As the market changes, so must the food industry, and this has become evident in the M&A trends of the food and beverage sector. A PWC report entitled “An Appetite for M&A” outlines the challenges facing the food industry and how they impact M&A activity.

Five challenges are identified as forcing change in the food industry:

  1. Low growth in mature markets. The food industry has not recovered from the recession, which encouraged consumers to seek lower-priced goods, and forced manufacturers and retailers to maintain or lower prices.
  2. Pressure on margins. Despite the pressure to keep prices low, from 2009-2013 input costs have gone up 15-17% for consumer packaged goods companies. Output price has not kept pace, increasing only 4-5% over the same time period.
  3. Changing consumer preferences. Consumers have been diversifying in what products they want. Some demand high quality foods, and are willing to pay a premium, while others are seeking low-cost, high-value products.
  4. Changing retail landscapeSupermarkets are competing for food sales with growing competition from online sellers, dollar stores, convenience stores, and other non-traditional food retailers.
  5. Intensifying competition from smaller playersNo longer are economies of scale particularly important for food companies, and smaller brands are increasingly competing effectively.

In an attempt to combat these challenges, M&A activity has grown in the food and beverages sector. But what makes for a successful deal?  The report analyzed a number of deals and determined that companies succeed at mergers and acquisitions when they focus on their “capabilities”: things they are particularly good at compared to their competitors. Deals were more successful if the acquiring company either acquired new capabilities, or could use its existing capabilities to improve the target company. Deals were not effective when they required developing capabilities that neither the buyer nor the seller had going into the deal.

The takeaway from this report is that as the food industry faces new difficulties, effective acquisitions become all the more critical. Taking stock of one’s strategic advantages and capabilities can provide a valuable tool for assessing the potential value of a deal. Enter into deals that play to your strengths, not ones that rely on developing new capabilities. Making the most advantageous deal is one way to stay ahead of the increasing industry pressures and remain competitive in the changing food and beverages landscape.

The author would like to thank Kira Misiewicz, articling student, for her assistance in preparing this legal update.

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