SPECIAL REPORT: More Consolidation of Big Food Companies on the Horizon

02 May 2016 --- Nestlé’s announcement of its joint venture with the UK’s R&R ice cream company is the latest example of a food giant carrying out a joint venture, acquisition, or other M&A activity to drive up sales and adapt to changing consumer changes in the food industry.

The blockbuster $40 billion takeover of Kraft by Heinz last year, bringing together brands including Heinz’s signature ketchup as well as Jell-O, Oscar Mayer, Planters and Kool-Aid, didn’t stun industry experts, despite the size of the deal, as they had long anticipated that such deals were a necessity.

The Heinz/Kraft tie-up not only meant that the combined entity would have greater power over retailers in stocking its brands but was also a means of driving up shareholder value through cost-cutting and synergies.

The deal also underscored a wider-point that food giants, also including the likes of General Mills, Campbell Soup, had been sluggish in adapting to younger consumers wanting newer, fresher, healthier foods and no longer willing to accept the same brands that their parents consumed.

Further consolidation to come
Francois-Xavier de Mallmann, global co-head of consumer retail and healthcare at Goldman Sachs told FoodIngredientsFirst: “We expect consolidation to accelerate, especially in the US, where a number of legacy brands and categories are growing less fast.”

“Capital markets and, in selected cases, activists, are putting pressure on these companies to manager their cost base more efficiently and increase cash flow generation, which many believe can be better achieved through greater scale.”

Speaking to FoodIngredientsFirst, David Hayes, an analyst at Nomura, the investment bank, said the Kraft/Heinz deal was: “part of an ongoing, and long overdue process of consolidation in the US food sector.”

However, Daryl Fielding, a former executive with Kraft, believes that no amount of consolidation in the food industry can strip the retailers of the buying power they hold over food companies, particularly in the UK and US.

Speaking to FoodIngredientsFirst, Fielding said: “I think even the likes of Kraft, Unilever, Procter & Gamble find the negotiations with the big supermarkets difficult because of the balance of power.”

R&R ice cream deal
Nestlè, the number two player in ice cream whose brands includes Haagen-Dazs and Dryer’s, is hoping the joint venture with R&R, first mooted six months ago, will mean it can scoop market share from arch-rival Unilever, the owner of Ben & Jerry’s and Magnum and the number one player in ice cream.

The 50/50 JV will be called Froneri (a name derived from a combination of frozen, Nestle and R&R) and will combine the Nestlè and R&R ice cream businesses (which includes own label ice creams and ice creams under licence such as Mondelez in the US) in Europe, the Middle East, Argentina, Australia, Brazil, the Philippines and South Africa, coupling Nestlè’s strong brands and presence in convenience stores and ice cream stands with R&R’s manufacturing prowess and footprint at traditional retailers.

The new venture will be the number three player in the market, with annual sales of £1.9 billion and employing around 15,000 employees.

Paul Bulcke, Nestlé chief executive, said: “This is an exciting growth opportunity in a dynamic category. Froneri will capitalize on complementary strengths and innovation expertise, combing Nestlé’s strong and successful brands and expertise in ‘out-of-home’ distribution with R&R’s competitive manufacturing model and significant presence in retail.”

Moving forward, experts believe the JV could present Nestlè with a number of options, from buying out R&R or even spinning off its ice-cream unit, however it seems that the business will be listed as a separate entity.

But according to R&R owner PAI, there is one clear goal.

Frederic Stevenin, partner at PAI, said: “Long term, the objective will be to list the entity as we believe this will be quite an attractive growth story.”

Different approaches from food giants
There have been a spate of deals across the food industry in recent years: Unilever’s acquisition of premium, Italian-style gelato ice-cream brands Talenti and Grom; spam-maker Hormel’s $775m purchase of organic processed meat maker Applegate Farms; General Mill’s acquisition of organic food company Annie’s to name a few. 

And then there are those that didn’t come off, such as PepsiCo’s attempt to grab a stake in yogurt maker Chobani.

An indication of how important M&A activity is underscored by forecasts from food companies.

For example, McCormick plans to generate around a third of its sales over the long-term through acquisitions while Campbell Soup said its quartet of acquisitions in healthy foods make up more than 10 percent of its $8 billion in sales.

There are a number of reason behind the wave of M&A activity: but they mainly rest on food companies wanting to shore up their share prices and belatedly adapt to changing consumer tastes.

Harry Balzer, an expert in food consulting, said: “People are not storing food as much as our parents did, as they seek fresher food. If you’re no longer storing as much, the people providing the inventory [the big food companies] will suffer. The de-inventorying of the American larder is not good for food companies.”

He added: “Consumers appear to be avoiding foods and beverages that were made to be better for them. Instead, consumers are going for products that are real and not altered.”

Speaking to the FT, Akeel Sachak, global head of consumer at Rothschild, said it is the new tastes of millennials which are prompting the big companies to buy into the organic and natural food market.

He said: “This has hitherto been mainly the preserve of hippy-type entrepreneurs from California and a select band of visionary larger consolidators.”

Retailers are carrying too much power
The battle for power between manufacturers and supermarkets is ages old but some argue a big shift is occurring, which means that supermarkets are no longer ruling the roost.

The buying power of the big supermarkets has long been an issue with manufacturers, where the dominance of retailers, most noticeably in the UK and US, has put pressure on manufacturers and squeezed them on their margins.

However, some believe there is a change in the shift of power. Population growth has pushed commodity commodity prices higher, which in turn has helped manufactures justify price increases.

But others are not convinced and believe that no amount of M&A activity will help combat the power that retailers hold over manufacturers. 

Speaking to FoodIngredientsFirst, Fielding said: “Even if you are a very, very large food company it is incredibly difficult to battle the strength of the supermarkets, When I was at Kraft, even the combined forces of the power brands we owned, made it difficult.”

“I am honestly not convinced that you’d get there by adding incremental brands to your portfolio. I think even the likes of Kraft, Unilever, Proctor & Gamble find the negotiations with the big supermarkets difficult because of the balance of power.”

Conclusion
With food companies continuing to struggle to adapt to changing consumer tastes and the improved economic conditions, including an increasingly liquid market, lending itself more to M&A activity, it seems that in 2016 and ahead, there will be more activity to come.

By John Reynolds