1H 2023 Food & Beverage M&A Report
In Food and Beverage, Expect the Unexpected
If anything, the first half of 2023 was an “interesting” time for the food and beverage sector. Government investigations, federal intervention on deals, inflation, higher wages, backlash on tipping, labor issues, new scientific scrutiny, and divestitures (and government seizures) in Russia. That’s a lot for any sector to handle, but Food and Beverage is a big category that affects everyone. We all eat. From craft beer to turmoil within one of the world’s largest fast food chains, Subway (more U.S. locations than McDonald’s), there are a lot of moving parts.
Previous Food & Beverage Reports
After a go-go 2021 and record M&A activity in the food & beverage industry, 2022 saw a cooling-off period. Not surprising. Rising interest rates, food inflation, the war in Ukraine, and supply chain issues created headwinds across the industry. Then, throw in a troublesome disease like Avian flu and an egg shortage. Tough times. It doesn’t mean deals didn’t get done, but not as many. Still, there are areas worth watching and some exciting possibilities, especially in food tech, from at-home nutrition tracking to the first-ever (mostly) automated McDonald’s franchise. Even when it comes to the stuff we put in our bodies, everything seems to come down to tech.
After a slowdown at the start of the Covid-19 pandemic, Mergers and Acquisitions in the Food & Beverage Industry accelerated through 2021, spurred in part – like other industries – by the hint of looming a higher capital gains tax rate that never materialized, while buyers leveraged low interest rates and significant stores of dry powder. We are seeing 2022 shaping up to be an active period as well as private equity remains active and larger, industrial brands look for smaller players to fill out their lineup. There are some concerns about rising interest rates, but for those with money to spend, both in private and public spaces, the struggling stock market could make acquisitions an attractive place to park money.
Even in comparison to a robust 2021, dealmaking in the U.S. was up significantly in the 1Q22 as more realistic valuations are luring bigger players looking to add components and keep up with changing consumer tastes. We saw Mondelez – makers of Oreos and Ritz crackers – snap up Mexican bread maker Bimbo’s confectionary side for $1.3 billion and U.S. nutrition bar Clif Bar for $2.9 billion.
Those consumer tastes and trends include growing demand for better food solutions, not just healthier and organic products. Health is still a concern after two years of a virus being in the news every day. But the rush to plant-based meat alternatives may be cooling as consumers start to think about how processed those alternatives must be. Concerned about the estimated $2.6 trillion in wasted food annually around the world, consumers have us looking at new companies that are combating food waste. And as 1H22 closed, food inflation was running above 10% in the United States and 9% in Canada…
Never satisfied with the status quo, the Food & Beverage industry continued to hunger for growth through 2021. Bigger producers have focused their efforts on expanding their exposure to high-growth emerging CPG brands through M&A.
Moving on from a challenging 2020, the year the COVID pandemic closed restaurants and saw consumers locking themselves at home, the sector began to show signs of life – and dare we say “growth” – in 2021. Growth in snack sales, boosted by the stay-at-home crowd, appears to be sustainable, and companies are investing in infrastructure to capitalize. Consumers flush with cash after a year avoiding bars and restaurants, are ready to spend again. And manufacturers, such as American Foods Group, announced renewed investments in production with the construction of a $450 million Missouri beef processing facility expected to create 1,300 jobs and a billion-dollar economic impact in the area.
Some of the largest players moved to shed portfolio components that showed signs of slowing while advancing in growth positions such as sports and energy beverages. We are also watching closely as big food protein processers invest in – or acquire – potential competitors in alternative sectors, such as cell-manufactured or plant-based competitors as a hedge…
If we are what we eat, surveys show most people want to be healthy. So healthy eating is becoming a regular drumbeat across the Food & Beverage industry. Stuck at home in 2020 – with many restaurants closed, home cooking replacing on-the-go dining, and the kids eating out of the fridge instead of at the school cafeteria – consumers turned an eye to just what’s in that snack or meal. As we move out of the pandemic, those new habits – and preferences – may be here to stay. A 2021 U.S. survey found 73% of Americans say they are confident they can identify healthy foods – 67% of them say they understand the labeling information – and nearly 60% say healthy ingredients are a driver when making a purchase. More than 70% say they are avoiding sugars, although it’s worth nothing taste remains king. Healthy food still needs to taste good.
It will be interesting to see how the consumer packaged goods industry reacts to these consumer shifts and better consumer education. We’re watching some in CPG that have already reacted and adapted. Companies that focus on sugar reduction technologies – and avoiding the aftertaste some sugar alternatives encounter – are worth watching. Recently, Israel’s Better Juice built a test plant and landed $8 million in funding. The company incorporates a technology that converts fructose, glucose and sucrose into dietary fibers and non-digestible molecules. The company reports the process helps reduce up to 80% of all sugar. The product is aimed at orange juice producers. It’s not just start-ups chasing a good-tasting sugar substitute, industry giants Nestlé and Ocean Spray are in the game as well…
Even as some business sectors suffered, and continue to suffer, during the global COVID-19 pandemic, the food & beverage Consumer Packaged Goods (CPG) sector enjoyed tremendous growth, in part as a direct result of the pandemic.
