Large players are buying niche brands, short-cutting R&D and buying immediate share. We discuss why and how M&A is part of Big Food’s innovation.
The last decade is littered with examples of big food groups greedily gobbling up challenger brands. Think Cadbury and Green & Black’s, Coca-Cola and Innocent.
However, the trend has intensified over the last 12 months or so, with the big food groups completing a slew of deals for smaller brands and businesses.
Nothing new about that you might think. But what is new is the nature of these acquisitions appears to be changing. It seems like for some companies at least M&A activity has become a replacement for innovation. They’re still eating up those challenger brands that play in the same category space as them, but they’re also investing in brands in burgeoning new sectors like paleo, meat-free, insect-based foods or foods rich in protein. Or they’re buying disruptive brands, such as direct-to-consumer operators. In addition, the big food groups are increasingly investing in start-ups via their own venture-capital arms or incubator/accelerator hubs.
So why do the big food groups seem to be using deal-making as a key part of their innovation strategy? And what do they need to do to ensure these acquisitions are successful?
There are a number of different factors behind the recent flurry of food industry M&A activity. Firstly, the big food groups are losing market share in many Western markets. According to data from Rabobank, over the last three years, in about 65% of all food categories in the US, the bigger brands have lost market share – mainly to smaller brands. It’s a similar picture in the UK and in many of the other more mature European food markets.
“One of the reasons [the big brands are losing share] is the consumer is more interested in those smaller brands or is shying away from the bigger brands and retailers are happy to stock those challenger brands on the shelves,” says Cyrille Filott, global strategist for consumer foods at Rabobank.
Essentially the middle of the market, which is where the big food groups have traditionally made the bulk of their money, is rapidly eroding, making growth harder to come by than ever, says Andy Searle, managing director, London, at AlixPartners.
“They’ve built fantastic businesses on the back of GBP1bn plus brands and so their whole business model is set up around manufacturing, marketing and selling these big brands,” explains Searle. “But actually where the growth is happening is in smaller places and it’s difficult for them culturally to do anything in that space.”
One way the big food groups can tackle this problem is to step up their innovation efforts. Filott says there are four different ways food manufacturers are approaching innovation at the moment.
“One of them is M&A. So you say ‘okay, this is a product that we can’t develop ourselves or we could develop it ourselves, but it will take too long,’ because speed is much more important in terms of bringing product to market than it was before. So if something is readily available, you might want to acquire it,” he explains.
The other way to get involved with what’s happening, particularly in terms of start-ups and challenger brands, is venture-capital firms [then there are] accelerators. Lastly, you have internal R&D. Venture capital is slightly lower investment and slightly longer horizon [than M&A]; accelerators are a lower investment [compared to venture capital], but have an even longer horizon; and R&D is probably the lowest investment with the longest horizon if you were to put it on a timescale.”
Innovating through M&A may be the most expensive option, but it’s also the quickest and it offers a host of different upsides. For starters, you’ve got what Hamish Renton, managing director of HRA Global, describes as “asset fit”.
“If you acquire a brand that is currently getting co-packed and you drop that into one of your own factories, then you’re taking the co-packer margin out and this can be 20%, 30% or even 40% [of your costs], so instantly you make the product more profitable, you fill your factory up and you’ve got another nice brand in your stable, which makes you more relevant with the retailers,” says Renton. “You can also potentially move that brand across other brands in your stable. For example, if you’re a chocolate manufacturer and you buy a small chocolate brand, you could make a new chocolate bar from it, you could make an Easter egg, you could do Xmas decorations and maybe the little guy who owned it before couldn’t do any of these things, so you have all of these new incremental opportunities as well.”
Innovating through M&A also gives the big food groups access to burgeoning markets that they might otherwise struggle to access, says Bryan Roberts, global insight director at TCC Global.
“Often the bigger food and drink companies are a bit more cumbersome,” explains Roberts. “They cover so many bases that they can’t have their finger on the pulse of what’s going on in all of the different edges at the market. That’s why you often get these smaller, nimbler companies who specialise in a niche. That then gives them a pretty good run at these smaller nascent markets, but over time these smaller nascent markets become sizeable sectors in their own right.”
He cites the example of craft beer. “The space allocation for craft beers has gone through the roof recently and all of sudden you get the major brewers recognising that their big brands are getting less space and these smaller more interesting or artisan brands are getting quite a decent amount of allocation. Greek yogurt and Icelandic-style yogurt is another good example that’s come out of nowhere to become a big category and suddenly you’ve got all of these the big guys going ‘okay, let’s try to introduce our own variants to get on the bandwagon’.”
