In the last two years, the Australian food and beverage sector has grown by an average of 4.3 per cent per year, with some sub-sectors posting highly variable growth rates. Senior advisor Mark Ostryn from Groves & Partners provides analysis on a competitive market and what it means for owners keen to sell, or acquire.
The financial dream of most entrepreneurial food and beverage business owners is to be bought out by a large company. Alucrative exit is seen as payoff for their vision, persistence, hard work, and overcoming supply and distribution challenges.
While only a small proportion of owners achieve this dream, there has, until quite recently, been an increase in business sales.
In 2020, there were more than 100 reported transactions in Australia, with large domestic and international food and beverage companies often paying a premium price for smaller food companies with quality assets or intellectual property.
However, with recent economic volatility, there are fears that food and beverage business sales volumes and values will shrink.
As with previous dips in economic activity, those fears may well be unfounded as quality assets, smart people, and the capacity for future growth will always attract interested buyers. Private equity has shown little hesitation to pay premium prices for smaller food companies with quality assets.
In fact, a downturn in a trading environment may well propel larger businesses to acquire proven products, brands, or intellectual property rather than risking organic growth.
Who are the buyers?
Many business sales were by larger food companies and private equity. For example, Arnott’s Group (Diver Foods), Endeavour Group (Josef Chromy Wines), JBS Australia (Rivalea, Huon Aquaculture), Lion (Fermentum Group, Bell’s Brewing), and Treasury Wine Estates (Frank Family Vineyards).
Private equity groups including Quadrant, TPG Capital, and Liverpool Partners looked to more niche markets, particularly in alternative proteins and food tech.
The largest number of transactions were in alcoholic beverages, snacks, food service distribution, plant-based food, and seafood.
Brands that conveyed positivity, particularly catering to active, health-conscious millennial demographics drew a lot of interest.
There was also a strong acquisitive focus on product and brand innovation, particularly in plant-based food products, healthy snack foods, ready to eat meals, and even high quality “human grade” pet food.
The buyers can be broken down into four main cohorts.
1 Large Food and beverage Businesses
They could be Australian owned or subsidiaries of overseas businesses. With the primary goal to grow shareholder value, these companies are constantly looking to innovate and extend. Their main buying motives are:
Purchasing innovative products and brands from existing businesses rather than risking the time, cost, and resources of developing competing products themselves. Recent sale transactions and capital raises in “hot markets” such as plant-based foods and regenerative farming methods bear this out.
An acquirer may look for a strong business in a particular location, such as premium foods from Tasmania, or wines from a specific region. Conversely, the acquisition of Select Fresh Group by Costa Group gave the company access to West Australian markets and state of the art warehouses in Perth.
This is when achieving economies of scale through cost savings and revenue synergies are the goal. For example, Nature One Dairy’s acquisition of Nepean River Dairy provided much greater capacity.
This is attractive for an acquirer looking to sell a broader range of products to its existing client base, as wellas selling existing products to new clients. Acquisitions by Lion have provided brands such as Little Creatures and Four Pillars access to a wider market.
An acquirer may be keen to purchase a business in a different part of the supply chain to ensure greater control through vertical or horizontal integration. The merger of Oceanic Agencies, amajor player of seafood packaging, into the Close the Loop Group allows the group to provide end to end packaging solutions.
Acquiring a business and securing the specialist skills of its personnel can count for a lot, particularly in the food and beverage industry where a founder’s reputation, or the charisma and technical skills of key employees can be a major selling point.
This is when an acquirer is looking for the opportunity to diversify or expand their current product offering. Aaron Zerefos’ acquisition of DrinkScene enabled the alternative milk distributor to diversify into broader non-alcoholic beverages, while pie manufacturer Patties Food diversified into health food by purchasing Fitness Outcomes.
Acquiring a competitive threat can strengthen the buyer’s position in a market.
2. Large Non-Food Businesses
Not all strategic acquisitions came from within the food industry and there may be strategic reasons why a non-food and beverage business would do so.
In 2021, fitness training company F45 purchased family-owned Australian nutritional supplements group True Protein, with a view to distributing product through its own network of 1700 fitness studios globally.
3. Private Equity
Private equity uses private investor funds to acquire all or part of food and beverage businesses. They seek to improve their financial performance through operational measures or synergies with other related acquisitions prior to divesting them.
Private equity was involved in several 2021 transactions including Accolade Wines (Carlyle Group) acquiring Rolf Binder in premium wines, and Openway Food Co. (Five V Capital) acquiring Annex Foods, Metro Foods, and Table of Plenty.
Corporate funded private equity is increasingly an option to assist growth. This is particularly so in 2022, with businesses including Australian Plant Proteins, EVR, Lauds, Fënn Foods, All G Foods, Harvest B, and Fable Foods all receiving investment or selling.
4. Private Investor
This category of non-strategic buyers includes private owner/operators buying food and beverage businesses and either managing them directly or appointing an operational manager.
These acquisitions typically produce the lowest sale multiples, since the incremental gains that an outside investor gains from buying a business are likely to be lower than a strategic buyer.
However, the more efficient the business for sale is, and the less dependent it is on the existing owner, then the more valuable that business is.
There are eight key assets that determine the likely future growth and profitability of abusiness:
- Financial – Effective management systems in place to manage production, inventory, cash flow, and opex/capex.
- Product – A recognisable, solid selling range of products driven by market need, with a pipeline of new products.
- Customer – Understanding what excites customers as well as what builds and retains their loyalty.
- People – Businesses that value their employees and inspire loyalty and performance by investing in, and motivating them.
- Systems – Well organised internal and market facing digital platforms to manage processes ranging from cybersecurity to food safety risks.
- Competitive – A vision forthe evolution of the business, along with the requisite partnerships and technology to enable omni-channel operations.
- Brand – A positive public perception of all aspects of a brand ranging from ethical ingredient sourcing to food preparation tips.
- Intellectual Property – This can range from “secret sauces” which gain and retaincustomer loyalty, to formalised and organised proprietary knowledge of the company CRM.
Food and beverage owners planning an exit need to think long term and set goals. There are three fundamental questions you need to ask:
- What is my business currently worth?
- What is my goal exit valuation and when do I wish to exit?
- How do I close the value gap between 1 and 2?
This opens a series of strategic questions to be addressed in future articles.
To download the Food and Beverage Business Sales Market Update 2022, visit here.