The article below is from our BRIEFINGS newsletter of 10 December 2019
After a string of recent mega mergers, food companies are hunkering down to digest their acquisitions—resulting in a slew of spinoffs and divestitures as they look to streamline their operations. We sat down with Goldman Sachs’ Ben Frost, head of Mergers & Acquisitions for the Consumer Retail Group in the Investment Banking Division, to discuss the drivers behind recent banking transactions.
Until recently, mega mergers—like the deals that brought together Kraft and Heinz, as well as Anheuser Busch and InBev—were a feature of the consumer packaged food-industry. With M&A activity starting to slow, what are companies focused on now?
Ben Frost: Most of the big M&A deals we saw in 2015 and 2016 were driven by food companies’ desire to get into new categories to grow their businesses or get bigger in categories that they were in to take advantage of scale. Today, we’re in the aftermath of that buying spree as companies are pruning their portfolios, reducing debt and pursuing divestitures or spinoffs of noncore businesses. Inevitably, there are parts of an acquisition that aren’t as synergistic or as aligned with the company’s core growth strategy, so companies are assessing whether it makes sense to sell certain brands to other owners, often to private equity.
In determining which of their businesses to sell, companies are often evaluating the future potential growth of a category and how difficult a business is to run and manage compared with the core of what they do. For example, Campbell Soup recently sold its Bolthouse Farms business to an investor group led by its former CEO given some of the challenges of running a fresh food business, which is a fundamentally different business for Campbell to manage.
In general, consumer packaged food companies have been struggling against the backdrop of slowing growth, lower inflation, pressure from distribution partners (notably Amazon) as well changing consumer tastes. Many, as a result, have branched into private label offerings which have, in turn, put additional pressure on branded companies to further reduce costs for retailers.
Where have food companies looked for growth and how have consumers’ changing tastes and habits affected where companies are investing?
Ben Frost: For many years, the baby food and pet food categories have been big growth drivers for packaged food companies. A broader trend toward snacking—with people eating more frequently than they used to—has also pushed companies to offer smaller, portable packages that can be sold in convenience stores or delis. At the same time, there has been a consistent move to eat outside of the home. In the 1950s, people used to eat three square meals in their home. Today, more often than not, they’re eating most of their meals outside. Meanwhile, an overall trend to health and wellness has pushed companies to acquire innovative brands that are making more nutritious foods.
How are traditional food brands competing with new, nimbler entrants into the industry?
Ben Frost: There’s a real concern that large-cap food companies just aren’t able to innovate the way they used to. But after many years of focusing on cost cutting and increased efficiencies, today many of the large-cap food companies have pivoted toward a focus on innovation and new product development. Tyson Foods, for example, just announced a new line of alternative and blended plant-based proteins. Kraft Heinz has redoubled its efforts to reinvest in its brands, extending the Heinz brand to mustard and launching new ketchup flavors, such as hot and spicy. Innovation is going to be more important than it’s been in the last few years, given startups are shaping new trends and categories. It’s hard for a lot of these big companies to do that, so we expect we’ll continue to see more acquisitions.
Online sales have started to transform not just what we’re eating, but how we’re getting our food. How are businesses adapting to that?
Ben Frost: In the battleground of online versus in-store grocery shopping, traditional retailers such as Kroger, Albertsons and Walmart have rolled out drive-up services that allow shoppers to shop online and pull up to designated spaces at their local stores and have their purchases delivered directly to their vehicles. People who participate in these services are more likely to order the same items week after week. While they may not physically wander the aisles as much as they used to, they’re likely to stick with the brands they know. The irony is that, without the foot traffic in the stores, it’s harder for the smaller and up-and-coming brands to get noticed by consumers, while giving an edge to the larger, established brands.
Ben, you recently joined Goldman Sachs after many years at another financial services firm. How are you finding life at the firm so far?
Ben Frost: After 18 months with the firm, the partnership mentality that permeates the entire organization is what stands out the most to me. The thoughtfulness that it is led and managed with a focus on the long-term success of its franchises makes it apparent why Goldman Sachs has been such a consistent market leader. Fortunately, both clients and colleagues have made the switch as seamless and enjoyable as I could have imagined.