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The last few years have been a disillusioning time for the British people. Our politicians fiddle their expenses. Our journalists hack people’s phones. Our bankers routinely do things that make the other two professions look honest.
And now we can’t even trust our mince. The horsemeat scandal may well be the biggest disaster to hit the food industry since the ‘mad cow’ scare in 1996.
Supermarkets have yanked products from the shelves. Several processing plants have been shut. The police are involved, and there have been calls for lots more regulation. It could be years before public confidence returns.
But it’s not all doom and gloom. Some companies are profiting from the crisis.
And with the consequences likely to last for far longer than it takes to clear the last thoroughbred-burger from shop shelves, anyone who invests in these firms now should do well in the long run…
How does beef turn out to be horse?
Just how does horsemeat end up in a beef lasagne? We look at the reasons in more detail in this week’s issue of MoneyWeek magazine: The horsemeat scandal.
But it boils down to our appetite for processed food, such as burgers and ready-made meals. Getting these products to supermarket shelves involves huge networks of processors, abattoirs and other suppliers. In some cases, the original meat can pass through up to eight different stages and several different countries before it hits the end consumer.
All of the companies involved in this network are under huge pressure to cut prices. And one easy way for an unscrupulous company to cut costs is to mix in cheaper horsemeat with the beef.
Trouble is, this only works until consumers (not to mention the other companies in the supply chain) find out what’s going on. Now we’ve seen a backlash that is destroying confidence in products across the country.
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To win that back, someone is going to have to reassure consumers that their meat is 100% what it says on the label, and not just some random collection of whatever looked cheapest that week.
But with the government cutting the amount of money spent on abattoir inspectors, the burden of providing that reassurance will fall on the companies that make the food and the supermarkets that sell them.
But as many consumers have discovered to their dismay, it’s not easy to tell if a processed product contains horse. The only way to be sure is through DNA testing.
And already, the companies that provide such tests for food products are seeing a queue of new customers at the door. Given the scale of the scandal, this is unlikely to be a simple one-off.
Tesco has already said that it plans to post statistics about the amount of its food that is tested on a public website. And there are rumours that the European Union will force sellers to run more checks too.
Your local butcher can expect more business
Better testing will only go so far, of course. Even if there was a foolproof way to prevent all horse meat from entering the food chain (which there isn’t), there will always be some people who won’t trust processed products. On top of that, in the short run, better testing might uncover even more off-putting problems.
As a result, butchers also look set to benefit from the scandal. While there is nothing to stop them from selling dodgy products, they tend to have shorter supply chains and many more direct dealings with abattoirs. This means that – rightly or wrongly – the public has more confidence in the quality of their food.
Already, butchers across the country are seeing a big surge in sales. Q Guild, a high-end butchers’ trade group, claims that 30% more beef burgers and meatballs are being sold. Overall trade is up by 20%. The chief executive of the National Federation of Meat and Food Traders agrees. “Our members are telling us that they're all getting more business”.
So how can you benefit from this business boost? On the testing side, Europe’s biggest food lab, Eurofins Scientific (FRA: ERF) should do well out of the current crisis. Unlike other safety-testing groups, it gets most of its revenue from testing food, not products. It’s not cheap – trading at 40 times trailing earnings. But it is debt free and growing fast. It’s one to stick on your watchlist at the very least.
If you have a healthy appetite for risk, you might prefer to invest in micro-cap Crawshaw Group (Aim: CRAW). Crawshaw is a chain of traditional butchers, selling a range of meats and freshly prepared meals.
It owns 20 branded stores across Yorkshire, Humberside, Nottinghamshire and Lincolnshire, and has been able to grow sales by persuading existing customers to spend more. It plans to continue expanding across the north of England, and demand is likely to grow further if people decide they want to have a better idea of where their meat comes from.
• This article is taken from the free investment email Money Morning.
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