Buy, not build
Acquisitions have become the most popular way for food companies to address the evolution in consumer preferences, Rabobank said. Recent examples include ConAgra Foods’ purchase of Blake’s All Natural Foods to capitalize on growth in natural and organic frozen meals, the Hershey Co.’s acquisition of Krave jerky to meet a greater demand for protein snacks in convenience stores, and Mondel?z International’s deal for Enjoy Life to deliver on the desire for healthy snacks with simple ingredients.
“M.&A. is often the quickest route to expand portfolios: into the fast-growing on-trend categories with brands that have a proven track record — whether these are bolt-on acquisitions that complement the company’s existing portfolio or ones that take the company into totally new categories,” Mr. Fereday said. “In the best-case scenario of an acquisition, the acquiring company can accelerate the brand’s growth rate by putting it into a stronger distribution network. It can improve profitability by creating operational efficiencies.”
Companies should buy brands in an early stage of the life cycle to reduce the risk of paying too much.
“In short, it’s better to run the risk of overpaying for a number of small scalable companies than betting the house on one major acquisition,” Mr. Fereday said. “While the execution risk is lower for a company that comes with a proven track record, these large acquisitions can carry greater financial risks if they fail to deliver expected growth.”
Smaller companies, on the other hand, while cheaper to acquire, may carry greater execution risks and are unlikely to have an immediate significant impact on top-line sales.
“That’s why scalability is key,” Mr. Fereday wrote.
The Hain Celestial Group has a 20-year track record of acquiring small natural and organic startups and building them into multimillion-dollar brands. And with the acquisition of Annie’s last year, General Mills now has a portfolio of natural and organic products with sales topping $600 million and plans to reach $1 billion by 2020.
“In the context of these deals, the mega-merger of Heinz with Kraft Foods looks like two dinosaurs mating as the meteor races towards earth,” Mr. Fereday said.
But while acquisitions may create growth opportunities for major companies, they also may come with risks. Small independent companies acquired by larger competitors may lose favor with loyal consumers for “selling out.” Similarly, a startup brand may lose the niche positioning and core values that led to its initial success after moving into mainstream.
“To maintain the culture and integrity of these acquisitions, (food and beverage) companies have become more forward-thinking in their approach to planning for the future, adjusting their internal structures to the point where these specialty brands can flourish,” Mr. Fereday said.
Large corporates should operate acquired brands on a “longer leash.” General Mills, for example, retained the management of Annie’s, and Mondel?z plans to operate Enjoy Life separately. Other companies have created separate divisions for specialty brands. PepsiCo has a Naked Emerging Brands division, and the Coca-Cola Co. operates a Venturing and Emerging Brands segment.
