How to grow your profits as the world’s waistline expands

"If every country becomes as fat as the US, then in mass terms it's like having an extra billion people on the earth or feeding another half a billion." That's what Professor Ian Roberts, who led a study on obesity for the London School of Hygiene and Tropical Medicine, told The Daily Telegraph earlier this year.

With obesity already the fifth-biggest cause of death in the world, that it has a serious environmental impact too simply serves to emphasise how much of a problem unhealthy eating has become. It's one that politicians have realised they can't ignore as obesity imposes ever-increasing costs on healthcare systems. It's an issue that investors can't afford to ignore either.

When it comes to obesity, America has long set the pace for the rest of the world. American humourist PJ O'Rourke once commented that Americans feel they have a "God-given right to consume". Perhaps that's because their available resources have allowed them to do so quite easily. The country's vast tracts of good farming land and modern agricultural industry mean Americans have enjoyed cheap food since the end of World War II.

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But the obesity story isn't just about agricultural plenty. America is also a world leader in food processing. Its food companies were among the first to experiment with the combinations of salts, sugars and fats needed to churn out cheap, highly-processed food.

However, while fast food may be cheap and tasty, it hasn't been good for consumers. It lacks the vitamins and micronutrients that come with fresh food. Although fast food is loaded with calories, it often leaves people wanting more. Moreover, many people don't realise the extent of the fattening power of some of the new compounds in these foods. For example, high-fructose corn syrup a sweetener used in soft drinks that was developed in the 1970s has been singled out as a major cause of obesity.

The spread of fast-food chains has exacerbated the problem. With competition driving down the prices of processed foods, fast-food firms have tended to increase portion sizes in the race to attract more customers than rival chains. When McDonald's opened in America in the 1950s, its fizzy drinks came in seven ounce (200 millilitre) cups. Today, a child-size drink is 350 millilitres and the largest cups hold just under a litre.

America's burgers have also grown. "It's hard to believe the Big Mac was considered large when McDonald's introduced it," says Lisa Young on MSNBC. "Big Mac's roughly three ounces of meat are puny compared to the new mega-burgers." Depending on the option you choose, "current fast-food servings are two to five times larger than they were in the 1950s", says Young.

As food portions have increased, people have expanded. In 1985 around 7% of Americans were classed as obese, according to the World Health Organisation (WHO). Now more than 30% are. Add in the percentage of the population classed as overweight', and this rises to almost 70%. Where America has blazed a trail, other countries have followed.

The spread of US food-processing techniques has spread the obesity problem too. As emerging markets get richer, they're not just building more bridges, power stations and planes they are also churning out ever-fatter populations. In Brazil, almost half the population is classed as overweight, and the rate is rising rapidly. Brazil's Ministry of Health says that between 2006 and 2011 the rate jumped to 48.5% from 42.7%. If it continues at this pace Brazil will be as obese as America by the early 2020s.

The figures for Russia are equally bad. Even China and India, where the national stereotype tends to the wiry and spry, have weight problems. Now a third of Chinese men and a quarter of Chinese women are overweight or obese. Indian rates are lower, with one in five men overweight, but they're catching up fast.

Obesity is turning into a global epidemic. According to the WHO, obesity rates have doubled over the past 30 years, leaving 1.4 billion of us overweight and 500 million obese. Moreover, the problem is set to get worse. Eating all those extra calories might be fine if you then go and burn them up. But two of the dominant trends shaping the world urbanisation and ageing populations mean that fewer people are exercising.

Urbanisation is a big driver of obesity, says Bank of America Merrill Lynch analyst Sarbjit Nahal. This is because "cities offer a greater range of low(er)-cost food choices, notably fast food. This is compounded by factors such as urban work, often involving less physical exertion." With hundreds of millions more expected to move to cities across Asia in the coming decades, urbanisation is likely to produce increasing obesity.

