Food & Beverage Industry Update – Q1 2018

Food & Beverage Industry Update – Q1 2018

M&A activity in the food and beverage industry remained robust in Q1 2018, a continuation from a highly active 2017. While Q1 2018 activity was down as compared with Q1 2017 levels, we believe that interest in the sector and current industry trends will result in full year 2018 activity ending up in-line with 2017 levels.

A number of sector trends will continue to drive deal activity in 2018. Primary trends include the emergence of the so called Amazon effect and changing consumer preferences toward (i) healthier, better-for-you alternatives, (ii) local brands/ingredients, and (iii) an increased appetite for snacks and on-the-go consumables.

As large, old-line food and beverage companies (think General Mills and Kellogg) have been caught holding the bag with vast, traditional product portfolios (e.g., sugary cereals), consumers, particularly millennials, have been voting with their wallets and forcing big changes at these companies. Hence the falling stock prices for old liners, including last-twelve-month declines of 10%+ for each of General Mills, Kellogg and Post. Large, old-liners have been prioritizing M&A for on-trend growth as it is often easier to acquire trusted, proven brands than to build them organically. And with on-trend, high-quality businesses of scale in short supply, competition for deals is often price based, with buyers offering significant premiums. For instance, Hershey paid a 70%+ premium for better-for-you snack company Amplify in late 2017.

Food and beverage retailers are also under pressure from the Amazon effect. The monumental impact of Amazon’s acquisition of Whole Foods in mid-2017 illustrates Amazon’s ability to significantly disrupt established industries. Stock price impacts were immediate, with next-day declines of 15%, 12% and 5% for Kroger, Target and Walmart, respectively. This generated an urgent need to develop scalable online grocery/fulfillment strategies among traditional grocers. As they experiment with online order/in-store pick-up, some have leveraged M&A to acquire proven delivery capabilities (e.g., Target’s acquisition of same-day delivery platform Shipt in late 2017), a trend we expect to continue.

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