A spate of recent bankruptcies upending the food and beverage space is likely just the beginning of the failures as more companies are expected to collapse in 2023 amid changing consumer tastes and challenges raising money to fund their cash-intensive businesses.
“We’re at the tip of the iceberg. There’s going to be more fallout,” said Brian Choi, CEO of The Food Institute, a food industry media and market research company. “There’s less of an appetite from investors to keep funding a fundamentally flawed business.”
This year has seen a meaningful uptick in bankruptcy filings. According to data compiled by New Generation Research for Food Dive, 85 food, beverage and tobacco companies have filed for bankruptcy through July 18, the largest number since the early days of the COVID-19 pandemic. In 2022, 61 companies filed for bankruptcy during the same period.
Among the highest-profile businesses to file for Chapter 11 bankruptcy are plant-based food maker Tattooed Chef, which launched in 2018 and upcycling company Do Good Foods. Companies with ties to agriculture have been hit hard, too, with indoor agriculture companies AppHarvest, once valued at more than $3.5 billion, and AeroFarms, also filing.
These follow the high-profile collapse last November of Bang Energy, which filed for Chapter 11 protection as it struggled to recover following multiple costly lawsuits. It was sold recently to energy drink giant Monster Beverage for $362 million.
From boom to bust
With the exception of Bang, the recent bankruptcies all involve companies that were in nascent industries — plant based, sustainability and alternative ways of farming. These companies ultimately couldn’t get access to more cash as they struggled due to issues such as slowing demand for their products, high costs to establish scale and uncertainty over the future of their respective categories.
There are a host of reasons why food companies have suddenly found themselves in a difficult operating environment.
Interest rates have surged, leaving young companies, many of which are operating under variable rates, paying more each month on their debt. Venture capitalists have become more selective in which companies they invest in, shifting their attention to profitable, established businesses.
Earlier optimistic projections in categories such as plant based have failed to materialize, leaving room for fewer companies and turning off investors who previously welcomed the opportunity to doll out millions of dollars to chase growth.
Other factors are weighing on businesses, including supply chain disruptions, that have increased their expenses. At the same time, inflation has infiltrated nearly all facets of the U.S. economy, which has made goods and services more costly for companies and consumers alike.
Shoppers may still value attributes like traceability or sustainability, but they might not have the extra money anymore to pay to get them. Some “consumers want to buy sustainable, but at the end of the day, money talks,” said Marcel Koks, an industry and solution strategy director at Infor who advises companies. “You can only spend the money you have.”
In announcing its plans to file bankruptcy, Tattooed Chef noted it has faced inflationary pressure on its business through higher packaging and material costs, mounting competition, a rapidly shrinking cash stockpile and broader challenges in the plant-based sector. Sam Galletti, its chairman and CEO, said the plant-based food company was being “impacted by a challenging financing environment and an inability to raise additional capital.”
A similar message was echoed by AeroFarms. The New Jersey-based firm said the vertical farming industry has “recently faced significant industry and capital market headwinds.”
People involved in the food industry told Food Dive that plant-based, sustainability and alternative agriculture companies will continue to be responsible for the lion’s share of bankruptcies in the future. Choi noted companies that rely upon venture funding to keep growing are especially susceptible if they are no longer able to tap them for help, or receive as favorable terms as they did in the past.
Bruce Markell, a Northwestern Pritzker School of Law professor and retired bankruptcy judge, said Chapter 11, and bankruptcy in general, will not be enough to help a bad company. “If someone’s got a bad business plan and someone is not making money because no one likes the product, Chapter 11 doesn’t have a magic wand that they can waive and make it good,” he said.
Big opportunities for big CPG companies
For those remaining smaller and mid-size businesses, the pressure will be on their executive teams to reign in costs and quickly pivot to make changes that can preserve cash and boost margins; such as by ending the sale of once-popular items that have waned in popularity or are simply too expensive to make.
Markell noted that food and beverage companies are especially vulnerable to financial problems because of what, how and where people consume their offerings is constantly in flux.
Koks at Infor said the demise of some businesses could prove to be beneficial to larger ones by removing scrappy competitors that are disruptive to their firms. It also could provide larger CPG companies with an opportunity to purchase a hobbling business at an attractive price.
“Some bigger customers think this is an opportunity for them,” Koks said. “There will be some kind of shakeout in the market.”