Q3 INDUSTRY UPDATE
We believe nearly every category within food and beverage is experiencing a market share overhaul like nothing we have seen before. The consumer palate has become very dynamic as millennial consumers have matured into a large piece of the economy and the purchasing power of Hispanics has tripled over the past 15 years. The new consumer is asking for more transparent, healthy, authentic and natural foods that also provide an experience (bold flavors, ethnic concepts, etc.). Thus, a new customer base has been established, making large returns possible for companies with the ability to provide innovative products.
In Q3 2016, product innovation was rewarded in several categories, and here are some headlines:
Sauces and Seasonings
Products that provide a healthy way for consumers to add bold flavors to meals were attractive M&A candidates in Q3. ConAgra’s acquisition of Frontera and Red Fork, respectively, represented the addition of ethnic flavors, sauces and salsas to ConAgra’s consumer portfolio. B&G Foods also acquired the spices business of ACH Foods.
Grains and Baked Goods
While consumers increasingly prefer healthy products, they still want to indulge sensibly. Products that allow consumers to enjoy their favorite meals or snacks without consuming unwanted ingredients also were attractive M&A candidates. ADM acquired Caterina Foods, a leading producer of gluten-free and high-protein pastas and grains. ADM also acquired Soozie’s Doozie’s, an all-natural maker of non-GMO cookie mixes.
The consumer’s delight in innovation has been rewarded many times over in the coffee category, and the latest is Silicon Valley-based Philz Coffee. The company hopes to accelerate its growth plans by taking pour-over coffee mainstream. Philz received a $45-million growth investment from TPG in October to expand geographically.
The market continues to remain active, and strategic buyers that once sought stable, cash-flow generating companies with $100 million of revenue now are targeting much smaller companies. Many have taken the approach of forming investment vehicles so that they can place bets on multiple small brands as opposed to one large brand. This has caused private equity some difficulty in branded CPG food.
We expect private equity to continue to invest in the sector, but perhaps in more mature, consolidated segments where they are less likely to be outbid by strategic buyers. Private label foods, however, has held its market share across all categories for several years, and Treehouse Foods remains one of the only strategic players in private label. We expect private equity activity to increase steadily in this area in coming years.
We attended FoodBytes Boulder, hosted by Rabobank, in October and were impressed by the emerging food technologies and brands. Several key themes stuck out, but among the most important was food waste. The beauty of many of the companies, like Mad Agriculture (www.madagriculture.org), who is cultivating animal feed on composted food waste, or Regrained (www.regrained.com), who uses beer grain waste from the brewing process for baked goods, is that these startups are not only finding ways to recycle waste, but they have identified low cost agricultural or food processing inputs that could change the game in fighting food supply issues.
Other interesting companies, like The Honest Stand (www.thehoneststand.com) have found incredibly innovative ways to give people with dietary restrictions access to their favorite foods. This is no new concept, but we at SDR have tasted a lot of plant-based dairy substitutes, and this was among our favorites…
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