Specialty foods M&A update: 1H-2016

Overview

This Specialty foods M&A newsletter provides an overview of the United States specialty foods market, industry trends, and relevant transactions for the first half of 2016 (1H-2016).

Specialty foods accounted for approximately $94 billion1 in sales at retail in 2015, a nearly twenty percent increase from 2013 according to the Specialty Food Association (SFA) for its The State of the Specialty Food Industry 2016. More than eighty percent of specialty foods are now sold through mainstream retailers, including Kroger, Costco, and Target, as these retailers have strategically grown their offerings of specialty foods to meet consumer demand.

Specialty foods defined

Baker Tilly Capital defines “specialty foods” as unique, premium quality food items. Specialty foods can typically be categorized into one or more of the following market segments: Health and wellness, indulgence, ready-to-eat, and ethnic.

Health and wellness: This market segment includes food products perceived by consumers as positively contributing or actually contributing to their health and overall well-being. The health and wellness segment includes food products that are naturally healthy (i.e. fruits and vegetables, nuts, yogurt, etc.) or foods made from ingredients that promote good health (i.e. products made from all-natural ingredients). Food products in this market segment can be further divided into the following sub-segments:

  • Organic refers not only to food products themselves, but also to the way they are produced and processed based on strict guidelines set by the US Department of Agriculture (USDA). According to the USDA, organic foods must be produced without the use of certain banned chemicals and fertilizers, and animal-derived products must come from animals that are given no antibiotics or growth hormones. The USDA acknowledges three categories for labeling organic food: (i) “One-hundred percent Organic” (must be made with one-hundred percent organic ingredients), (ii) “Organic” (made with at least ninety-five percent organic ingredients, with strict restrictions on the remaining five percent, including no GMOs), and (iii) “Made with organic ingredients” (made with a minimum of seventy percent organic ingredients with strict restrictions on the remaining thirty percent, including no GMOs).
  • Natural foods, according to the USDA, are minimally processed and free of synthetic preservatives; artificial sweeteners, colors, flavors, and other artificial additives; growth hormones; antibiotics; hydrogenated oils; stabilizers; and emulsifiers. Foods labeled “natural” must include a statement explaining the meaning of the term natural (such as “no artificial ingredients” or “minimally processed”).
  • Fortified foods are foods which have extra nutrients added and are commonly referred to as nutraceutical or functional foods. This sub-segment includes foods that are high in fiber, protein, or whole grains, or fortified with calcium, vitamins, or minerals.
  • Allergen-friendly foods are those made free of one or more of the commonly known food allergens. The following eight foods account for ninety percent of all allergic reactions: eggs, fish, milk, tree nuts, peanuts, shellfish, soy, and wheat. For example, in recent years consumers have demanded gluten-free food options due to gluten-intolerance, food allergies, or celiac disease.

Indulgence: These food products satisfy or play off of consumers’ senses (especially taste and smell), evoke certain memorable feelings, or turn eating into more of an experience than a necessity. The indulgence market segment also includes food products made with ingredients that are local or sustainably raised and make the consumer “feel better” about buying them (termed “morally conscious foods”). Examples of foods in the indulgence market segment include premium or artisan versions of traditional foods like chocolate, olive oil, and cheese, or sustainably sourced food items such as chocolate made with Fair Trade Certified cocoa.

Ready-to-eat (RTE): American eating habits have changed considerably over the past decade, and consumers are snacking and eating on the go more often than ever before. The ready-to-eat market segment includes the following sub-segments:

  • Fully-prepared foods – eliminate any preparation work on the part of the consumer
  • Partially-prepared foods – reduce preparation time for consumers
  • Hand-held foods or foods with convenient packaging – allow consumers to “grab and go” or eat on the run
  • Bundled products – simplify food preparation

Ethnic: Ethnic cuisines have grown considerably in popularity as consumers seek out new cuisines or incorporate new ingredients and flavors into everyday meals. The ethnic market segment includes food products or dishes popular in other ethnic regions (i.e. taco shells, paneer cheese, sushi, etc.) or ingredients, spices, or toppings often used in ethnic dishes (i.e. salsa, curry, hot sauce, etc.). According to the Specialty Food Institute, the top five emerging cuisines in the US market include Mediterranean, Latin, Greek, Spanish, and Thai.

1Based on the SFA’s The State of the Specialty Food Industry 2016 report, retail channels include sales from natural, specialty, and multi-outlet (MULO) outlets as well as an estimate for specialty food perishables (price look-up (PLU) or random-weight specialty items sold in bakery, deli, meat, and seafood) sold in these outlets. In addition, these figures include estimated specialty food sales from Trader Joe’s and Whole Foods Market. MULO is representative of the following channels: total US grocery, mass retail, total US drug, total Walmart stores, dollar, military, and club.

Key drivers and trends

Health and wellness is one of the major market segments of specialty foods and has experienced significant growth in the past decade as consumers are focusing on health and choosing better-for-you foods more than ever before. According to Euromonitor, global sales of healthy food products are estimated to reach $1 trillion by 2017. Results of Nielsen’s 2015 Global Health & Wellness Survey, which polled more than 30,000 individuals, indicate that more consumers are seeking fresh, natural, and minimally processed foods and eighty-eight percent of survey respondents are willing to pay higher prices for healthier foods. While various health trends may come in and out of favor (i.e. organic, natural, non-GMO), the overall health and wellness market is expected to continue to expand. In the last five years, many mainstream retailers have significantly expanded their offerings of organic and natural food products. In June 2016, retailer CVS Pharmacy announced it was expanding its offerings of healthier foods and beverages in more than 2,900 stores, dedicating approximately twenty-five percent of front checkout space to better-for-you snacks.

The strong growth of healthier foods does not necessarily mean demand for Indulgence foods is weakening. According to IRI’s State of the Snack Food Industry webinar, dollar sales of indulgent snacks grew 3.1 percent from 2013 to 2014, outpacing the 2.5 percent growth in healthier snacks. Americans are also leading busier lifestyles and working longer hours than ever before, while more people are living alone, all of which have contributed to growing demand for convenient, RTE food products. Growth of the Indulgence and RTE segments is especially apparent in gluten-free foods, which experienced a 9.6 percent rise in sales in 2015 according to data compiled by Euromonitor. The value of gluten-free bread alone reached $1 billion in 2015. Within the gluten-free sub-segment, gluten-free cakes (Indulgence) increased fourteen percent in value in 2015 compared to 2014. Sales of gluten-free RTE meals expanded 41.5 percent from $287 million in 2010 to $406 million globally in 2015, according to Euromonitor.

Ethnic foods are a rapidly growing segment within specialty foods as the immigrant population in the US continues to grow and consumers seek out more exciting foods and tastes to satisfy their adventurous palates. According to the Migration Policy Institute, the immigrant population in the US (people residing in the US who were not US citizens at birth) has more than quadrupled since 1970 to 42.4 million in 2014, representing a 13.3 percent share of the US population (versus only 4.7 percent in 1970). According to Statista, a leading statistics company, US retail sales of ethnic foods totaled $11 billion in 2013 and are projected to grow to $12.5 billion in 2018.

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