Brad: Welcome to The Flip Side. I'm Brad Rogoff, Head of Global Research, and I'm delighted to be joined today by Warren Ackerman, who is our Head of European Consumer Staples Research.

Warren: Thanks, Brad. Great to be here. 

Brad: All right. Warren. So you're sitting in Europe, but we are going to talk about very much a global topic. And so the reason I wanted to have you on is, is all the time your team has spent in the last year researching what's certainly been one of the biggest trends in food and beverage. And I'm going to call that the protein boom. Consumers are clearly prioritizing protein manufacturers their products around it, and your research suggests the opportunity, it still has significant room to run. 

Warren: Yeah. That's right. We've done a lot of work on this. Our research estimates that the global protein market is already worth around $1.7 trillion, and our work suggests that demand could increase by more than a third if consumption moves towards what we describe as health-focused levels.

Brad: All right. Well, $1.7 trillion is a big number, a third more than that's an even bigger number. But whenever I kind of see consumer trends that become this pervasive, I do start to wonder a little bit whether we're looking at the start of a long-term shift, which is kind of what you're suggesting here, or the point where expectations maybe have become a bit too optimistic. And protein, it's already everywhere. Yogurt shakes, bars and protein bread we're seeing now. Right. So, your research shows company references to protein. They've increased twelvefold I think you guys said over the last 25 years. But I'm just not convinced that consumer behavior has changed quite as much as that. Much of the apparent opportunity. It looks like to me, really effective marketing rather than a structural shift in demand to consumers, that they may care more about protein, but that doesn't automatically mean consumption keeps accelerating from here.

The big number that you already mentioned. So, I can see a scenario where the marketing campaign worked for call it the low hanging fruit. And now companies might be overestimating how much growth, pricing, power and premium remains.

Warren: Actually, Brad, I don't think so. I think what we're looking at here is a fundamental long-term shift in consumer behavior. If it were just marketing, we'd expect awareness to rise without much changing consumer habits. But we're not seeing that, consumers are becoming more health conscious. They're much more focused on nutrition and increasingly see protein as a central part of their diets. And really the behavior is driven by a few factors. Firstly, mainstream health and fitness culture, healthy aging, weight loss, drugs, and the wider availability of protein across food categories. And then you think about social media. If you look at Ocado, they're saying that 47% of Gen Z consumers use Instagram and TikTok for protein inspiration. So yes, protein is being marketed aggressively, but I think the marketing is succeeding because it's tapping into that genuine change in consumer priorities.

Brad: All right. Well, I'm certainly not the demographic they're looking at on Instagram and TikTok for protein inspiration, but thankfully they have enough protein already. But what I want to talk about here a little bit more is the difference between a trend becoming mainstream, which clearly, yeah, I think I'm not going to push back on you too much on that. And that trend actually continuing to accelerate. So, if consumers, not just me, already have protein across breakfast, lunch, dinner and even snacking. You think about U.S. household awareness of protein that's already close to 80%. My concern is that the markets it's approaching saturation, and the industry can overestimate the room for growth from here. 

Warren: Yeah. Look, that's a fair challenge. But look, awareness doesn't always equal consumption. I don't want to throw too many stats at you, but I'm going to give you one, which is the IFIC survey shows that 70% of Americans want to consume more protein, but actually only 35% of them are doing that. So, the next leg isn't about teaching Americans that protein matters, it's about converting awareness into consumption. And if I look at one of the biggest sports nutrition players in the US, Optimum Nutrition, they were saying recently that 60% of their buyers are actually new to protein powder altogether. So yes, we're looking at this through a US lens, but globally the trend is far less mature.

Brad: That's fair to criticize me a little bit for getting to US centric there. So, but let's talk about the international story, and I do think it's a bit more complicated though. So if we think about some of the largest emerging markets, they're already consuming proteins at levels that are kind of comparable or maybe even above in some examples to develop markets which, look, when I was doing some research ahead of this, quite frankly, that surprised me. And I know you said you didn't want to throw out too many stats, but the stat that I was looking at was if you look at the FAO data, it shows China consuming a little bit more in terms of protein at 132g per day relative to the U.S., at 123g per day, and Brazil, for example, just behind the US.

