The urge to consolidate may be tempting for major food and beverage manufacturers struggling with slowing growth and competition from nimble upstarts, but being bigger is not be the only answer.
The food and beverage industry has been hit by a few mega-mergers in recent years, including the deals that brought together Kraft and Heinz and Anheuser Busch and InBev. Other proposed deals have failed to close, led by Mondelez’s pursuit of Hershey and Kraft Heinz’s $143 billion takeover bid this February for Unilever. Analysts have speculated more deals could be in the works involving Coca-Cola, PepsiCo, General Mills, Campbell Soup and Kellogg — all of whom could be acquisition targets or on the lookout to buy a company themselves.
While mergers are likely to continue, long-term growth must also include internal innovation and a willingness to work with other companies in ways that may have been unheard of in the past, Randolph Burt, a partner at A.T. Kearney, told the audience at the Grocery Manufacturers Association's Science Forum last week.
“Consolidation will probably continue to occur but consolidation by itself is not going to allow large manufacturers to get on-trend from a consumer standpoint,” Burt said. “There may be another 3G acquisition. There may be consolidation for others, but it’s not going to solve the growth problem fundamentally, these kind of scale purchases. So we think that manufacturers and brands are going to have to look for other avenues.”
"There may be another 3G acquisition. There may be consolidation for others, but it’s not going to solve the growth problem fundamentally..."
Partner at A.T. Kearney
Brazilian private-equity firm 3G Capital Partners, a big player in the U.S. food industry, and Warren Buffett-owned Heinz helped orchestrate the condiment maker's 2015 merger with Kraft. It is widely believed on Wall Street that 3G is itching to make another deal.
In an interview on the sidelines of the conference, Burt acknowledged while some companies may put too much faith in a merger to promote growth, "the idea that consolidation is going to create a healthier business is flawed.” Most firms are aware of the risk of depending too much on large deals, he said, leaving them on the lookout for smaller transactions, intrinsic growth and other unique partnerships. He pointed to the agreement between AB InBev and Keurig to develop a beer K-cup as one notable example.
Kraft Heinz and AB InBev have turned to mergers, followed by significant cost-cutting, in an attempt to become more profitable. For some, the concern is once all the costs have been rung out of the new company, there is no choice but to turn to another transaction for growth — just as Kraft Heinz tried to do with the Unilever proposal.
Nestle CEO Ulf Mark Schneider warned earlier this month that food and beverage companies too focused on cutting costs will undermine their growth prospects. “Many companies are focusing on radical cost-cutting to deliver higher profits in the short-term,” Schneider said in his first appearance at Nestle’s annual shareholder meeting. “This approach is not sustainable.”
The struggle to stay relevant
The food and beverage industry is not only facing slowing growth, but intense competition from upstarts who are able to tailor their products to the latest food trends such as free-from, fresh and local and high in proteins or other ingredients.
“It’s not just ticking one of those boxes," Sara Mortimore, vice president of product safety, quality and regulatory affairs with Land O'Lakes, told the GMA audience. "You have to be thinking about all of them and the relevancy of your product for the future and how you shift and become and stay relevant. Some of us as manufacturers struggle with that big asset base.”
Large food manufacturers have turned to incubators to buy stakes in startups — most notably, General Mills, which through its 301 INC venture capital unit, has invested in probiotic-startup Farmhouse Culture, Rhythm Superfoods, known for its kale, beet and broccoli chips, and D’s Naturals, the maker of low-sugar, plant-based No Cow protein bars and low-sugar, protein-infused nut butters. Chicken, beef and pork producer Tyson Foods even owns a 5% stake in plant-based protein company Beyond Meat.
"We need to think more about how do we tell the story to drive value and connect with our audience. It's really more about the message right now. If it comes from [the industry], it's automatically distrusted."
Vice president of corporate food safety, quality and regulatory affairs with Cargill
During a discussion at the GMA Science Forum, officials from Cargill, Mondelez and Land O’Lakes acknowledged they haven’t done enough to tell their stories and communicate with consumers. For decades, companies have promoted their products predominately through the usual media formats. The rapid growth of personal computers and mobile devices connected to Facebook, Twitter and Instagram has forced food and beverage giants to become more active online and engaged with the public through channels like social media, but the industry said more needs to be done.
"We need to think more about how do we tell the story to drive value and connect with our audience," said Mike Robach, vice president of corporate food safety, quality and regulatory affairs with Cargill.
The food industry would benefit from standard definitions of terms like natural or local — all of which are open to different interpretations across the industry — that can be used by companies to promote their products to shoppers. Food manufacturers also must be willing to be more transparent and open their doors to verification from their critics. "It's really more about the message right now," Robach added. "If it comes from [the industry], it's automatically distrusted."
With all the information being shared — much of it online — consumers are struggling to figure out what's right or good for them, Land O'Lakes' Mortimore said. Corporate America as a whole, including food, has struggled to break through the noise.
“They really want to know — is this real, am I being fleeced or is this hogwash about what this company’s talking about?" she said. "Is it really authentic?"