Like in any other business vertical, M&A in the food and beverage sector has its own set of benefits. At the same time, dealmakers should also be aware of the potential pitfalls. And work out the right strategies for navigating them.
The food and beverage (F&B) sector has numerous opportunities available, with players of all kinds vying for M&A deals. These may include private equity firms, family offices, and strategic acquirers looking for small and mid-sized companies.
The focus is always on potential synergies, streamlined supply chains, economies of scale, and accessing innovative Intellectual Property. And the best way to achieve these objectives is to bring in expert M&A advisors.
These professionals can assist both the buy and sell sides of the transaction and ensure that the dealmakers derive value. Whether it is navigating market changes or raising capital and finance for the deal, the experts can get them there. That’s how they ensure optimum positioning for success.
The Ultimate Guide To Pitch Decks
The Volume of M&A Deals Is Rising in 2023
Activity in M&A in the food and beverage sector has been ramping up in 2022 and 2023. A total of 295 deals closed in the four quarters starting from Q3 2022 through Q2 2023. Statistics point to a year-over-year rise of 15% in the number of deals, with a quarter-over-quarter of 44%.
The year 2023 has seen the highest activity in the past few years. Strategic alliance seekers account for a major share, with private equity investors snapping up 84% of the deals. Close to 78% of the total deal volume centered around strategic transactions.
A total of 13 deals concluded in the first two quarters of 2023, valued at $3.1 billion. In the third quarter of 2023, 59 deals closed with a valuation of $1.2 billion. This figure includes the M&A deal between Blast Asset Acquisitions and Vital Pharmaceuticals for $362 million.
The outlook for the F&B industry is promising, with experts anticipating rapid growth from $905.13B in 2023 to $1,767.54B by 2030. The CAGR during this period is 10.03%.
Factors Influencing M&A in the Food and Beverage Sector
Since the pandemic, several factors have contributed to this increased interest in the F&B segment. Falling inflation levels and cooling interest rate hikes lead investors to look for attractive investment opportunities. This trend continues, though debt is not readily available and is expensive.
Although the industry is experiencing exciting M&A deals with attractive prospects, it has its fair share of challenges. The rising prices of inventory and weaker purchasing power with consumers looking for economical products are only some of them.
Hurdles in the supply chain of raw materials because of the Russia-Ukraine conflict are other issues. Interestingly, companies have effectively transferred the higher costs to the end user by raising the prices.
As a result, they have successfully maintained revenues, making them viable prospects for mergers and acquisitions. In fact, revenues have grown by around 15% in the last few months.
That’s because, unlike other sectors where customers exercise discretion with their spending, F&B purchases are likely to remain consistent. The ready availability of capital in the market also maintains the demand for the top brands and assets of the F&B industry.
Startups are developing new concepts and carving out their spaces, and the bigger brands simply buy them out. There are few mid-sized companies. That’s because once the company grows to a certain size, founders prefer to make an exit. Or, they may enter into a horizontal merger or conglomerate.
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Consumer Food Habits Are Changing
Acquirers are focused on startups with innovative concepts that are attracting consumer interest. The trend is now shifting toward plant-based foods, healthier and sustainable products, and brands that advertise cruelty-free food sources.
Statistics indicate that the demand for plant-based and dairy-free products is likely to grow at a CAGR of 12% in the next few years. Companies that can cater to this growing demand are, in turn, in higher demand for acquisitions.
The pandemic saw a spike in the demand for prepared and packaged foods and snacks. Around 20% of consumers shifted mainly to private-label CPG (consumer packaged goods) brands. Although 90% continue to rely on such products, the stress is also more on organic products.
Or brands that are free of pesticides and preservatives. Retail store chains are also entering into M&A deals to diversify their private-label product portfolios.
Seafood brands are next on investor radar, with consumers cutting back on red meat and moving to heart-healthy options. Yet another interesting aspect of M&A in the food and beverage sector is that deals are typically closed between startups and established giants.
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Why Companies Enter Into M&A in the F&B Space
The food and beverage sector is an innovative and rapid-growth space. Companies must consistently innovate if they can hope to stay competitive and maintain their edge in the game. One of the key challenges in this industry is that developing a new product has similar brands mushrooming quickly.
Having an in-house research and development (R&D) facility is not only advisable but essential. But not all companies can afford the investment or lack the agility to disperse their attention. They may prefer to focus on their core strengths and attempt to achieve excellence in a few selected products.
At the same time, bigger brands also need to maintain growth and a market presence. The best way to do that is to buy out complementary and competing firms. Acquisitions are also ideal for expanding into new geographical locations and gaining traction in mature market segments.
For instance, capturing the customer demographic in locations in Europe, Asia, and Australia. Even older legacy brands can only stay competitive if they can build a presence in hypergrowth sectors. That’s how they can diversify their product portfolio and take advantage of R&D efforts.
One of the most common barriers to entering new markets is unfamiliarity with local demand and food tastes. Collaborating with regional brands not only enables the bigger brand to acquire their know-how but also infuse unique flavors.