Around the world, consumers were banished from their offices and sent to work from home. As Zoom online calls replaced in-person meetings, traditional lunches out or stops on the way home were replaced by home cooking. In the U.S., restaurant sales fell $240 billion off industry expectations for the year. But people still have to eat – in March, grocery food sales were up 30% for the month, compared to prior year sales. After a frantic “stocking up” phase, food CPG growth remained up 12% through November. For the first time in years, Canadian and U.S. consumers began spending more money in the supermarket than on restaurants and take out.
We saw more than an across the board increase in demand for CPG foods. There was nuance in the demand. With healthcare in the news daily, warnings about precautions, and the ubiquitous face mask, it was only natural consumers became more health-conscious and more concerned about the food they consume. And while the kids might eat spaghetti for a few meals, that gets old. Families began exploring new foods, new spices, and new things to enjoy together. Cookbook sales in the U.S. were up 15% through September…
The global pandemic has had a dramatic impact on the entire Food & Beverage Industry, driven largely by major changes in consumer behavior. With lockdowns and stay-at-home orders, the entire foodservice sector was decimated, while there was a corresponding surge in spending at the grocery store. According to Mintel, increased sales were reported across all departments, with the frozen aisle and shelf-stable categories seeing the largest increases during the late winter/early spring. Fresh produce also saw strong sales since the onset of the pandemic, according to The Packer, and online grocery sales have been breaking new records, according to Digital Commerce 360.
We tracked 99 M&A transactions in the Food & Beverage Industry during the first half of 2020, with a median deal multiple of 9.1x EBITDA and 0.6x revenue. The most active segment was Alcoholic Beverages with 26 transactions. CPG Foods and Non-Alcoholic Beverages were also active segments and had 17 transactions each.
Publicly traded EBITDA multiples were an average of 16.9x TTM EBITDA for the Food & Beverage Industry segments we track, down from 18.2x TTM EBITDA from the first half of 2019.
TRENDS TO WATCH
One of the many Food & Beverage trends impacted by the pandemic has been an increased and accelerated interest by consumers in healthy foods and beverages to boost immunity. Google search terms such as “immunity-boosting foods” and “high Vitamin C foods” saw as much as a 300% spike in frequency during March; particularly in places such as New Jersey, New York and California where the virus outbreak was trending upward at the time…
We tracked 147 M&A transactions in the Food & Beverage Industry during the second half of 2019, with a median deal multiple of 8.5x EBITDA and 1.3x revenue. The most active segment was CPG Foods with 31 transactions. Restaurants and Alcoholic Beverages were also active segments and had 29 transactions each.
Publicly traded EBITDA multiples were an average of 21.1x TTM EBITDA for the Food & Beverage Industry segments we track, up from 18.2x TTM EBITDA from the first half of 2019.
TRENDS TO WATCH
A recent research survey conducted by the Agri-Food Analytics Labs, at Dalhousie University in Nova Scotia, Canada, found that Canadians are highly concerned about food waste, driven partially by rising food costs. Approximately 53% of survey participants said they plan to take steps to reduce food waste in their home in 2020. Many also plan to eat out less often, look for discounts at retailers and plan to buy in bulk to save on food-related expenditures.
Awareness of in-home food waste has been rising and a recent study by Ohio State indicated that the top drivers of food waste in the home are concerns about food safety, odor, appearance and dates on the label.
“No one knows what ‘use by’ and ‘best by’ labels mean and people think they are a safety indicator when they are generally a quality indicator,” said the study’s author, Brian Roe. The study found that Americans consume only about 40-50% of the fruits, vegetables, dairy and meat they purchase.
Currently, product date labeling is required only for infant formula at a federal level, however there are new labeling rules being proposed to help reduce consumer confusion over “use by” (safety) and “best if used by” (quality) guidelines.
We tracked 190 M&A transactions in the Food & Beverage Industry during the first half of 2019, with a median deal multiple of 10.6x EBITDA and 1.4x revenue. Restaurants was the most active segment with 45 transactions. CPG Foods, Alcoholic Beverages and Proteins were also active segments and had between 29 and 31 transactions each.
Publicly traded EBITDA multiples were an average of 18.2x TTM EBITDA for the Food & Beverage Industry segments we track, up from 13.7x TTM EBITDA at the end of 2018.
TRENDS TO WATCH
Meat Alternatives
According to UBS, the plant-based meat alternatives market is poised to grow from $4.5 billion in 2018 to $85 billion by 2030; a growth rate of over 25% per year, which goes well beyond any anticipated growth trends in veganism or vegetarianism. Animal protein companies such as Tyson and Maple Leaf Foods are taking notice and investing in the plant-based meat alternative trend as well.
However, if you look at the ingredient list on a Beyond Meat or Impossible Burger label, you will notice a long list of ingredients; many of which are highly processed. Certainly, consumption trends are based on the perception that a “plant-based” burger is healthier than an “animal-based” burger, however there is very little evidence that this perception is true. Undoubtedly, high levels of regular red meat consumption are negatively associated with an increased risk of heart disease and other health issues, but on a burger to burger comparison, they have a similar nutritional profile (similar calories but plant-based have slightly less saturated fat and higher sodium). Meanwhile, consumers are gravitating towards foods with simple, easy-to-pronounce food ingredients that are minimally processed. It will be interesting to see how the typical health-conscious, “better-for-you” consumer reacts to this dichotomy.
