Investors in food and beverage companies are drawn to the sector for a variety of reasons: fascination with the industry, perhaps a touch of romanticism or a family history in the business. But what they have in common is an awareness that this is a moment of nearly unprecedented growth — some have even called it a ‘frenzy’ — fueled by shifting industry trends.
Heightened awareness about all natural, organic, better-for-you food and beverage options has turned the market upside down, causing significant disruption. And savvy investors with track records in the industry are ready to react.
Large manufacturers are losing ground to nimble, proactive innovators and private label products, and loyalty to well-known household brands is largely a relic of the past. According to Bloomberg News, the 10 largest packaged food companies have seen sales slow by about $17 billion over three years, even as big food deals with smaller companies accelerate -- with a 54% increase over 2016’s $27.1 billion.
While low price and ‘guilty pleasures’ were once key drivers of purchasing, we see consumers increasingly showing a willingness to go in the opposite direction: paying more at the market for products perceived to be healthier, higher quality and environmentally and socially responsible.
Examples include the range of organic products, from produce to pizza. Plant-based foods, from veggie burgers to soy-based chocolate chips, dairy-free cheese and a variety of functional beverages are increasingly gaining shelf-space in stores and homes. Animal-based protein giants such as Tyson and Cargill are now experimenting with vegetarian-based protein foods, much the way automotive giants are slowly shifting to electric cars. Gluten-free food, once considered a fad, is here to stay, although growing at a slower pace than vegan.
These shifts create significant opportunities for entrepreneurs and investors. In the past, a startup CEO thinking about a merger or acquisition while still refining his or her manufacturing was putting the proverbial cart before the horse. We now see companies approaching deal brokers at earlier stages.
The extent of deal flow in consumer packaged goods (CPG) has drawn the attention of family offices and investment funds that previously only involved themselves in real estate or technology.
They see opportunities to invest in or buy branded companies that have been ‘de-risked’; in other words, concept proven, approved (when needed) by regulators, tested by the market and already appearing in distribution channels.
Challenges for entrepreneurs remain large. Getting a food product from a home kitchen to a major retailer requires numerous intermediate steps, from developing scale to finding warehouse space and a broker who will gain the attention of a major retailer. Fortunately, in the current environment private equity funds investors are stepping in at a much earlier stage, and considering smaller deals than they have in the past. Vast resources and industry connections at these funds are attracting founders to consider going that route for growth.
Because so many investors have capital readily available, they are not only making decisions quicker but also investing in more opportunities. In the Private Equity world, dry powder is near its high mark. Since it’s incredibly expensive to market a brand-new product, investors find products already generating revenue highly appetizing. Big retailers are using funds they once spent on retail expansion on investments in promising early stage products. Corporations that recently launched venture capital funds, accelerators or startup incubators include General Mills, Barilla, Campbell’s, Kellogg and Chobani.
In January of this year, General Mills’ venture arm, 301 INC, led an investment of $17 million in Urban Remedy, an organic food company that delivers ready-to-eat meals, juices, cleanses and snacks in a series B round. In November of 2016, Pepsi purchased kombucha innovator KeVita for a sum believed to be in the range of $200 million-$300 million. Around the same time, Dr Pepper Snapple poured in $1.7B to acquire antioxidant drink maker Bai Brands.
While a far smaller part of the M&A picture, established closely held businesses are also seeing transitions. As they begin to transition to next-generation leadership, some family businesses find they do not have a natural heir or leader. Those companies are more aggressively considering sales to competitors or an outside investor who will take the helm, with founders maintaining an interest, or workers entering an employee stock option plan.
Just a few years ago, investors may have looked skeptically at a baby food startup, or viewed it as boring. Today, they may be intrigued by new variations -- organic, all natural, sealed pouches instead of jars, no processed ingredients. Knowing parents will pay a premium for this type of product will make them more attractive for investment.
Smart investors today are patient and ready to invest, not just in manufacturing and hiring costs at the outset but to assist with developing traditional and non-traditional retail channels they know from other successes. They are prepared to see lower returns in the short term, provided they see a cohesive long-term plan for growth in the near future and an understanding of strengths, weaknesses, opportunities and threats in that sector. With decreasing regulation and potentially lower income taxes under the current administration, food M&A is likely to reach even greater heights in 2018.
Whether it’s organic baby food, probiotic drinks or plant-based protein, today’s smart food investors are thinking about tomorrow’s best bets, ready to reap rewards for thinking big.
Greg Wank is an accounting and advisory partner at Anchin Block and Anchin and leader of the firm’s Food and Beverage Industry Practice, providing services to privately held companies and investors throughout the industry, including many emerging brands, manufacturers, distributors and retailers.