Editor’s note: This story is the third installment in a monthly series looking at individuals and organizations that invest in food and beverages. Previous articles sponsored by BMO Harris Bank can be found here.
New products, supercharged ingredients and cleaner-label formulations of old favorites can be found throughout the grocery store today.
While this explosion of creativity is partially the result of consumer interest, there's another good reason: deep-pocketed investors. Greg Wank, leader of Anchin's food and beverage industry practice, told Food Dive that these investors make it possible for brands to pay distributors and retailers to get on shelves, to put together marketing campaigns, for more things to happen — without brands needing to be independently wealthy.
"With private equity money, you can accelerate that so much," Wank said. "I think it's a lot of people taking chances, starting their own business. Trying to develop a brand, develop a following and then get fueled by, whether it be angel investors, private equity capital, whatever you want to call it. ... It's created this incredibly robust industry with so many new entrants in so many new products."
Private equity firms, which control billions of dollars, have been turning their eyes more toward the food and beverage industry in the recent past. And they've done more than just invest in brands. They've acquired them, bringing more funds, more ideas and more attention to different areas of the industry.
"It's created this incredibly robust industry with so many new entrants in so many new products."
Leader of food and beverage practice, Anchin
According to The Food Institute, which tracks mergers and acquisitions in the food, beverage, grocery and food service industries, 2019 has seen 55 private equity acquisitions so far. Twenty-six of them have been food processors, Brian Todd, the group's president, told Food Dive.
The trend has held strong over the last few years. In 2018, there were 72 private equity acquisitions in the larger food space. Two years ago, there were 109.
There are many aspects that make food and beverage an enticing space for investors. Demand in the sector stays constant, no matter what else is going on. Investors are also personally consumers who have their favorites — and who can get excited about owning brands that have wide name recognition.
Todd said that private equity firms excel at investing in and improving businesses. And looking at some of the possibilities, they often prefer to take control.
"I think many of them are going in with an end game. Kind of knowing, you know, all right, this is what we really want to do — build it," he said. "I think they feel they can have a bigger win by doing it themselves. You know, taking complete control."
Why food and beverage?
Charles Tillen, a partner at Bain & Company, told Food Dive that when looking at business sectors to invest in, food and beverage ranks somewhere in the middle in return on investment.
However, he said, investors like the familiarity of the companies and brands, as well as the possibilities they represent.
Falfurrias Capital Partners, a private equity firm based in North Carolina, has investments in many different industries. It just got into the CPG space earlier this year with its acquisition of Duke's Mayonnaise maker Sauer Brands.
Disclosure: Falfurrias is the majority owner of Food Dive's publisher, Industry Dive. Falfurrias has no influence over Food Dive's coverage.
Ken Walker, a partner, and Chip Johnson, a principal at Falfurrias, told Food Dive the firm had been looking at food and beverage brands for a while. Part of the reason was the industry's relative resistance to economic downturns. In the event of a recession, Johnson said, people will continue to buy food — and are likely to buy more food to eat at home.
But there are other reasons that now is the time the firm got into the space.
"We're starting to see smaller emerging brands take share all across the board with cleaner labels," Johnson said. "With concepts that are more on trend with ... brands that consumers perceive as being more authentic. And we believe that presents a real opportunity to invest in some of these smaller, more nimble brands and capitalize on an opportunity to continue to take share from some of the larger CPG brands that have dominated this market for years."
However, private equity investments only work out if it is a fit for both parties. Wayne Wu, managing director at private equity firm VMG Partners, compared it to dating. VMG — which launched the new Velocity Snacks platform as an incubator of sorts for the space when it acquired Popchips earlier this month — tries to get to know food and beverage entrepreneurs, the companies, their leadership, their goals and their challenges.
"We believe that presents a real opportunity to invest in some of these smaller, more nimble brands and capitalize on an opportunity to continue to take share from some of the larger CPG brands that have dominated this market for years."
