Food: strong drivers leading a robust deal making activity
Food: strong drivers leading a wave of consolidation and deal-making activity
The Food Industry landscape is changing and experiencing a wave of consolidation driven by strong market catalysts, that are reshaping the sector and fueling a robust deal-making activity. In a continuously evolving scenario, driven by rapidly changing trends in consumers’ demand and increasing power of private label’s brands, food players struggle to sustain margins and reduce price pressures by leveraging on scale economies and tight budgets, seeking to widen their product offerings and brands portfolios by entering new and innovative premium categories, particularly in the fresh, organic and “better-for-you” spaces.
One of the most powerful trends currently shaping the Food Industry and driving a robust M&A activity, is the growing consumers’ demand for fresh, organic and “better-for-you” products, able to combine a pleasant taste with a healthy nutritional profile. Whilst traditional and more mature food categories are experiencing a modest yet stable growth, less-processed foods are growing fast and are expected to be the strongest driver of the industry’s growth for the years to come. Consumers are increasingly concerned about their health, paying close attention to what they eat and carefully reading labels before buying. Low-fats, low-sugars, high-fibers, organic or gluten-free are just a few examples of what consumers seek when they shop nowadays. This is clearly forcing producers to significantly and rapidly shift their offerings from traditional processed foods to “free-from” and healthy proposals, with the introduction of new products and exotic recipes capable to meet the demand for flavorful but “fit” foods, free of additives and chemicals. Unilever’s acquisition of Italian artisanal gelato maker Grom, Coca-Cola’s investments into Latam based soy drink business Ades and organic-juices producer Suja Juice as well as Pinnacle Foods’ takeover of the healthy food platform Boulder Brands are just a few examples of huge traditionally processed foods-focused players moving into the healthy space.
Private Label’s brands: key profit driver for retailers
Private label’s brands have significantly increased their importance over the course of the last years, becoming a key threat in the already highly competitive Food Industry arena. Originally introduced to offer low-price, cheaper and often lower-quality alternatives to consumers compared to their branded equivalents, private labels have now significantly shifted their proposition becoming a key profit driver and point of differentiation for retailers, contributing to increase customer’s loyalty and generate a relevant stream of revenues and margins. The quality gap with brand-name manufacturers has significantly reduced, with offerings including premium lines and expanding into new and diverse categories.
Appetite for compelling, niche brands
Large multi-brands players are on an eternal look-out for compelling brands across new, innovative, fast-growing categories to rapidly build-up platforms. Acquirers look for premium, well-recognized brands, with clear upside potential, that allow them to enter new market niches (like the mentioned health-indulgence space) and/or new geographies.
Big, tight and “core”
In a very competitive environment, with rising pressures on margins, big players look at scale economies and tight-budgets as major profit drivers, that permit to increase their bargaining power with suppliers and sustain competitive pricing policies. Large food companies are hence largely using M&A as a catalyst to get bigger and generate cost-cutting synergies, monitoring the profitability of their diverse businesses and divesting what they no longer consider “core”, investing the proceeds in more margins-generating businesses, thus contributing to feed a robust M&A activity. The recent headline-grabbing mega-merger between Heinz and Kraft goes indeed exactly in this direction, with 3G Capital engaged in a massive cost-cutting activity. The Nestle divestiture plan of some of its most famous businesses (like the Spanish frozen ready meals brand La Cocinera sold to Findus, or the sale of the French frozen food Davigel to the UK-based Brake Bros) witness the mentioned trend toward a generalized portfolio refocusing.
Changing retail landscape
The retail landscape is rapidly evolving, with traditional retailers suffering the competition from alternative emerging channels like convenience stores, drug stores, mass stores and e-tailers, that came into play changing the rules of the game. Grocery retailers are attempting to stay competitive by redesigning their formats, promoting more intimate and innovative shopping experiences to customers and tailoring their offerings to the organic, fresh-made and ready-to-eat trends. Large conventional retailers strive to increase their size, expand their geographical coverage, enter the e-commerce space and operate a diverse portfolio of store formats, thus leading a robust M&A activity in the food retailing industry. Moreover, each of these channels has different go-to-market and trade requirements thus forcing the food producers to timely adapt to the changing environment to maintain competitiveness.
Private equity continues to be very attracted by the sector
Private equity investors continue to be intrigued by the Food space, which offers a kind of perfect combination between stability and attractive growth opportunities driven by solid market catalysts. Private equity is irresistibly attracted by the opportunity to build-up platforms and perform add-on acquisitions, a couple of things that the food sector can offer quite well, and will keep investing capitals into attractive targets even in the coming months.