Warren: Okay, I can see you got to be there, Brad. Look, you're right. China, Brazil. But that's not the real opportunity. It's actually the smaller emerging markets where consumption is much lower and the next wave of growth may not come from protein powder but will come from consumers maybe incorporating more protein into their everyday diets. The question for me isn't whether demand grows, but what form it takes.

Brad: Okay, that may be true, but even if you're right and demand does continue to grow, we got to talk about the economics and whether it can work here. Right. So, I think that's where it really tests the story. If you think about markets where protein is most established. Like let's go back to the US for a second here. You're also facing pressure from higher food bills, mortgage costs, tighter budgets and the US savings rate is falling, mortgage costs above 7%. Consumers are trading down. I mean, that's certainly a narrative we've been talking about a lot. And if you're faced with $7 protein yogurt, I think there are people going to choose cheaper alternatives. Manufacturers, they could be underestimating the pressure that consumers are facing. And if I look are U.S. food research team, they're seeing price increase, particularly among middle- and low-income consumers, which suggests further price increases could put volumes under pressure. 

Warren: Yeah. Look, I think the jury is out on that. You know, we don't really know yet how much the elasticities are changing and how much brand loyalty is really being tested. So, our research shows that consumers are becoming more selective, true, but are not becoming less health conscious. Protein sits closer to health and functionality than discretionary indulgence, which makes it one of the last categories that consumers cut. I think you're treating protein perhaps more as a commodity than consumers do. Or think about it, than egg a chicken breast they're ready to drink shake may all provide protein, but consumers don't see it that way. They're not really direct substitutes. They're also buying at the same time convenience and functionality. 

Brad: Look, I agree. Convenience may justify some premium, but affordability does determine the size of that premium. I think consumers, they don't need to abandon protein for the economics of the category to change. They can prioritize health while maybe trading down to like private label cheaper brands or just lower cost protein sources. And I think in the research, you've shown that only 2% of new protein products make a value for money claim, which suggests the industry; it's really focused more on that premium than affordability. 

Warren: So, I guess that's one area where we're going to have to agree to disagree. I mean, I think consumers are becoming more price conscious, but that doesn't mean they're automatically trade down in this area. They aren't just buying grams of protein. Those brands earn a premium through convenience, through taste, trust and consistency and CivicService, they did a survey in January this year where they found that health and wellness is the only category, and that includes protein, where consumers intend to increase spending led by these categories. So maybe look, there is a squeeze, but that's spend on protein from the data we can see looks to be pretty protected.

Brad: So, look consumers might remain committed to protein. But what we're seeing here going on in the market means that we really need to see some premium in the protein product. I mean, one of the biggest ingredients players in the world recently said at their investor day that they'd seen a 133% increase in new product launches with higher protein claims just in the last 12 months. I mean, that doesn't sound like just looking for a small untapped opportunity. It's almost like a gold rush at this point. And if every brand is launching another high protein product and consumers are becoming at least somewhat more price conscious, doesn't that make it easier for private label to gain share? And private label, it doesn't need to be better, it just needs to be good enough and less expensive?

Warren: Yeah, I mean, that is a big number. And, you know, that's a fair challenge. But what we're seeing out there is what we call repertoire behavior. And that's where consumers rotate between 2 or 3 brands depending on price and promotion. So I think you're underestimating the barriers to entry here. Private label faces many of the same cost pressures as the branded manufacturers, and often they have less ability to secure those specialist ingredients. And you know where supply tightens, scale, procurement, formulation, expertise all of these things matter more, not less.

Brad: So, you just said the word supply. Let's move to supply. Industry promotes protein demand takes off, specialist ingredients become scarce, costs rise. And companies what they need to do next is higher pricing. It looks to me a little bit like protein has become a victim maybe of its own success. 

