Is fat a threat to the food industry?

The food industry has played a large role in fattening us all up up to 50% of British adults are overweight. But it could now be punished by our changing eating habits.

Why all the fuss about obesity?

Because some 22% of British adults are obese and 50% are overweight and the numbers are rising. The proportion of school children in Europe who are obese is thought to have risen almost 50% since the late 1990s and is likely to reach 6.4 million in 2010, according to the International Association for the Study of Obesity. A further 26 million European school children are overweight. In the US, 50% of school children are likely to be overweight in 2010 on present trends.

What's all this costing us?

In Britain, obesity is thought to be costing the National Health Service £1bn a year. Across the European Union, it is estimated to account for 7% of healthcare costs and will continue to rise in line with obesity trends, according to JP Morgan. The impact of obesity on children's health is startling. More than one million European school children are estimated to have high blood pressure or cholesterol levels, putting them at greater risk of heart attacks, and there is a sharp increase in incidences of diabetes. Health experts warn that obesity could soon replace tobacco as the biggest cause of premature death.

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Why are we getting so fat?

The simple answer is that people are consuming more calories than they are burning off. That's largely due to people eating too much and not taking enough exercise, but also to too much junk food and snacks. Indeed, a UK Government white paper in 2004 laid much of the blame on the food industry. It threatened to hit the industry with restrictions on the marketing of high fat, high sugar food to children and called for clearer labels on packaging. It also demanded a public education campaign to encourage exercise and improve diets.

Was it unfair to blame the food industry?

Not entirely. The industry had been steadily increasing the salt, sugar and fat content in food for years. It also used to promote these foods widely, particularly to children via television advertising and vending machines. But faced with the prospect of regulatory action, it has introduced voluntary changes. Salt has been reduced in breakfast cereals, soups, breads and pasta sauces. Most recently, Walkers Crisps has cut its use of saturated fat. Companies are also putting more nutritional advice on labels, while Cadbury is to go even further and put warnings on its confectionery.

Will this prevent regulatory action?

Probably not. The British Government has just bought in new rules banning schools from serving junk food from 1 September this year. A Government advisory body has proposed banning vending machines selling sweets and soft drinks in schools. The EU is proposing a new directive that will further restrict the way foods such as soft drinks, ice cream and confectionery are allowed to be marketed. All this regulation will drive up costs for the food and drinks industry.

How are eating habits changing?

Unhealthy foods such as fizzy drinks and junk food are being replaced with fruit and vegetables. Britvic last week warned of a slump in sales of soft drinks such as Tango and 7UP and McDonald's announced the closure of 25 restaurants. Golden Wonder crisps last year went out of business. On the other hand, Tesco reported vegetable sales were up 8% last year on 2004, and Sainsbury reports sales of lentils up 150% and dried fruit up 123%. Sales of Innocent smoothies trebled last year and sales of bottled water were up 10%. Eighteen of the fastest-growing food categories have a healthy image, according to market analysts AC Nielsen.

How is the industry responding?

By focusing on healthier products. Britvic, for example, has been building up its portfolio of non-fizzy drinks. Cadbury has launched a chocolate bar with only 99 calories. Some companies are launching products that claim to offer specific health benefits. For example, Tropicana has launched Tropicana Essentials with Benecol, which it claims can help reduce cholesterol. Some of the larger food companies, such as Unilever and Nestl, have set up venture capital funds to invest in research into new techniques and technologies that allow the development of healthier products.

Isn't that expensive?

Yes. Some companies have tried to embrace new healthier foods and drinks to capture the new trends. But this has often come at the expense of margins, which tend to be lower on items such as water and fresh fruit and vegetables. The alternative is to reformulate existing products to offer "better for you" versions. But this can involve significant costs, which again lead to lower margins. Obesity is both an opportunity and a threat to the industry.

How can you profit from healthier living?

Obesity is certainly an important issue for the food industry, but so far, it has not been a decisive factor for investors. Following Britvic's share-price plunge last week that may change. The companies with the best exposure to healthy eating trends are France's Danone, which makes yogurt and bottled water, and Switzerland's Nestl. But perhaps the best play on the switch to healthy eating is Tate & Lyle, the UK sugar group, which is transforming itself into a world-leading value-added ingredients business. Its sucralose sugar substitute Splenda is already a core ingredient of low-calorie products. And it has a number of other exciting products in development.

Simon Nixon is executive editor of Breakingviews.com