It doesn't help that the global population in general is getting older. As we age, we tend to do less exercise and put on weight. "The ageing of the population in many countries is tending to nudge many overweight adults into the obese category, and push many of those who are already obese into severely obese' territory," says Nahal. "There is a real possibility that we could be looking at an impending demographic wave of older, obese patients and even higher medical costs."

That makes it even more worrying that obesity rates are also rising among children. "Today's growing number of obese and overweight children and adolescents could become tomorrow's adult obese and overweight," says Nahal. Obesity is going to be with us for a few generations at the very least.

How to profit from the trend

This is all pretty depressing. The good news is that obesity is an issue that governments are keen to tackle. That in turn means there are plenty of opportunities to profit from the trend.

There is a simple, cold-blooded reason why governments are bothered by obesity it costs a fortune. In America, the estimated annual cost of obesity is $190bn. That's around a fifth of the country's annual spending on medical costs. Total healthcare costs for an obese person are about 40% higher than for patients of normal weight. That's because obesity is connected to a slew of other problems, such as diabetes, heart disease and certain cancers.

These costs are expected to rise by 3.6% a year until 2027. That may not sound a lot, but if costs could instead be capped at 2010 levels, the government would save more than $500bn. That's a big incentive to do something.

There are also significant indirect costs. Because it is generally less healthy, an overweight population will also have lower productivity and higher absenteeism. A heavier population is also more energy-intensive, and therefore less environmentally friendly. It consumes more food, and it takes more energy to transport such people around, so they generate higher emissions of greenhouse gases. Basically, as Roberts points out, having bigger people is like having more people. With the population growing exponentially as it is, this places greater demand on resources.

All of this will lead to higher demand for anything that can stop obesity, says Nahal. "The growing cost burden...on governments, corporates, and both the obese and non-obese will spur greater collective action to fight obesity." One of the most cost-efficient ways for governments to do this is by approving more obesity drugs.

Until recently, America's Food and Drug Administration (FDA), which regulates the world's biggest healthcare market, had proved reluctant to approve obesity drugs there was only one available. However, in the past month it has approved two drugs that it had previously rejected. Shares in the companies behind these drugs Arena and Vivus are up this year.

The trend will continue, says Marianne Kirby in The Guardian. "The FDA has indicated support for diet drug research enough so that pharmaceutical companies are banking on their drugs being approved." Another more established element of the medical fight against obesity is the drugs and treatments used to combat the diseases that obesity often causes, such as diabetes.

Then, of course, there is the traditional way of losing weight eating less and doing more exercise. Just as governments have managed to cut smoking numbers and reduce drink driving, a number of campaigns are now pushing healthier living. That should provide a boon for sports shops, weight-loss clubs and healthy food retailers. There are also less obvious investment opportunities in solutions that tackle the wider costs of obesity. Car makers, airlines and house builders are adapting the built environment to accommodate larger waistlines. As a result, once-niche areas will become mass markets. We look at the best ways to profit below.

Where to put your money now

When we last wrote about obesity (in September 2010), we tipped McDonald's, Weight Watchers and diabetes specialist Takeda Pharmaceuticals. The tips have done pretty well, though as you can see from the chart on the right, the whole sector has had a good few years. With obesity here to stay, firms in the obesity index' should continue to profit.

Weight Watchers is up 60% since we tipped it. With its marketing costs per member rising, now is probably a good time to take profits. Japanese firm Takeda has remained flat, its earnings plans partly scuppered by an expensive acquisition. The firm still has decent growth prospects, but there are more exciting plays in the space.

As for McDonald's (NYSE: MCD), it has produced a solid 20% return, but we wouldn't sell now. The firm has the best emerging-market penetration of all its peers, meaning it will continue to profit as new Indian and Chinese customers move to the cities and try fast food for the first time.

It has also proved successful at deflecting criticism from health campaigners in the developed world. It reduced the size of its largest fizzy drinks from 42 ounces to 32 (slightly less than a litre) and unveiled a new range of healthy' alternatives.

