carbon emissions and homebuilding materials that are free of chemicals. In other words, Cleaner Living is more than just natural or organic food, even though that category is one of the fastest growing and most recognizable. Compared to a decade ago, the range of Cleaner Living solutions has expanded significantly. It was not that long ago that in order to find these type of products you had to shop at places such as Whole Foods or your local health food store. Now, shoppers not only see them on the shelves of Target (TGT), Wal-Mart (WMT) and nearly every local grocery store, but even the stores’ private-labeled versions are touting their Cleaner Living aspects — GMO-free, organic or free from artificial colors and fragrances, etc. As consumers increasingly flock to these cleaner options, it will be at the expense of non- clean ones, giving the range of clean-living products and solutions room to expand. The more competition we have for these solutions, odds are the more affordable they will become over time, which in turn has a high probability of expanding the consumer 2019 Cleaner Living Thematic Report Thematic Living 2019 Cleaner base. 7 © 2019, Tematica Research, LLC The Global Impact of Cleaner Living Other thematic tailwinds helping accelerate the transition to cleaner solutions are found within our Living the Life and New Global Middle-Class themes. A recent study conducted by Reuter Communications, (a luxury intelligence, digital, communications and marketing agency) revealed that luxury consumers in China, especially in the Millennial and Generation X age brackets, have a preference for food with organic ingredients, frequenting restaurants and hotels with sustainable practices, participating in health and wellness programs and choosing transportation options that have minimal impact on the environment. At the same time, rising disposable income in China and other emerging markets has led to a sea change in consumer preferences there as well. In the past, the often-cited example of the evolving food preferences has been the trade up from a rice-based diet to a protein-influenced one. That story is old news as China has quietly become the fourth largest market for organic food and beverages, valued at just under $3 billion. As consumer awareness and incomes continue to grow, the market in China is expected to grow at a compound annual growth rate of 14% through 2022. There are also other factors at work that should push demand for cleaner products in Asia, such as legislation introduced in countries such as Thailand, India and Sri Lanka aiming to reduce sugar content. What this means is the consumer shift toward Cleaner Living is global in nature and that raises the stakes for consumer product companies.