Warren: I don't think it has become a victim of his own success. I think it's really more a category experience, how best to put this, growing pains. I think demand is growing faster than supply, which is supporting higher prices today. And if you look at whey that's probably the clearest example. Whey is a byproduct of cheese, so you can't simply decide to materially produce more whey in the way you might increase output on existing packaged goods. You need greater milk supply, cheese processing capacity, specialist filtration to turn that whey into higher value protein ingredients. And all of that takes time. And that explains why the key whey ingredient has gone up 3X in four years. But that's not evidence that the protein trend is broken. What that's evidence of is that supply is still catching up with demand. 

Brad: Okay. But what it means practically is the industry wants consumers to pay a premium because proteins desirable. Okay, maybe that happens, but then they want them to pay another premium because the industry cannot produce enough of it. At some point, that's where this elasticity has to appear. 

Warren: Look, it may I you know, I'd be surprised if there was no volume response to sustain price increases. But I think you're also assuming that supply pressures are permanent. They're not. There was a really interesting study recently from the International Dairy Foods Association. And what they said was that U.S. dairy processors are investing $15 billion in expanding manufacturing capacity across 23 states in the US, out to 2030. So supply constraints don't affect everybody equally. In some cases, what we're seeing is they can reinforce the advantages of the larger players. And, you know, companies with long term contracts scaling, procurement, multiple formulations, they may be able to secure those ingredients or reformulate more effectively actually, than those smaller guys. 

Brad: But doesn't that not necessarily protect the category. It more protects the largest companies within the category, which I know are a lot of the companies that you follow. And even for them, though, higher sales I mean, doesn't automatically mean higher profits. So if I look at your research, which I did a lot of preparing for this, it noted that high protein yogurt can require around three times the culture content of standard yogurt. So protein cultures and formulation all cost more. How much of the retail premium reaches actually the bottom line? It seems to me that costs keep going up and prices keep going up, but many of the players in the industry are going to struggle. I mean, probably to even reach something like a 10% operating margin. 

Warren: Yeah. Look, I spent a lot of time looking at operating margins, and I would be a bit careful with that, Brad. You know, because on margins it's quite hard to isolate individual high protein brand margins. You know, the margins depend on a lot of factors: market share, volume leverage, cost competitiveness. Yes. Costs are going up. These will all dairy proteins. And that pricing reflects that more than anything else. 

Brad: I guess that brings us back to affordability, right. So, a manufacturer can protect margin by using cheaper proteins, for example. But if the taste suffers, the consumer may leave. Or it can protect taste, you know, your example maybe keeping whey as a protein and passing on the cost. And then the consumer could leave because of the price though. 

Warren: Yeah, they could. I mean that's the tension. I mean that is the judgment call. The protein industry has to grapple with. Higher costs in real dairy are already constrained by more than factory capacity. You know, milk production depends on herd sizes, feed water, weather, farmer economics. In Europe as well, you've got environmental limits, which makes herd expansion more difficult. Beef supply has similarly long biological cycles. You can't just switch these supply chains on and off. 

Brad: That's a good point. But there's one other big trend that everyone is certainly concerned about right now in the food world and in the cost part of it. And that's El Nino weather patterns. So, most of what I've read through does not make it clear cut, that El Nino will have a direct cost implication for the protein industry. Is that fair? 

Warren: I think it's fair. I mean, you know, we don't really know yet the full impact of El Nino. We're watching it pretty carefully. The exact impacts are still far from clear and could be lagged. But what we have seen in the past from El Ninos is that big dairy regions around the world, I'm thinking Australia and New Zealand, they could face severe droughts and there could be a knock on impact to how much milk powder is then exported, which then could in turn drive up whey powder costs again, which the manufacturers will then need to reflect in their cost base. So, the reality is that the long-term climate volatility is here to stay, and consumers, unfortunately, will need to accept that dairy proteins are going to get more expensive. 

