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Insights on M&A in the food and beverage industry

What did we learn from PrivCap Game Change?

INSIGHT ARTICLE  | 

What are the mergers and acquisitions (M&A) trends affecting the food and beverage industry? Jeffrey Edelman, director in RSM’s consumer products industry practice, provides insights shared at Privcap Game Change: Consumer and Retail event. The recent conference included investors, private equity fund managers and consumer products company executives and focused on the latest challenges and opportunities related to consumer and retail dealmaking, including those activities occurring in the food and beverage sector. 

Buying vs. building

For many companies in the food and beverage space, it is more cost effective to buy a company than to invest and build a new product from scratch. We’re seeing this played out especially in large-package food companies as they tend to lack innovation for creating new goods. Rather, they seem to be looking for growth potential via smaller niche players with desirable new products whose expansion potential can be increased with greater financial strength, increased distribution—including international in some cases—along with product line extension.

Investing early

Some private equity (PE) investors have focused on smaller companies a little earlier in their development; these PE buyers can bring different areas of strength and expertise, which could include helping build and add value, as well as guide the acquired business through the next level of financing or transaction. These early-development deals often include fine-tuning and strengthening the management structure and financial controls with the added discipline many entrepreneurs tend to lack.

Attractive investments

Popular food trends such as health and wellness, ethnic foods, snacking, and convenience are proving to be attractive areas for investment. Social media plays a big role in educating the consumer and developing shopper preferences around many popular trends, and consumers have shown their willingness to experiment and try these new products. Health and wellness categories, in particular, have been among the biggest beneficiaries of these efforts, resulting in product line extension opportunities and strengthened positioning among competitors.

Private label penetration, however, appears to have peaked for many food product categories, although companies with unique positioning or production facilities remain attractive to investors.

Risks to watch

Slow growth and drawn-out ease of entry have undermined the success of many acquisitions. Consumers are fickle and always looking and willing to try something new, adding to the difficulty in long-term planning. Industry consolidation has moved the balance of power more to retailers with respect to pricing and their development of private labels. The competitive situation at retail has intensified, pressuring already razor-thin margins which then translate into some pushback to food manufacturers.

In addition, safety issues and regulation are among the most difficult to address for many in the food and beverage industry. Too often we see manufacturers react to safety breaches rather than anticipate, often disrupting their business model and strategic planning.

Want more on the food and beverage industry? Learn more about other industry trends affecting your business.

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