Food Companies Accelerate Buying and Selling
Are you making waves in the food industry?
If so, watch out. The capital investment hawks are circling.
Most investors understand that the quickest way to flourish in this industry is to buy rather than build—and buying they are. There were 410 food-industry (all retail channels, food processors and restaurants) deals in 2015, according to The Food Institute, Upper Saddle River, N.J.
“It’s much easier to acquire than to start a new business,” Brian Todd, president of The Food Institute, said during the March Food Institute webinar Will Merger & Acquisition Activity Ever Slow Down? “Investment firms are more active now.”
As Todd pointed out, one attraction to food deals is that “people have to eat,” and these days many consumers snack as often as five times a day.
In the past six years, food processors represented one-third of all deals reported by The Food Institute, as both larger food companies and capital investment firms developed an appetite for buying niche players—namely organic processors with an emphasis on snack foods.
Retailers represented 18% of the deals reported by The Food Institute over that period, fueled by 65 supermarket deals in 2014 and 2015. The restaurant industry accumulated 100 deals in the past two years.
What’s the attraction to food and why now? Michael Johns, managing director for BMO Harris and a webinar presenter, said the low cost of capital is fueling M&A activity. “The current industry tailwinds are stronger than the headwinds,” said Johns, who oversees food industry investments for BMO, offering capital and advisory services. “This is about as cheap as money is and is going to be. My guess is that in 10 to 15 years, the cost of capital will be higher.”
Wal-Mart Threat Long Gone
Another factor that makes traditional retailers more attractive to potential buyers is the Wal-Mart effect. “It looked like they would hurt the soft underbelly of the grocery industry,” said Johns.
“While some of this did happen,” it didn’t transpire as projected.
“History is a funny thing: Banks have realized that traditional grocery have adapted,” he said.
The food processors and retailers who survived the Wal-Mart threat are now stronger and more nimble. “The story today is different,” and that differentiation is “what’s fueling the confidence of investors to spend money” on traditional food companies and retailers, said Johns.
“Everyone (retailers) who is on their game is selling products in their stores (many of them natural and organic products) that meet the desires of consumers—even offering private-label products across these categories. This is something that’s taking share from the Whole Foods of the world,” said Johns.
He said traditional retailers are strengthening their position several ways, including:
- Emphasizing that less is more. Retailers are cutting back on square footage. They do not want to be “over stored,” said Johns.
- Shoring up loyalty efforts. Consumers have begun to question the overall value of loyalty programs. “Retailers are curating a better experience for customers, including more customization via granular data generation,” Johns said. “They are using big data to focus on loyalty practices and become very customer-specific rather than offering volume discounts to shoppers over time.”
- Traditional becoming more like specialty. Conventional retailers adapted to change and nullified some of the distinctive advantages of natural/organic/specialty grocers. They did it through solid supply chain efficiencies and efficient sourcing of quality organic products. “They are taking sales from specialty grocers on a relative basis of same-store sales,” said Johns. “Shoppers now realize they don’t have to go elsewhere for on-trend and wellness items—this is taking a chunk of the specialty retailer sales.”