Grapefruit, boot camps, planks, and plyometrics—it seems that every few years a new fitness or diet fad is sweeping across the country. But today a more enduring shift may be playing out—a reordering of values that has individuals increasingly focused on health, wellness, and active lifestyles.
There are a number of factors possibly driving the increasing focus on natural foods and active lifestyles. These factors include an aging population that can expect much longer lives than previous generations, and near-epidemic levels of obesity and the increased occurrence of diabetes, which have stirred a national debate over food policy and diet. There is some speculation that consumers are increasingly driven to find new experiences and adventures, as well.
Whatever the causes, the trend in purchases is clear. “The health and wellness theme has been driving growth in many different areas—from where people shop and dine to the clothes they wear,’’ says Sonu Kalra, manager of the Fidelity Blue Chip Growth Fund (FBGRX).
For investors, companies that are able to satisfy consumer desires for a more active lifestyle or greater health, or those that are simply associated with these trends, may benefit from growth that far outpaces their industries overall.
“Throughout retail, there has been a general trend for less foot traffic in stores or restaurants, but a few places have been bucking this trend, and healthy living is one area that has stood out,” says Peter Dixon, manager of the Fidelity Select Retail Portfolio (FSRPX). “Companies that have exposure to this trend and have the best brands in the space have the potential to outperform, compared to other companies in the same industry or in their benchmark indexes.”
Organic and natural food
Growth in the overall grocery space has been less than thrilling, averaging sales growth of about 2.5% each year. But for natural and organic foods, the pace has been much faster, averaging nearly 12% growth each year, as a growing number of people opt for these types of foods.
Investors can approach the space in a number of ways. One major and well-known player is Whole Foods (WFM), which estimated it will grow sales 11%-12% this year. “This company has really built an entire shopping experience around organic and natural food, and has shown impressive growth in recent years,” says Kalra.
A lesser known play on the theme has been Costco (COST). “There are a lot of things that have been driving strong improvement at Costco, including its increasing emphasis on natural and organic food,” says Dixon. Costco has found not only that these products are sold at higher price points, but also that their customers have been buying these items at other stores. For instance, when the company offered fresh organic ground beef, it generated $25 billion in sales in the first year, and found that 80% of the sales were to members who previously had never bought beef at Costco. The additional products offered incremental growth rather than cannibalizing existing sales.
Another approach to the trend can be investing in the brands that market specific prepared foods. For example, Dixon’s fund has invested in Annie’s Inc. (BNNY), maker of natural and organic products, including macaroni and cheese. The company’s earnings doubled from the fourth quarter 2012 to the fourth quarter 2013.
Dining has also seen the same preference for natural and healthy options play out. Among the fastest growing fast-food chains has been Chipotle (CMG), which Kalra says offers customers a convenient way to choose a healthier option. “Chipotle is committed to antibiotic free chicken and has a non-GMO food pledge that helps it connect with customers’ preference for natural foods.”
Along with a shift in diet, Americans are also increasingly living active lifestyles. More than 50 million people finished a running race in 2012, which is more than double the number from 2000, according to Running USA. Triathlons, biking, yoga, and a range of other sports and exercises have also seen dramatic growth in recent years.
Dixon says he does a lot of primary research to understand how brands are positioned with consumers. He thinks the best prospects for investors come when you marry the tailwind of category growth with companies that are growing increasingly popular with customers.
In the active apparel space, Dixon has been interested in beaten-up brands like Lululemon (LULU), which produces women’s yoga and sports clothing, and industry leaders such as Nike (NKE). Kalra is also looking at apparel makers, including Under Armour (UA). “The company has benefited from increased activity and has a stronger position with the younger demographic,” says Kalra. “They have just started to expand geographically outside the United States, which may provide them with a pretty big opportunity to replicate some of the success that they’ve had here.”
Consumer preferences have been changing and driving sales growth for products that offer consumers a health or wellness benefit. Investors may want to consider leading brands in the space as growth opportunities.
Views expressed are as of the date indicated and may change based on market and other conditions. Unless otherwise noted, the opinions provided are those of the speaker or author, as applicable, and not necessarily those of Fidelity Investments.
Keep in mind that investing involves risk. The value of your investment will fluctuate over time and you may gain or lose money.
As of February 28, 2014, Fidelity Select Retail held 1.679% of assets in Costco Wholesale Corp., 1.054% in Annie’s, Inc., 1.150% in lululemon athletica, Inc., and 1.059% in Nike, Inc., class B.
Past performance is no guarantee of future results.