Principal, Falfurrias Capital Partners
"We're very much engaged for a long period of time and then sometimes get married," he said. "And we think that makes for a more effective investment strategy. But also I think we do a lot of good along the way in supporting entrepreneurs, retailers, and large CPG conglomerates during that journey."
While 3G Capital and Berkshire Hathaway's takeover of Kraft and Heinz — which led to the megamerger of the two powerhouses in 2015 — is probably the most infamous example of private equity getting involved in the food and beverage business, it's not an example that is being emulated in today's private equity investments. 3G's introduction of zero-based budgeting, as well as massive job cuts, brought enviable returns at the beginning.
As time went on, however, the company's earnings could not keep up. The company reported a 54.6% decline in operating income for the first six months of this year, compared to 2018. Kraft Heinz recently brought in a new CEO to try to fix the company from within. Last month, 3G sold more than 25 million shares in the company.
"Stage one is cut costs. Stage two, turn over management. Now what's step three?" Wank said about Kraft Heinz. "You know, you gotta grow. And that's the challenge, I think, for anyone buying these legacy brands, is how do I grow when the demand for the core products is decreasing — even if it's only decreasing a couple of points a year. ...I don't know the answer to that question, but I think that might be the cautionary tale."
In years past, Tillen said, private equity made a lot of acquisitions of trendy new brands, acting as a bridge to get them from the independent startup phase to where they could be acquired by larger manufacturers — a lucrative exit strategy. Today, a lot more of the private equity acquisitions are carve-outs: brands another manufacturer is selling in order to focus on core products.
Tillen said private equity is both smart capital for food manufacturing and an "incubator-fixer" for brands that need work. And it's helpful for large CPGs to figure out how to improve their total business.
"They see private equity come in and sweat those things, and get true ROI, and improve the business," he said. "So it's made all CPG more conscious of [thinking about] are we the best owner of our brands and our assets?"
From left behind to lucrative
It's a story that's been told several times in the last few years. Major food companies, which once bought up brands with abandon, have taken a deep look at their holdings as sales and revenues dwindle.
And companies from Smucker to Campbell Soup to Hain Celestial have come to the same conclusion: It's time to sell off more fringe brands and concentrate on core segments. Tillen said he thinks this is a five-to-10-year trend, as Big Food right-sizes itself in order to grow.
"The thesis behind those is that, you know, like many things inside of large corporate, they were probably undermanaged, the costs were probably, you know, neglected — or at least not state of the art. And there's legacy values to the brands there," Tillen said. "And so private equity can come in, put in state-of-the-art marketing, fix the cost structure ... to push growth."
Beyond name recognition, Tillen said there is also significant opportunity to improve some of these brands. Through the years of Big Food ownership, a focus on margins may have led manufacturers to use cheaper, less quality ingredients in stalwart products. Private equity can use its investment to return these products to their earlier glory, while at the same time offer an opportunity for the product line to expand.
Some of these divestments are substantial brands with huge name recognition, like the spreads business that once belonged to Unilever. The CPG giant sold brands including I Can't Believe It's Not Butter and Country Crock to KKR & Co. for $8 billion in 2017.
Another was baked goods megabrand Sara Lee, which Tyson Foods sold to private equity firms Kohlberg & Company and Entrepreneurial Equity Partners — which goes by e2p — in 2018.
Anchin's Wank said this acquisition is an example of private equity taking a brand that is well known and using it as a smart investment.
"I'm not sure their private equity buyer is thinking, you know, Sara Lee is super-on-trend with current healthy eating," he said with a laugh. "They're probably thinking, well, Sara Lee is always going to have a place in people's freezers and even if it's ... a diminishing percentage, it's still an astronomical number of freezers and we would like to own that asset at a favorable price."
"It's not about financial engineering. It's not about the leverage that you can put on the business, per se. It's about understanding the operations. Understanding when you do and don't have the right management team in place. Understanding which bolt-on acquisitions make sense. Understanding what the strategic buyer universe might be looking for."