The firm has an amazing record of rewarding shareholders and its success of adapting to changing attitudes in the developed world suggests that's not about to change. The share price has dipped recently, as investors fear it could be hit by rising food prices and a strong dollar. This may have an impact in the short-term, but on a forward p/e of 15.5, the company is still a long-term buy.

As for obesity prevention, analysts, including those at Bank of America Merrill Lynch, believe sports clothing and equipment companies should benefit as governments and doctors urge people to take more exercise. We're not so sure. For many people, sport is the least attractive solution to weight gain, and the new availability of diet pills is not going to make it seem any more attractive.

US firm Herbalife (NYSE: HLF) sells both nutritional supplements healthy-eating pills that help you lose weight and sportier supplements. Although based in America, around 80% of sales are from elsewhere including more than 60% from emerging markets in Latin America and Asia.

A network of 2.7 million distributors does the selling, Avon-lady' style. The sales model has its detractors, but it's well suited to emerging markets, says Bank of America's Sarbjit Nahal. The firm saves costs on local branches and only pays up when its products have been sold. In America, Herbalife is growing its business with nutrition clubs' that foster brand loyalty and encourage members to tell their friends. On a forward p/e ratio of 12.3, it looks cheap.

Picking a winner among the anti-obesity drugs isn't easy. The share prices of both Arena (NASDAQ: ARNA) and Vivus (NASDAQ: VVUS) have gained several hundred per cent so far this year. A better bet is firms fighting diabetes. The leader in the market is Danish firm Novo Nordisk (OMX: NOVOB).

"Serious diabetes needs treatment with insulin and Novo has a 50% global market share in insulins with leadership in all world regions," says Dr Mike Tubbs, author of the Research Investments newsletter. "Moderate diabetes needs GLP-1 treatment (with Novo's drug Victoza, for example) and Novo has 62% value market share in GLP-1. These are very strong... positions."

Unlike some of its rivals, the firm has strong patents and has submitted next-generation insulin to regulators. The shares are up about 65% in the last 18 months and trade on a forward p/e of 24.6. However, with its first-quarter earnings up 18% this year, and its market expected to grow strongly over the next ten years, Novo is a buy.

Our fat pets

Humans aren't the only ones putting on weight, writes Inigo Kelsey. An RSPCA report found that 50% of pets in Britain are overweight or obese. Pet obesity is an "out of control epidemic" that affects all types of domestic animals from horses to reptiles says Mark Evans, chief veterinary adviser for the RSPCA.

Part of the problem may be that pet owners don't realise that "Tibbles" is overweight. At least "22% of dog owners and 15% of cat owners characterise their pets as normal weight when they are actually overweight or obese", says Dr Ernie Ward from the Association for Pet Obesity Prevention.

Harder to explain is that even animals cared for by professionals have been piling on the pounds. For example, in 2008 the dolphins at Japan's Kinosaki Marine world got too fat to jump and were placed on a reduced-mackerel diet. Meanwhile, in the Shanghai Ocean Aquarium, overweight sharks were given fish stuffed with cabbage to help them slim down. What's going on?

One school of thought is that, as with humans, processed food is to blame. Some scientists believe synthetic pet foods lack nutritional value, causing pets to remain hungry after their meal and eat more to satisfy their hunger. There's also the argument that we simply have more money available to spend on spoiling our pets.

Whatever the answer, together with a rise in pet ownership, pet obesity is set to carry on driving demand for pet food. The Italian Pet Food and Pet Care Association puts the world pet food market at £42bn and estimates it will grow by 69% over the next five years.

Obesity-related health problems have also helped. British insurer RSA reports an 11% growth in pet insurance premiums for the first half of 2012. Elsewhere, niche pet health companies, such as dog treadmill-maker Fit Fur Life, have sprung up to take advantage of the pet obesity problem.