Brad: But it seems more to me from what you're just saying, there's likely like kind of a 12-month lag from El Nino event on the impact to dairy, livestock, for example. And so, I wouldn't think this was like more of an immediate risk. And it almost feels like a bit of a scare story that allows you to take even more pricing to an already stressed consumer that's facing what I would consider pretty darn high protein prices already. 

Warren: Now listen, Brad, this is real. This has been certified as being the most potent El Nino since records began in 1950. And it shouldn't be underestimated. Protein players will really need to think ahead and be savvy with the supply chain. And look, the obvious point is milk is perishable. It can't be stored for any period of time. So, if there are droughts, cows have to stay indoors where costs are just much higher. Plus, there are other environmental factors that may not be obvious but are real. I'm thinking the methane cap in Europe, which means that other countries just can't breed or buy more livestock. 

Brad: All right. So, we've gotten probably a little bit technical here. Hopefully, people still enjoy that part of the discussion. But let's finish out with what might change either of our minds. But just to be clear, like my thesis is that consumers, they'll continue to eat protein, but the industry is probably overestimating how much growth, pricing power and premium remains for the industry. I mean, I might change my mind if we continue to see strong volume growth despite higher prices, without greater promotion, without a material shift towards private label, and without consumers switching into cheaper protein sources. What would change your mind, Warren? 

Warren: Well, I've got to say that's a lot of caveats. It really is. Look, three things I think would change my mind. Firstly, if protein consumption starts flattening rather than just product launches, that's important, I think. Second, if consumers react to higher prices by eating less protein rather than switching formats. And third and final with supply catches up. But growth stalls, that would also suggest that perhaps we've been overestimating demand. 

Brad: All right. Well, I deserve that because you were very succinct in your three points. But let me ask you a follow up. What about margins? I know you said to me earlier, I gotta be careful about operating margins, but would weaker margins in general change your view, even if category volumes remain fairly strong? 

Warren: It wouldn't necessarily change my view of who the winners would be. At the end of the day, we're looking at the top line as well as the margin. I think protein can remain a structural consumer priority while some companies struggle, and others make acceptable returns. Our job is to try and pick which ones are which, and that's why, you know, stock selection really matters. You know, from my point of view, a company with secure supply, strong demand, strong brands, differentiated formulations, good price pack architecture, they're going to be the companies that will win and the company paying spot prices for whey and putting big price on undifferentiated claims on front of pack You know they're going to suffer. So, I think you're going to see bifurcation between the winners and losers. 

Brad: All right. So, you look like you have your own long list of requirements too, Warren. Just to be clear here. And my argument, it was just it wasn't that protein is going to disappear. It's that expectations now require almost everything to go right.

Warren: Yeah, I guess true. But my argument is that protein has become so embedded in structural consumer priorities. You know, think about fitness, healthy aging, weight management, functional nutrition. Growth rates will normalize. Some products will fail, but affordability will matter and so will supply chain, but none of that means that the underlying shift and interest in protein has peaked.

Brad: Well, look, maybe I've got too much of my financial analyst had on, and I just think the industry might be confusing protein demand with protein profits. The consumer can maintain or even increase protein consumption while trading down private label, switching from steak to chicken, moving from shakes to eggs, or refusing to pay for protein where it's simply been bolted onto an existing product, the boom can continue nutritionally, while disappointing commercially.

Warren: Yeah, and I think you're confusing how deeply protein has moved into the mainstream health behavior. I mean, consumers are becoming more selective, but they are unlikely to stop prioritizing it. I think the opportunity shifts from putting protein everywhere. So offering better protein propositions at the right price. And look, that is the more difficult phase. But it's not the end of the boom.

Brad: Well, look, even though I feel strong on my side, I have to say that I might be helping you out here because I feel inclined to go have a nice protein packed lunch after this conversation. You know, so maybe the marketing is all working. But thank you for joining me today, Warren. 

Warren: Thanks so much, Brad. 

Brad: Clients at Barclays Investment Bank can read our recent reports on the protein trend on Barclays Live. Thanks, everyone for listening to The Flip Side. Please do subscribe wherever you get your podcasts, so you don't miss the next debate.