2015 and, to a lesser extent 2016, were bumper years for M&A in the food and beverage industry, with 2016 deal activity accelerating considerably as the calendar year reached its close. As we reported back in August, though consumer demand in certain staple food and beverage categories has declined in the past half-decade, emerging trends such as demand for “natural” and organic products has recently led to a sizable number of deals. According to consumer strategists in the industry, organic and “natural” food demand will continue to boost M&A into 2017.
However, amidst the growing movement towards healthier food options, there has also been deal activity on the decidedly less healthy side of the industry. Affectionately referred to as the “indulgence” category, continued consumer interest in less healthy foods could perhaps signal a backlash to the health food trend or a way for consumers to return to the days before they learned of hydrogenated oils and high-fructose corn syrup. Some suggest that the “indulgence” category, with its time-tested but slow-to-no growth companies, is ripe for the entrance of private-equity buyers – perhaps to streamline certain successful brands.
Within the indulgence category, an area of particular growth exists in the premium and so-called “super-premium” and “ultra-premium” food and beverage brands, which produce creative new takes on classic foods and drinks using higher-quality ingredients. While consumer demand for run-of-the-mill indulgence products may arguably have waned, demand for premium products has increased dramatically. A report produced by management consulting firm Kurt Salmon shows that the total market growth of the US ice cream category, for example, rounded out at only 1% between 2010 and 2013. However, in the same period, “super-premium” ice cream brands grew by 5.7% and “ultra-premium” by 41.7%. A similar phenomenon can be seen in terms of beer, a classic indulgence beverage. Sales of US domestic and import brands have experienced negative growth in recent years, but craft beer sales have grown by around 20%. The Kurt Salmon report suggests that these indulgence subcategories present numerous targets for private-equity buyers and are helping revive deal activity in the industry as a whole.
It is yet to be seen how the recent campaigns to curtail junk food advertising in countries like Canada and the UK, particularly with respect to children, might affect the future of both the classic and newcomer indulgence brands.
The author would like to thank Peter Charbonneau, Articling Student, for his assistance in preparing this legal update.
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