By Ben Levisohn

For investors, food stocks have been about as appetizing as a plate full of slugs -- a state that will continue until significant changes are implemented. And no, it's not about RFK Jr.

On Wednesday, Health and Human Services Secretary Robert F. Kennedy Jr. announced the phaseout of eight dyes commonly used in American snack foods, something that food companies should have -- and likely did -- see coming. Yes, we love the rainbow of colors in a bag of Skittles or the blinding brightness of our Trix cereal, but when even my 14-year-old son is checking ingredients and avoiding products with artificial colors and flavors, you know it's time to move on. The companies, which haven't pushed back against the rule, probably know it.

But food company troubles go well beyond their use of dyes. There's more from Kennedy -- he also wants to make soft drinks and snacks ineligible for the Supplemental Nutrition Assistance Program, commonly known as food stamps -- while Ozempic and other weight-loss drugs have hit snacking, too. So too has the proliferation of fitness trackers and calorie-counting and ingredient-checking apps.

What's more, big food companies raised prices more than they needed to during the pandemic, and are now paying the price as consumers look for cheaper -- and healthier -- alternatives, including from private labels, explains TD Cowen analyst Robert Moskow. "Consumer expectations for higher-quality food are rising," he writes.

These headwinds have already started to get reflected in food stocks, which have dropped 10% over the past 12 months, even as the S&P 500 has risen 6.1% over that period. And while food stocks have outperformed so far this year -- the S&P 500 Food Products Index has gained 0.6% to the S&P 500's 8.9% loss -- they have underperformed the Consumer Staples Sector's 5% rise.

Many prominent companies, including PepsiCo, Conagra Brands, Campbell's, and General Mills have suffered nearly as much as or even more than the market. Worse still, they likely won't recover their previous safe-harbor status without major changes, Moscow says. "[We] do not expect these companies to provide a safe haven for investors unless they commit to more reinvestment," he writes, adding that he doesn't believe food stocks will be a good place to hide if there is a recession.

What should food companies do? They have three choices, according to Moskow: Boost the perception of quality, upgrade the product, or cut the price. The amount of each depends on the product mix. Campbell's, for instance, should improve the quality of its soups, prepare for price cuts, and consider unloading its V8 brand, Moskow writes, while Conagra, which has already cut prices on many of its products, should introduce premium products in frozen foods, and exit brands that are too small or commoditized, including hot dogs and margarine.

General Mills should cut prices and focus on product quality in its advertising, he argues, while Kraft Heinz needs to invest in higher quality, especially in products like Lunchables, Capri Sun, and Mac & Cheese, where the company has lost share as customers pivoted to healthier options.

Taking such steps will be far from painless. But only making changes at the margins doesn't seem to be helping either. Case in point: PepsiCo, which missed earnings forecasts and lowered its full-year guidance on Thursday. The company will shift to natural dyes "in the next couple of years," CEO Ramon Laguarta said on Pepsi's earnings call, it has also been offering shoppers more price points to buy its products. The market seemed unimpressed: Shares dropped 2.9% to $138.20, their lowest level in four years.

But making big changes doesn't have to lead to disaster. RBC analyst Nik Modi, who argues that "the time has come for the majority of consumer staples companies to cut their earnings forecasts significantly," points to Constellation Brands as one positive example. It cut its medium-term outlook earlier in April on concerns about tariffs and industry pressures, but the stock rose 0.7% even as the S&P 500 fell 3.5%. "We believe investors are of the view that the company took down its numbers enough as to provide a buffer even if things deteriorate further," writes Modi, who counts the stock as one of his top picks.

Just don't expect the safety food stocks once offered.

Write to Ben Levisohn at ben.levisohn@barrons.com

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

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April 25, 2025 01:45 ET (05:45 GMT)

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