Founding partner, Entrepreneurial Equity Partners.
Mark Burgett, who founded e2p last year with former Sara Lee CEO C.J. Fraleigh, told Food Dive that Sara Lee — which now runs independently as a company called Sara Lee Frozen Bakery — is the classic orphaned business. That's something they know well, Burgett said, because Fraleigh, who is currently the chairman of Sara Lee Frozen Bakery, is the one who orphaned it. Fraleigh was forced to resign as the business split operations in 2012, and Tyson acquired the brand in 2014.
"If you think about it, Sara Lee was a small bakery business within a $40 billion meat company," Burgett said. "So when you think about the priorities within Tyson, driving the Sara Lee Frozen Bakery was very low on their priority list.
"So for us, it's about focus, focus, focus. Let's get a dedicated management team in there that's focused on driving this: the Sara Lee frozen bakery business. Let's carve it out from Tyson. Put it up on its own ERP system, make sure it's a standalone business with one set of strategic goals," Burgett said.
In the Sara Lee acquisition, e2p and Kohlberg could present insider knowledge of the company that was being acquired — as well as offer the best price. But, Burgett said, the expertise goes beyond that. Throughout his career, he has done eight carve-out acquisitions, which include Hearthside Food Solutions and Shearer's Foods.
Under the guidance of the private equity firms, Sara Lee Frozen Bakery is moving forward. In addition to strengthening its positioning in existing areas — 80% of its business is in food service, Burgett said — the company has also made an acquisition of its own. In August, it bought in-store bakery company Superior Cake Products from Hostess Brands for $65 million.
Burgett said that this acquisition, like others e2p makes, is not about trying to run a company or make a quick fix.
"It's not about financial engineering," he said. "It's not about the leverage that you can put on the business, per se. It's about understanding the operations. Understanding when you do and don't have the right management team in place. Understanding which bolt-on acquisitions make sense. Understanding what the strategic buyer universe might be looking for. And ... what's the right type of people to make those decisions. It's really someone who's deep into operations and understands how the operations work."
Hungry for potential
But not all acquisitions are carve-outs. Some private equity firms look for brands that could excel with more investment in strategy, marketing and development.
VMG has an impressive track record in these kinds of investments. Its alumni include Bare Snacks and Health Warrior, both acquired by PepsiCo last year; Pirate Brands, bought first by B&G Foods in 2013 and Hershey last year; and Justin's, which Hormel acquired in 2016.
Wu said Popchips presented a great opportunity for VMG, especially as an anchor for its new Velocity platform — which he said will give the brands and the private equity firms an opportunity to work together on both growing brands and spinning off or creating new ones. As a fan of Popchips since the product launched more than a decade ago, and a person who's known co-founder Keith Belling for more than a decade, he knew the acquisition would work well on both sides.
"[Popchips has] attributes related to the brand that line up with where the consumer is today in terms of a healthier snack, a low-calorie, clean label snack," Wu said. "I think it's as great of a brand today as it's been at any point over the last decade. There's 89% plus brand awareness on the product, and [it's] sold in basically every major retailer in the U.S."
What Popchips has been lacking is capital to increase innovation as the market has gotten crowded. With this acquisition, the brand can get the attention to do that.
"[Popchips has] attributes related to the brand that line up with where the consumer is today in terms of a healthier snack, a low-calorie, clean label snack. I think it's as great of a brand today as it's been at any point over the last decade. There's 89% plus brand awareness on the product, and [it's] sold in basically every major retailer in the U.S."
Managing director, VMG Partners
Falfurrias, which has a broader portfolio, found what it was looking for in a CPG acquisition in Sauer Brands, the parent company of Duke's Mayonnaise. Sauer, which also makes seasonings, is a 132-year-old Richmond, Virginia-based company. At the time of the Falfurrias acquisition, it was on its fourth generation of family ownership. While Duke's Mayonnaise has been produced for more than 100 years, it was until recently only sold in the Southeast.
