The food and beverage industry has become very attractive to private equity firms looking to add to their portfolio. Many middle-market food and beverage companies present characteristics that private equity groups salivate over: stability, durability and niche, while also having significant growth potential. Further, there are several trends and opportunities in the market making this industry even more attractive to private equity groups. A few of them include:
- Increased consumer interest niche food groups
- Growth opportunities through geographic expansion, product diversification and complementary acquisitions
- Increased interest in smaller brands by large consumer packaged goods companies
During a recent panel discussion, select groups of private equity firms that have made recent investments in food and beverage companies gave their views on the middle-market food and beverage industry. The panelists included:
- Andy Unanue – Managing Director – AUA Private Equity Partners
- Ed Benford – Managing Director – Benford Capital Partners, LLC
- Chaoran Jin – Managing Director – Keystone Capital
- Meranee Phing – Partner – The Riverside Company
In an excerpt from Private Equity Craves Specialty Food Companies, the panelists detail trends and characteristics that have attracted them to the food and beverage industry.
What trends attract you to the specialty food industry?
AUA: As corny as this might sound, the industry is in my blood. I grew up working in my family’s food business and after I graduated college I took a full-time position there working across all the departments - from marketing, to sales, to operations, to finance. Given the Hispanic-focus of my family’s business I spend a lot of time thinking about the growing/shifting demographics in the U.S. and how these evolving tailwinds are reshaping the U.S. consumer market. The generational shift in ownership taking place in the U.S. as baby boomers seek retirement is exciting to me within the food and beverage industry –since I come from a family-owned business in the food industry. I think it’s important to stick to your knitting and for me working with/alongside other families that might be going through a lot of the same nuances I went through with my family business is particularly appealing.
Benford: First and foremost what attracts us to the industry and also to Saco is the stability and durability. Saco is a niche-leader and has significant growth potential through new product introduction in the categories that they're currently in – such as powdered milk – and getting into new flavors and formulations. We have also launched an organic and fair-trade product line, both in milk and in baking products, and we’re off to a good start. Again, stability and ability to grow a business over time organically and also the ability to make acquisitions that are complementary to our core business.
Baker Tilly Capital: Is the Bakery aisle, like many foods, really growing on a GDP basis or do you think there’s enough niche products and other opportunities to grow under the radar of the big food companies? Are some of the products too small right now for the big companies to be interested?
Benford: I think it depends on the category. In the niches we’re in and the strategy we’re taking with flavors and organic, we think there’s significant growth potential in center-store, notwithstanding the fact that your comment is accurate about the stability and low growth in baking in general. Our growth will be driven by new product introduction and new product innovation.
Keystone: We live in a world of constant change and technological evolution that has the power to turn almost any industry upside down. What does not change is people’s need for nourishment and desire for flavorful and satisfying food experiences. As a staple in the consumer goods market, food and beverage products on the whole offer a stable investment vehicle that stands up well in the face of recession and provides ample opportunity for growth through geographic expansion and product diversification. We are most intrigued by the fast-growing food and beverage niches as well as momentous consumer trends and preferences that provide significantly more upside to a food and beverage investment. In particular, ethnic niches have been of interest to us. Not only are some U.S. ethnic populations growing much faster than the overall population growth, but increased globalization and the ubiquity of ethnic food choices has driven the average American to include more ethnic dishes in his/her diet, as reflected by mainstream grocers increasing shelf space of ethnic food and beverage. Another trend investors should keep in mind is the shift in consumer preferences towards natural, health-conscious foods and beverages, which will likely have staying power as the younger generations grow to become a more influential consumer in the food and beverage market. It was these market and demographic trends that influenced our decision to partner with the team at Nature Soy, and these factors will continue to keep us engaged in food and beverage investment opportunities in the years to come.
Riverside: First, there is a lot of M&A activity that should continue. Food and beverage accounted for the highest share of consumer deal volume for the 10th consecutive year, and 2016 was a record year with 600 food and beverage M&A transactions closed. Secondly, large CPG firms lack innovation and organic growth so are seeking external acquisitions to bolster growth. Large legacy brands are losing share to newer, smaller, more nimble brands. Several years ago, strategics wouldn’t look at an asset unless it had more than $100 million in revenue. Now they’re willing to look at businesses with $30 million in revenue and, in some cases, less. They’ve realized that in the past they overlooked a small brand that a private equity firm bought, grew and professionalized, and then sold to them at a high multiple, when they probably should have at least considered buying the asset when it was smaller. I think there will continue to be good strategic and financial buyer interest in food & beverage for several years to come. Third, we have found a great partner, Richard Lan, who has an extensive network in food and beverage. Nustef, the specialty cookie business we bought in January 2017, was a proprietary deal Richard sourced. Finally, we find the opportunity for outsized growth attractive.