The new product portfolio they develop can be a fusion of ideas and tastes that consumers enjoy.
Optimum Targets for M&A in the Food and Beverage Sector
The most critical aspect of an M&A transaction is identifying and acquiring the right target. When searching for optimum opportunities, the stress is always on viable projects that can add value to the acquirer. In the F&B industry, dealmakers must focus on targets that adapt to changing trends.
The right pricing structure, Intellectual Property and Intangible Assets, talent, and potential for being a robust business fit are priorities. Startups that best cater to consumer demand are optimum projects to acquire.
Customers are more health conscious, and demand is trending toward brands offering organically produced food with a minimum of additives. On their part, companies are adapting to the rising demand for plant-based sustainable proteins and foods suitable for allergies.
Gluten-free, dairy-free, and diabetic-friendly foods are topping the list. Buyers support green labels and research how the food is produced, particularly if the brand adopts eco-friendly techniques.
Acquirers check for these practices when conducting the due diligence for purchasing the company. They are also concerned about the target’s compliance with Environmental, Social & Governance (ESG) laws.
Non-compliance may lead to the company’s depreciated value with no takers. As a result, sellers are also motivated to adopt these principles, which can potentially fetch them a higher premium.
Yet another interesting trend is influencing how dealmakers approach F&B acquisitions. Experts estimate that the global demand for meat and meat products will rise by 74% by 2050. The main reason for this phenomenon is that populations are now moving more toward urban locations.
As OECD countries get richer, their food includes higher calorie intakes with a higher percentage of processed food and animal protein in their diets. Although the stress is on healthier food, companies must keep up with the rising demand from a growing customer base.
As demand continues to grow, companies must enter into collaborations and alliances to scale quickly. That’s how they can take advantage of expanding markets and diminishing border constraints and limitations.
Common Hurdles in Integration After an F&B M&A
Dealmakers entering into an M&A in the food and beverage sector should prepare for common integration challenges. As with most other sectors, restructuring the legacy organization to integrate the new incoming technology is a huge challenge.
Introducing not just new IPs but also new skill sets and coordinating their efforts is an uphill task. The optimum approach is to identify the needs of both companies and work out a middle ground to align efforts. Acquirers can choose to assimilate the target into their organization or allow it to function as before.
Assimilating the target might involve switching it to the buyer’s platform and making it conform to their operational processes. For that to happen, the acquiring company should have the capacity to support the incoming and make the necessary customizations.
When it comes to integrating know-how and IP, buyers need to be cautious about deriving complete value. But without compromising on the uniqueness and USP, the smaller company brings to the table.
An alternative is always to allow the target to continue operating as a subsidiary that maintains its identity. It gets the financial backing and support of a bigger brand, which, in turn, can stay relevant in a rapidly evolving space.
Acquirers must also be capable of running multiple facilities in other geographical areas, particularly when they’re engaging in cross-border deals. Achieving cultural integration among employees who may be resistant to change is a top concern.
Extensive training and orientation programs for HR management and team members can help diffuse tensions. That’s how owners can hope to achieve synergies and their objectives from M&A in the food and beverage sector.
Achieving Integrational Success in a F&B M&A Transaction
Growth in the F&B industry is heavily reliant on innovations and new techniques for producing healthy and sustainable foods. As a result, most M&A in the food and beverage sector are driven by IP and top talent acquihires. Bigger brands are interested in taking on scientists, researchers, and food artists.
Integrating these assets into the surviving company can be challenging, and leveraging AI and data analytics helps. Companies can also use top-notch cloud-based solutions like ERPs or enterprise resource planning systems.
Solutions like these streamline the integration process remotely since they don’t need on-site physical installation. Accessing and analyzing huge volumes of data presents executives with a holistic and detailed overview, enabling well-informed decision-making,
Experts advise dealmakers to focus their attention on organizing not only the changes in operations but particularly human resources. Ensuring open communication lines to enable two-way interactions is crucial for a smooth transition.
Any challenges the team faces will likely have a long-term impact on synergies and long-term success and scalability.
Achieving Operational Success After an M&A
The F&A industry is looking at several challenges in the coming years. Acquirers entering into M&A deals should be ready to navigate to ensure success in their operations. Possibly, the most major hurdle is likely supply chain issues.
Instability in the supply of raw materials can influence the company’s bottom line. They can raise prices only up to a point if they hope to remain competitive. Customers can always switch to more economical brands thanks to the ready availability of alternatives.
Moving forward, most companies will likely source their supplies from domestic markets and lower their reliance on offshore suppliers. Rising shipping and labor costs and uncertain political conditions also present risks to prepare for.
M&A in the food and beverage sector must account for rapidly changing consumer buying habits and purchasing power. Innovations, R&D, and IP are the key drivers that influence strategic alliances. At the same time, dealmakers must pay special attention to customer retention and competitive pricing.
Brand loyalty and uninterrupted supply chains will likely affect success in this segment.
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