Fast food operators under threat from weightloss drugs

This week my ECONS102 class has been covering (among other things) economic welfare, and last week we covered the model of demand and supply. Interestingly, this NBR article from yesterday (paywalled) gives us an opportunity to apply both of these things:

But it hasn’t stopped Shoeshine’s ears pricking up hopefully at the tidal wave of stories about the ‘miracle’ drug Ozempic, made by Denmark’s Novo Nordisk, the drug initially developed to treat diabetes and now used ‘off label’ across the world to lose weight. The success of Ozempic, and sister drug Wegovy, a USFDA-approved treatment aimed exclusively at weight loss, has been astronomical...

It’s a wave of obesity solutions that’s not yet hit New Zealand, says Dr Luke Bradford, medical director for the Royal New Zealand College of General Practitioners. But, he adds, “it will” – particularly after the patent on pack-leader Ozempic comes off around 2031.

While Ozempic is not available in New Zealand at present, and GPs are prescribing slightly older versions for Type 2 diabetes (Saxenda and Victoza), Bradford said it was a matter of time as supply chains and production lines get up to speed; and as production starts to include oral versions that are easier again to ship.

“These drugs are incredibly effective at what they do,” he says...

For the majority of people, however, the main side effect of taking the likes of Ozempic and Wegovy is that their appetite is substantially reduced, as is their desire for and ability to handle alcohol. Reddit boards that canvas the effect of taking Ozempic are full of people suffering extreme illness after gorging on fast or fatty food (which reacts badly with the drug); enduring ‘hangovers from hell’ (alcohol irritates the stomach lining and exacerbates the drug’s digestive effects); and toilet adventures that don’t bear repeating...

Most companies involved in the fast-food area, as well as the likes of global players including Nestlé and PepsiCo, are looking at how they might need to pivot in this new era of drug-induced weight loss. McDonald’s, which lost 16% in value last year (the result of a number of factors including a cost-of-living crisis, higher input costs affecting profits, a global boycott, changing diets) is among companies investigating healthier, smaller options for weight shedding clientele.

One might think New Zealand’s Restaurant Brands, owners of KFC, Taco Bell, Pizza Hut, and Carl’s Jr across New Zealand, Australia, California, and Hawaii might also be looking at this trend and wondering what it might do to its bottom line.

I don't think that we need to spend too much time wondering, and a consideration of the demand and supply model, and economic welfare, can give us an answer (albeit not a perfect answer). Consider the market for fast food, as shown in the diagram below. The market starts in equilibrium, where the demand curve D0 intersects the supply curve S0, with Q0 fast food traded, at an equilibrium price of P0. Decreased calorie demand from consumers, alongside some pretty awful side effects from consuming fatty foods when using Ozempic or Wegovy, decreases the demand for fast food from D0 to D1. This reduces the equilibrium price of fast food to P1, and decreases the quantity of fast food traded to Q1.

Now, think about what this means for the producers of fast food. Producer surplus is the benefit that sellers get from operating in the market. It is the difference between the price that the sellers receive, and their (marginal) costs. On the diagram above, producer surplus is initially the area P0AC. However, after demand decreases, the producer surplus decreases to the area P1BC. Clearly, the sellers of fast food are made worse off by this change.

It's little wonder that fast food brands' share prices have been tumbling of late. For example, here's Restaurant Brands' share price over the last five years (source here):

For reference, the drug Wegovy was released in 2021, while Ozempic was released in 2017, but was approved for use in weight loss in 2021. Notice that is about the time that the Restaurant Brands share price starts to fall. Share prices reflect markets' expectations about future profits and cashflows (at least, in theory). The falling share prices reveal that the market believes that future profits and cash flows will be lower, possibly because effective weight-loss drugs (especially those that have awful side effects for people eating fatty foods) are going to harm those firms' profits.