Unlocking Value: Insights into Food Industry Growth and the Related M&A Environment

On October 29, Plante Moran, BMO Harris, and Nixon Peabody combined to host the 2014 Food Forum in Chicago, Illinois. More than 100 food industry executives and professional service advisors attended and discussed industry trends and growth strategies. Topics included the growth opportunities big data can provide food companies, a 10-year vision outlining a metamorphosis in the food industry, and various expert panels discussing opportunities to leverage trends to unlock value.

Our focus for this article is to summarize the key topics discussed by one of our "Unlocking Value" panels. The panelists included Joe Campolo, president of Arbor Investment Management; Chuck Adair, head of food M&A at BMO Capital Markets; and Chris Meyers, chief financial officer at KeHE Distributors. The panel was moderated by David Martland, a partner with Nixon Peabody, and provided a lively discussion on food trends and their impact on merger and acquisition (M&A) markets for food companies.

The discussion was overwhelmingly positive, as there’s tremendous opportunity within the food industry. The M&A market is robust, and financing is readily available. Multiples are much higher than they have been in recent history. Companies of all sizes are reaching double-digit multiples. One panelist commented that he’s seen “nothing less than 7.5 times.”

So how can middle-market food companies leverage these opportunities? Here are a few recommendations from the panelists.

1. Innovate. Growth in the U.S. food industry is generally aligned with growth in the gross domestic product (GDP). As GDP growth remains in the low single digits, the overall growth of the food industry remains relatively low. However, there are pockets that are growing faster than others, including private label and "better for you" segments. In order to tap into these pockets of growth, innovation is key. The panelists referenced the recent 2014 international food exhibition in Paris where innovation continued to be a significant focus; food and beverage companies continue to look for opportunities to connect with customers and surpass competitors through innovation.
2. Mitigate commodity volatility. Commodity volatility continues to be a concern for everyone associated with food. While the consensus is that fluctuations in commodity prices may normalize when interest rates rise, that offers little comfort in the short term. Many companies have leveraged commodity pricing into an opportunity to pass along a price increase to their customers. Commodity management may be a matter of leveraging short-term pain for long-term gain.
3. Pay attention to demographic trends. Ethnic populations in the United States and Canada continue to grow. One panelist predicted that, by 2031, today's minorities will actually be the majority in Canada for the first time. It stands to reason, then, that there’s been significant growth in ethnic foods and global cuisine made easy. In addition, millennials continue to have an impact on food trends, as they’re willing to spend more to ensure healthier foods with fewer ingredients and transparency regarding the source of their food.
4. If looking to sell, plan ahead. Companies contemplating a sale should slow down and plan so they can take advantage of the “right” market. It’s also important to review the management team in place and ensure customer and vendor relationships will remain intact following a sale. (This can be a deal breaker for many private equity companies.) If key management is retiring, create a succession plan to replace them. Finally, review your sales pitch since financial and strategic buyers will be focused on different areas.

In conclusion, the market is ripe for opportunity, but to leverage the best opportunities, companies should focus on innovation, commodity management, planning for changes in demographics, and managing commodity volatility. For more information on any of these topics, give us a call.