Replacing Artificial Food Dyes Unlikely to Spoil US Packaged Food Firms’ Sales and Profit Prospects

The US Department of Health and Human Services and the Food and Drug Administration plan to eliminate a wide range of petroleum-based food dyes in packaged foods by the end of 2026. This builds off of pending statewide bans, including in California.

Why it matters: Despite our presumption that dyes are a small contributor to the overall cost structure, more cost pressure may ensue, as natural color additives lack robust supply and the development timeline could elongate.

• We think operators will flex to blunt any impending profit strain by removing excess costs, altering price packs, and potentially raising prices.
• This decision stands to benefit firms like McCormick and other flavor manufacturers that work with packaged food customers on reformulations (altering the ingredient profile while striving to maintain taste).

The bottom line: Following this announcement, we don’t intend to alter our intrinsic valuations or moat ratings for our US-based packaged food coverage.

• Despite market concerns around the trajectory of volumes, we view Kraft Heinz (trading at a 40% discount to our $53 fair value estimate) and Hershey (trading 20% below our $205 valuation) as attractive opportunities for investors looking to gain sector exposure.

Big picture: Even before stepped-up state regulations, packaged food firms were working to improve the health profile of their fare by removing artificial flavors and colors. This is seldom publicized, though, since consumers tend to associate a healthier product with a less favorable taste.

• Kraft removed artificial flavors and colors from its namesake macaroni and cheese a few years back and didn’t market the change. Management claimed volumes held up.
• However, about a decade ago, General Mills launched artificial-ingredient-free Trix after many years of development to ensure it boasted a similar taste and held up in milk. But because of consumer pushback, the firm ultimately brought back the original version.