"As we kind of peel back the onion in terms of the company itself, it's the senior team, the manufacturing processes, the way they thought about their customer base, everything that we kind of dove into, we liked," Falfurrias' Walker told Food Dive. "And also, [we] recognized that there were opportunities to help the business grow to the next level that would require a level of investment or a third party's perspective.
"We enjoy those kinds of partnerships with companies that have already seen success but are looking for infusion of resources — be it financial or additional talent-wise or additional capital-wise — to just allow it to grow and surpass."
Johnson added that with a popular regional brand like Duke's Mayonnaise, there is a great opportunity to expand sales nationwide.
"The thesis behind those is that, you know, like many things inside of large corporate, they were probably undermanaged, the costs were probably, you know, neglected — or at least not state of the art. And there's legacy values to the brands there. And so private equity can come in, put in state of the art marketing, fix the cost structure ... to push growth."
Partner, Bain & Company
Burgett at e2p said he enjoys being able to acquire smaller family businesses. Throughout his career, he's said he's been involved in 15 of these types of acquisitions. Most recently, the firm acquired charcuterie company Daniele Inc. According to an interview with second-generation family owners in the Providence Journal, the family was thrilled with the acquisition, saying nothing will change for their operations. Burgett agreed, telling Food Dive this acquisition is more of a partnership with the family, which still has an ownership stake in the company.
"We really understand how to identify what makes these family businesses successful and unique, and we don't try to stifle that on broader ownership," Burgett said. "In fact, it's quite the opposite. We look to capitalize on that. We're also looking to continue to invest behind the business so that the business can continue to innovate and continue to be good partners to the retailers and the end consumer. Because at the end of the day, the end consumers are looking for high quality, good tasting, innovative products."
Burgett told Food Dive Daniele made a good investment opportunity because the company is already on the path to expansion and it fits into current consumer trends. By investing in equipment for slicing and packaging artisanal meat and cheeses, Daniele easily fits into the trend of healthy, convenient, protein-filled snacks.
While private equity firms say they are interested in helping the companies they acquire, they also want to make a profit.
Though Wu's VMG has made several exits to CPG powerhouse companies, he told Food Dive that they don't go into an investment looking at the exit. In fact, he said, when the preferred exit strategy is sketched out at the beginning of the investment, it works against the brand.
"Those are generally not the best brands to invest in because ... they haven't focused on surprising and delighting consumers. Rather they're focused on trying to grow revenue just purely for the sake of a perceived economic outcome that they want. ...During the investment time horizon, we're focusing our investments on keeping our head down and building a great business and brand, and above everything else, help out," said Wu.
Investors repeatedly said they don't want to be like 3G Capital and gut a company in search of the best short-term returns and exit.
"Our approach is that if we build a great business, the right buyer will come and be excited about being the next partner for the company," Falfurrias's Johnson said. "So we don't ... try to build a business for any buyer in particular. ...We try to build the best business that we can with attracting growth prospects and great profitability and great brands and a great team. And we think that the end game will fall itself."
Burgett from e2p has received high multiples from his previous investments as well, but that's not necessarily what he wants. He echoed the others, saying he's just looking to make money for his shareholders and investors based on businesses' growth and margin potential.
"That's the way that you're gonna drive returns in this industry — in any industry, frankly — and that's really the sole focus," he said.
Anchin's Wank said he's seen this outlook from where he sits.
"[Private equity firms are saying] we have to be a little more thoughtful. Not that they weren't thoughtful before, but even more thoughtful about what the path is for this brand to be a sustainable company — even if it doesn't get acquired in three years, because maybe that's not the likely path for it. The likely path for us maybe is to help this become a real company that can stand on its own."
This series is brought to you by BMO Harris Bank, a leader in commercial banking. To learn more about their Food & Beverage expertise, visit their website here. BMO Harris Bank has no influence over Food Dive's coverage.