M&A in the Food Industry: a permanent shift towards purpose?

There is no doubt that the mindset of consumers, corporations and investors has shifted towards sustainability and the purpose-driven sector. This disruptive trend has been developing over the past few years, in part due to the wider megatrends of health and wellness and concerns around the environmental and social impact of businesses. Many consumers now have permanently altered buying habits and simply will only buy products which reduce the environmental impact while increasing the positive social impact.

This fundamental shift in consumer demand has led to a major influx in investment, despite the backdrop of Covid-19. The FT, using Morningstar data, has reported there are now $1.7 trillion of assets in sustainable investor funds, an astronomical increase of 50% from 2019. This huge influx of capital can only serve to increase valuations of purpose-driven businesses both in the public and private markets, raise the profile and value of products and lead to a shift in M&A strategies.

A higher bar

However, it is clear that brands are now being held to a higher standard in a number of key areas such as ingredients, traceability, packaging and social contribution. These standards also need to be balanced with maintaining competitive pricing, given the rise of income inequality and the proliferation of discount retailing.

The impact of the recent backlash against a number of major chocolate suppliers remains to be seen but it is clear that the food industry is changing. This is clearly evidenced by Oatly’s eyewatering $10bn anticipated IPO in New York. The growth in consumer demand and the capital flows towards sustainable and purpose-driven products means that there is a more than generous prize for getting your M&A strategy right.

What does this all mean for Food M&A?

Many conglomerates are likely to shape their portfolios towards purpose-driven products, which are typically higher growth and higher margin. For example, the UK Free-From sector is valued at nearly £2bn and is expected to grow at a far higher rate than the wider food industry through innovation and continued demand. The favourable IPO and equity markets also now serve as a realistic exit route for the most successful growth food companies.

This presents a number of opportunities:

• For conglomerates these trends will mean exiting certain products that do not have purpose-driven attributes and therefore become “non-core”. Major corporations such as Unilever, Nestle and Tyson Foods have capitalised on this trend and are evolving their portfolios through direct investments or through venture capital style funds and carving out non-core brands.
  
  
• For private equity and financial investors, this also presents a value arbitrage opportunity to acquire non-core brands at lower valuation multiples and then improve performance and cash generation before exiting.
  
  
• For entrepreneurs, this is clearly an exciting time, where there is the potential to grow innovative purpose-driven brands during a period when there is no shortage of capital keen to be deployed in the sector.