Report: Smaller competitors grow faster than major companies

Dive Brief:

  • The top 25 U.S. food manufacturers have seen 1.8% revenue growth since 2012. In the same time period, smaller competitors have seen to 11% to 15% growth, according to a new report from A.T. Kearney.
  • Major manufacturers also saw their earnings growth slow in that time period to 4.8%, while market capitalization increased by 8.1%. This suggests current valuations may be unsustainable and large companies need to focus on improving top-line and earnings growth from their current levels, according to the report.
  • The report suggests that manufacturers apply a mix of three strategies to recapture profitable growth: leverage cost take-out and divestiture to free up capital for growth investments; pursue expansion into trending categories through controlled acquisitions of small, developed players and venture capital efforts; and create venture funds to promote smaller brands that could provide a lower-cost entry into the right segments in the future.

Dive Insight:

As the industry evolves from being production-driven to demand-driven, consumers whose perceptions of health have changed and are more impassioned about food purchase decisions command the trends. This report cited a 2015 study by The Hartman Group, which found that for the first time, consumers believe their purchasing decisions are more impactful on society than their voting decisions or local community involvement.

This passion explains why issues like locally-sourced ingredients and transparency have become so vital to building trust and establishing a loyal consumer base, which in many cases gives smaller companies an edge.

The report named functional, private label, free-from and fresh as key trends for manufacturers to watch, while local, transparency and discovery were trends for awareness. Smaller manufacturers are often on top of these trends as they tend to develop new products and bring products to market faster.

Acquiring smaller competitors that are either positioned in promising categories—referred to as scope expansion—or threaten the acquiring company's market share—known as scale expansion—is still a key method for fostering growth among larger companies. However, for that growth to be profitable, acquisitions may need to be more strategic and potentially based in early venture capital investments.

This can cut down on the higher multiples an acquiring company might have to offer later on when the acquisition target is more developed. But it also often means starting due diligence earlier and potentially going more in-depth, such as by using big data, to assess risk in these startup investments.

Filed Under: Manufacturing
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