The environment for growth
Organic food companies have been experiencing an increase in product demand in the wake of fast-paced growth in the health and wellness sector. More health-savvy consumers are preferring to avoid the center aisles, venturing to the less travelled ones in search of sustainably sourced, organic, vegan, or gluten-free healthy options. The growth in this sector and evolving consumer tastes have created an excellent opportunity for organic food companies to grow. That said, growth can be restricted by internal and external factors. Organic emerging companies will need to meet these challenges head on and overcome them with as little negative impact on revenue, profits and jobs as possible.
Current challenges facing the healthy food industry
1. Consumers’ concern around what they eat resulted in 63% of Canadians being worried about food fraud*. Given the complexity of certain supply chains, the lack of upstream visibility will impact quality control, which poses a significant risk to brand reputation.
*PwC Global Economic Crime Survey 2016
2. The increased presence of multiple vendors in the market is leading to price wars among healthy food companies. Buyers now have moderate bargaining power, which may impact corporate profits.
3. Compared to global brands, emerging and middle-market companies typically have smaller distribution channels, which limits their shelf exposure. Lack of product visibility can hinder growth.
Why expanding market presence matters
Packaged food giants have identified the health and wellness segment as an area with the highest opportunity for profitable growth. Large corporations have begun acquiring smaller organic brands in order to expand their market presence and leverage their much larger distribution channels to quickly gain market share and exposure. Examples of major acquisitions within the food and beverage industry over the past two years:
- Campbell Soup Co. has agreed to buy Pacific Foods of Oregon, a company that makes organic soup and broth, for US$700 million
- Hormel Foods paid US$775 million to buy organic processed meats maker Applegate Farms
- SunOpta Inc. acquired Sunrise Growers for US$450 million
- Amazon.com Inc. acquired Whole Foods Market Inc. for US$13.7 billion
- Coca-Cola and its largest bottler have acquired soy-based beverage maker, AdeS, for US$575 million
- Otsuka Pharmaceutical Co., Ltd. has entered into a definitive agreement to acquire Daiya Foods Inc. for C$405 million
Ripe for picking
We expect continued M&A activity across the organic food and beverage sector. Global manufacturers with product portfolios now considered less healthy will struggle to achieve growth targets unless they acquire or build a portfolio of healthier offerings. Middle market organic food companies will continue to be prime acquisition targets.
An increasing number of global food players have established research units devoted to studying food’s role in management of and the prevention of disease. Smaller, more innovative food companies that can advance this research will be of particular interest. Those businesses focused on products with “clean labels” are better positioned to meet this trend and will be pursued by buyers.
Preparation for due diligence is vital ahead of a sale process. Key areas that buyers will focus on include:
- sales and profit margins by customer and by product
- sales and purchase volumes trends
- support for normalization adjustments
- support for financial projections
- details on cost-savings initiatives including: cost, timing and expected annual savings
- support for maintenance capital expenditure forecasts
- working capital trends
- foreign exchange sensitivity analysis/constant current earnings analysis