The problem is that, as well as seemingly favouring smaller brands shoppers, at the moment consumers are also looking for authenticity and Roberts says they can instantly tell when something is a “thinly veiled rip-off” of an artisan product.
“It’s a lot easier to buy in authenticity than try to create it yourself because it’s never usually that effective,” says Roberts.
While some big food groups are happy to wait for challenger brands to get to a certain size before making a play for them, because of how fast markets are now moving Filott says that many companies feel the urgency to act much more quickly than they have done in the past. Hence the rise of Big Food’s own VC arms and accelerator/innovation hubs.
“There’s a lot going on in terms of new ingredients and new types of diets, so they [big food groups] are trying to get an understanding of what’s going on [by investing in start-ups], but also they are hopefully going to make a financial return on their investment,” says Filott. “It’s a way to get into a new area that the consumer likes and where you will find growth. So it’s about the quest for growth to a degree because they see these companies rise at a phenomenal pace, but I think companies are also getting in slightly earlier to fend off competition for those particular assets.”
At the other end of the scale, there are plenty of opportunities to snap up older, established brands for a cut-price fee, thanks to recent, brutal, retailer range reviews, which have seen a number of brands culled from the shelves.
“Any of the tertiary, or in some cases secondary, brands who have been taken out of distribution in these range culls that we’ve been seeing, are therefore damaged and their value decreases,” says David Sables, CEO of Sentinel Management Consultants. “So you’ve got products with equity, who are now available at a more attractive price and can be scooped up by the larger brands.”
Sables thinks there could be plenty of opportunities out there for further M&A activity in the future thanks to the growing number of products and brands that have been made vulnerable to takeovers because they’ve lost listings with key retailers.
But just because the big food groups can go out there and snap up brands as a means of innovating it doesn’t necessarily mean that they should. While history is littered with examples of M&A activity that worked, there are plenty of examples where it backfired. Remember cereal maker Kashi, which was acquired by Kellogg? In the food sector, it’s become the cautionary tale cited by analysts as to how not to undertake M&A.
The most successful acquisitions appear to work because the new parent company has left the existing management of the business alone, at least initially, says Filott. “Integration needs to take place at a very slow pace to keep the spirit, to keep the differentiating factors, to keep the people engaged – and people are very important in these young companies – and to allow them to run their business as a start-up, but also to provide them with the support and distribution that the big food companies can give them.”
One of the most regularly cited examples of a big food group that approached an M&A deal in the correct manner is Coca-Cola’s acquisition of Innocent.
“What they did was they completely managed it as an independent business,” says Sables. “There was a bit of cross-fertilisation in the management but effectively they allowed it to run itself and keep with its values. And, of course, it then benefitted from the size of the Coke machine.”
Coca-Cola’s purchase of Innocent isn’t the only example of a successful acquisition made by a big FMCG group. There have been plenty of others in the past and there will no doubt be plenty more in the future, because this sort of acquisition activity has always been cyclical and fuelled by different factors. It’s also in a strange way circular, according to Renton.
“Part of what drives the smaller brands is they need to be innovative, distinct and new, and they need to do something different in order to get the listings,” he explains. “So they think big thoughts and they push the envelope and take things forward. One of the reasons they also get some traction in the market is the supermarkets don’t want to keep stocking products from the same old companies. Whilst they make a small fortune from products made by the likes of Nestle, Coke and P&G, it doesn’t drive footfall for them because you can buy that stuff everywhere. So the retailers are deliberately encouraging these smaller brands to differentiate their offer to drive footfall in the stores, but, of course, the irony is the [big] brands then hoover them up.”
Another point Renton is keen to make is nine out of ten products fail and there is “a lot of spray and pray” that goes on among smaller companies as well as at the bigger food groups. “It’s not like these smaller companies have got a monopoly on good ideas,” he adds. “It’s just you only see the winners. You don’t see the nine other ones who died at the gates of the supermarket trying to make it happen.”
Regardless of which strategic approach to innovation the big food groups favour, the only certainty is they will have to step up their efforts in the future if they want to enjoy strong growth. And based on recent evidence innovating through M&A appears to be an increasingly popular option for many companies.
“We’re in a world – certainly in the West – where slow growth is the new normal,” says Searle. “So the days of 5%, 6% or 7% growth are probably dead. It’s going to be 1%. So as an FMCG, how are you going to get more than that? How are you going to take share from somebody else? Some of that is inevitably going to come by acquiring or getting access to lots of these companies that are smaller, but have a better consumer product, or offer, or resonance, or premium. So I think this [M&A] trend will continue.”