BOCA RATON, Florida — After several years of large, transformative deals, food manufacturers are shifting their attention to acquiring smaller companies to quicken their entrance into faster-growing segments while jettisoning brands in their portfolio that hinder their ability to increase sales and improve margins.
It's a sharp change for companies that doled out billions of dollars on deals for much of the past decade to offset slowing demand in their core businesses. The acquisitions allowed food makers to expand their product offerings but also saddled their balance sheet with huge amounts of debt, forced them to rein in spending that stifled R&D innovation and in many cases failed to generate the promised synergies.
With these challenges, investors have questioned the M&A strategy used by companies — prompting some in the CPG space to reassess the way they go about freshening their brand portfolios. Now, food manufacturers are pruning and divesting slow-growing divisions, and then using the cash to purchase companies in trendier areas like snacking and bars, invest in their core operations or improve their balance sheets.
The strategy appears to be paying off, with Mondelez International, Kellogg and General Mills among the companies predicting low-single digit organic growth in their businesses, with others like Nestlé forecasting even more robust increases.
"We're in the business of perpetually reshaping our portfolio for better growth and better margins," Sean Connolly, CEO of Conagra Brands, said at the annual Consumer Analyst Group of New York conference in Florida last week. "We have not been shy improving our portfolio to help strengthen the company overall. And we won't begin getting shy now."
Conagra Brands has added to its product mix a number of smaller complementary products, such as Duke’s meat snacks and Angie’s Boomchickapop, through acquisitions.
"We're in the business of perpetually reshaping our portfolio for better growth and better margins. We have not been shy improving our portfolio to help strengthen the company overall. And we won't begin getting shy now."
CEO, Conagra Brands
Its biggest deal came in 2018 through its $10.9 billion purchase of Pinnacle Foods, a big bet on frozen foods that added Birds Eye, plant-based brand Gardein and Hungry-Man to the fold. But since the deal closed, Conagra has been largely divesting some smaller brands like its private label peanut butter, Wesson oil and its Lender's Bagels business.
"We expect we're going to continue to be aggressive looking at our portfolio for divestiture opportunities," Dave Marberger, Conagra's CFO, told analysts.
Let's make a deal
The divestitures by Conagra pale in comparison to some of the other high-profile businesses that have been offloaded by major CPGs in just the last two years.
During Nestlé's presentation at CAGNY last week, executives spent much of their time outlining portfolio management as a key lever in cultivating growth.
Sanjay Bahadur, deputy executive vice president and head of group strategy and business development, estimated the company has 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.
In food, Nestlé sold its U.S. chocolate business in 2018 to Ferrero for $2.8 billion, and then announced late last year it would sell its U.S. ice cream business valued at $4 billion to Froneri. After coming under activist pressure three years ago, the world's largest food manufacturer has been investing more in its water business, pet care and bulking up its offerings in coffee through the acquisition of Chameleon Cold-Brew and a $7.15 billion deal with Starbucks.
Bahadur said Nestlé's "portfolio management" helped jumpstart organic growth at the company, rising to 3.5% last year from 3% in 2018.
"Recent activity has been biased toward divestitures, which is really in 2019, and for 2020 we'd like to bring the focus back on to acquisitions and have a better balance," he said. Still, Bahadur noted that in hunting for acquisition targets the price tag has become expensive in areas where Nestlé is looking to grow.
"We've walked away from some of these transactions," he said.
At Kellogg, executives said the cereal and snack company is now focusing on growth with a stronger portfolio of core brands, improving its profitability and posting organic net sales again. It also has improved its balance sheet after its debtload swelled from deals like its $600 millon acquisition of RXBAR three years ago.
Kellogg, best know for its cereal offerings, Pringles chips and Eggo waffles, reshaped its portfolio by unloading a collection of well-known brands such as Keebler and Famous Amos to Ferrero for $1.3 billion last year to focus on its core business.
"We are entering 2020 from a position of real strength," Steven Cahillane, Kellogg's CEO, told Wall Street analysts. "Big actions have been taken and results have clearly improved. We have a stronger portfolio today, more geared towards long-term growth."
The Kraft Heinz effect
Analysts said one reason for the more conservative approach to M&A and the industry-wide decision to invest in its brands comes amid ongoing challenges facing Kraft Heinz. After merging five years ago, the company cut thousands of jobs, closed plants and wrung out other inefficiencies, giving it the highest profit margins in the U.S. food industry.
But many of its processed brands like Oscar Mayer meats and Velveeta cheese watched sales suffer as consumers gravitated toward healthier, fresher and natural brands that clashed with many of its offerings.
"There seems to be an appetite for (divestitures), and maybe prior to that there was more focus on acquisitions and consolidating the market," Erin Lash, a director of consumer equity research at Morningstar, told Food Dive. "But I think the likes of Kraft Heinz, in particular, has shown that that's not the be-all end-all strategy."
Food companies presenting at the CAGNY conference said while they remain committed to paying down debt and reinvesting in their brands to stay competitive, they remain on the lookout for smaller deals.
General Mills, which watched its debt levels grow following its $8 billion purchase of natural pet food maker Blue Buffalo in 2017, is still hunting for smaller deals. The manufacturer of Cheerios, Yoplait and Chex Mix, has put "large scale M&A and share repurchases on hold" until it can further improve its balance sheet, Kofi Bruce, the cereal maker's CFO, said.
"There seems to be an appetite for (divestitures), and maybe prior to that there was more focus on acquisitions and consolidating the market. But I think the likes of Kraft Heinz, in particular, has shown that that's not the be-all end-all strategy."
Director of consumer equity research, Morningstar
John Boylan, a senior equity analyst with Edward Jones, told Food Dive that regardless of the industry, companies are "essentially ... running a portfolio and divestitures and acquisitions are" a routine part of business.
Snacking giant Mondelez is one of the few major CPGs to eschew major deals in recent years. Instead, Mondelez, whose portfolio of brands includes Chips Ahoy, Triscuit and Cadbury, has bulked up its snacking roster by purchasing premium cookie Tate's Bake Shop for about $500 million in 2018, and acquiring a majority stake in Perfect Snacks, the manufacturer of organic, non-GMO, nut butter-based protein bars and bites, last year.
Dirk Van de Put, Mondelez's CEO, told Food Dive big M&A could be harder to achieve because there are only a few players available that pique Mondelez's interest, and the ones that do either aren't for sale, carry too high a price tag or the acquisition target also contains assets that may not be attractive to the company. The Illinois-based food giant also must address any anti-trust issues that arise from global regulators.
"That's what makes the opportunity that we will do something big much less likely," he said. "The bolt-ons allow us to reinforce in areas. It's almost like a very targeted approach."
Along with its cash-rich balance sheet, Mondelez owns stakes in Keurig Dr Pepper and JDE Peet's, which reportedly is considering an IPO for its coffee business. Luca Zaramella, Mondelez's CFO, told the CAGNY audience the company could choose to "utilize these assets to fund" large-scale additions to its snacking portfolio.