- A new report from Credit Suisse predicts that 2021 will see the beginning of "a portfolio reshaping revival" in the food sector due to four factors: increased sales during the pandemic providing financial flexibility; management teams continuing to shift portfolios toward high-growth brands; lower valuations for Big Food companies due to skepticism over whether portfolios can maintain positive sales growth long term; and the assumption that slower-growth brands will fetch above-average valuations due to stronger sales.
- Analysts reviewed more than 30 companies and put a high probability on a takeout of Hain Celestial Snacks and Simply Good Foods. Plant-based is another category where the report anticipates portfolio restructuring, but Big Food is not expected to bid for market leaders and is instead likely to strike a balance between extending their existing brands and executing small tack-on acquisitions.
- M&A is not a new tactic for companies looking for growth, and this report confirms that this trend is far from fizzling out. For several years, Big Food has focused on large, transformative deals, but more recently, there has been a shift toward acquiring smaller, trendier brands and selling divisions that don't meaningfully boost sales.
As the pandemic has forced consumers to cook and eat more at home, the resulting sales boom has certainly benefited the food and beverage industry, helping alleviate debt on balance sheets and breathe new life into old brands. It has also been educational, showing Big Food that consumers are eyeing plant-based alternatives and snacks for sustenance.
In response to these trends, manufacturers have looked to add smaller brands in these popular categories to their portfolios. Since the pandemic began, McCormick & Co. acquired hot-sauce maker Cholula from private equity company L Catterton for $800 million in cash. Utz Brands purchased Truco Enterprises, a manufacturer of tortilla chips, salsa and queso under the On The Border brand from Insignia Capital Group for $480 million and also acquired the H.K. Anderson peanut butter-filled pretzel brand from Conagra. And just last month, Mars fully acquired Kind North America.
Frozen food and meal kits have also seen a surge in demand from pandemic shoppers. Companies in these popular categories are also likely acquisition targets, according to Credit Suisse analysts. The report cites multiple companies that could see consolidation, including The Simply Good Foods Co., which makes meal kits, pizzas, frozen foods and bars — all of which are segments that have seen significant growth as consumers look for options that are simple to prepare and better-for-you.
Hain Celestial Snacks was also called out by the analysts. Although the company is a purveyor of better-for-you products, its expansive portfolio has posed problems, and it has previously looked to sell itself. However, with food companies flush with cash and interested in healthful products, there is a chance that Hain Celestial’s fortunes may turn around.
Analysts also recognized Amy’s Kitchen and Herr’s Foods as attractive acquisition targets, but said their independent family ownership may lessen chances of a deal.
At the same time, significant divestitures have occurred as legacy companies shed slow-moving brands in favor of generating cash. Credit Suisse suggested that Conagra could divest some of its $1 billion of refrigerated brands and Kraft Heinz should consider selling its coffee business and infant feeding business Plasmon, which it has previously considered.
Other companies have already begun divesting slow-growing brands as they focus elsewhere to build their bottom line. J.M. Smucker sold its Natural Balance premium pet food business, which generated $220 million in net sales for the year ending April 30, to Nexus Capital Management for $50 million. The company also announced its intention to sell its Crisco oils and shortening business to B&G Foods for about $550 million. Nestlé has also relied on divestitures for growth. As of February, Nestlé had done more than 50 transactions since 2017 — representing about 12% of its portfolio, or $10.2 billion in value — after the company failed to meet its own growth targets. The majority of the deals have been divestitures of slower-growing businesses.
As consumer demands evolve, manufacturers need to adjust. While legacy brands attracted big sales during the pandemic, companies will need to build a flexible portfolio that responds to emerging consumer trends to ensure long-term growth. Restructuring portfolios through smaller deals presents an opportunity for companies looking to dip their toes into trends without investing hundreds of millions of dollars in stifled internal R&D or buying out market leaders.