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July 17, 2013

Organic baby food: Corporates M&A flurry in growing segment

For three weeks in May, the industry's M&A spotlight shone brightest on the organic baby food sector.

By Dean Best

For three weeks in May, the industry’s M&A spotlight shone brightest on the organic baby food sector.

On 2 May, US food group Hain Celestial, the company behind the Earth’s Best organic baby food brand, moved to boost that part of its portfolio with the acquisition of UK-based Ella’s Kitchen.

Eleven days later, Danone, which has Cow & Gate in its roster alongside a significant global infant formula business, made its first foray into organic baby food with its move to buy 90% of US business Happy Family.

The unusual flurry of activity in one sector was rounded off by Campbell Soup Co. on 24 May when it announced it had done a deal to buy US business Plum Organics, which itself had used M&A to expand at the start of the year when it acquired unrelated UK firm Plum Baby.

Why this interest in organic baby food? Hain Celestial, Danone and Campbell Soup Co. would have individual reasons for wanting to either expand or enter the sector but, simply, it is a fast-growing industry, even in mature markets for baby food. In the US, for example, while baby food sales fell in 2012, sales of organic lines jumped almost 16% last year, according to data from The Organic Trade Association.

According to data from Euromonitor, of the top ten markets for organic baby food in 2012, nine were developed – ranging from the US, Germany and the UK in the top three to others including France, Austria and Australia. The tenth market – sixth in the list – was Russia. On the face of it, the global market for organic baby food is, at present, based in mature, developed economies, where birth rates are, at best, stagnant. Hardly macro-economic conditions conducive to growing demand.

However, sales are on the rise, perhaps in the main as consumers perceive organic food to be healthier for their children. Euromonitor analyst Idliko Szalai says organic baby food, for example, is seen as a way of avoiding pesticides and other additives. “Even if consumers don’t buy organic products for their own consumption, they would consider it a better option for their babies,” she says.

Euromonitor has issued forecast data for sales in the top ten organic baby food markets until 2015. All, except Germany, are forecast to continue see sales climb solidly, providing an attractive niche for those already in – and new to – the sector.

“Overall baby food esp in developed markets is not going to grow in value terms but there are little pockets, like organic baby food, that are going to grow very fast,” Szalai says.

The just-food managment briefing on the organic baby food market takes each of the three recent acquisitions in turn and looks at the detailed reasons why Hain, Danone and Campbell Soup Co. have invested in the category.

For Hain, which has recently snapped upmore mature businesses in the UK, Ella’s is a brand enjoying faster growth. There is also international potential to build on Ella’s positions in the US and Europe.

Through its stake in US firm Happy Family, Danone gets a foothold in the largest organic baby food market and one that is still growing rapidly.

Campbell Soup Co. is entering a completely new market, broadening a business based on soup and snacks, which last year took in chilled foods with the acquisition of Bolthouse Farms, into baby food. Plum gives Campbell a presence in a fast-growing category but also gives it access to the relatively more affluent consumers that buy organic baby food. The company could also benefit from Plum’s presence outside mainstream supermarkets in the US.

Looking ahead, which could be the emerging markets for baby food? And which could be the next acquisition target for a major?

Markets in the south and east of the globe are those where birth rates remain high and where, in many cases, disposable income is growing and middle classes interested in Western brands and consumer habits are building.

Last month, there was a fourth acquisition in the baby food sector with UK-based consumer goods company PZ Cussons snapping up Australian firm Rafferty’s Garden.

Rafferty’s sells a small range of organic cereals but discontinued its organic baby food range 15 months ago. That said, PZ Cussons said its presence in Asia Pacific could support Rafferty’s Garden’s fledgling export ambitions and cited Indonesia and Thailand as two potential markets. If FMCG majors are seeing such markets as possible attractive markets for a range of premium baby food, perhaps the two countries could be among those that could see an organic segment.

As for the next organic baby food companies that could follow Ella’s, Happy Family and Plum into the rosters of bigger players, the world’s largest organic baby food company is not Hain, Danone or Nestle. It is privately-owned German firm Hipp, which according to Euromonitor, accounted for 34.5% of global retail sales in 2012. 

“Maybe that’s next on the list as an acquisition for some bigger company,” Szalai says. “We’ve written about Hipp as a potential target for years. They are privately-held so I don’t know how profitable they are, how fast growing….. but yes, Hipp has been up on the stage for years as the next target in the organic arena.”

Two multinationals with relatively small interests in organic baby food are Nestle and Heinz, which could look to Hipp to bolster their businesses in Europe, which accounts for seven of the world’s top ten organic baby food markets.

Click here for part two of our management briefing, examining Hain Celestial’s expansion in the UK through its acquisition of Ella’s Kitchen. 

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