food and beverage

M&A industry focus: the Food and Beverage sector

M&A industry focus: the Food and Beverage sector

The appetite for mid-tier Food and Beverage firms has never been greater – but will it continue?

With 97% of the industry made up of small- and mid-tier businesses, there are few clearer bellwethers of the UK SME segment than the food and beverage (F&B) sector.

And as is true of the wider mid-tier segment, the current climate presents exciting opportunities to Food and Beverage companies, as well as challenges.

Despite fierce economic headwinds, including inflation and the rising cost of ingredients, most Food and Beverage companies reported positive earnings during 2017 – and overall industry turnover increased by 2% to £97.3 billion.

Robust overseas demand has proved a key driver. As the eurozone economy gathers pace, a weakened pound saw UK food and drink exports reach a record £22 billion last year, according to Defra.

The consumer knows best

The Food and Beverage segment has always had a knack for innovation and adaptation, and these qualities are also playing a major role in the current growth trend.

Realising the health food craze is here to stay, Food and Beverage producers big and small have been quick to factor in the UK’s changing dietary habits. Sales of organic food and drink rose by 6% in 2017, reaching £2.2 billion.

To keep pace with changing consumer trends, many producers are tweaking their recipes, with the sugar and calorie content of soft drinks having fallen by 12% since 2012.

Others are bolting on health-friendly brands. According to a recent Lloyd’s survey, 57% of Food and Beverage firms consider new products as their primary route to growth.

Hungry for M&A

But product development not the only game in town: creating new products from scratch or even revamping existing lines requires a significant R&D investment and carries a high degree of risk.

Instead, many firms are opting to make strategic acquisitions of small- and mid-tier producers. 36% of Food and Beverage companies are targeting growth through M&A, according to Lloyd’s.

Popular niche brands are in high demand – Unilever’s recent acquisition of Pukka Herbs being a prime example.

A seller’s market

Bolstered by this trend, the combined value of UK food- and drink-related deals more than doubled in 2017, reaching £21.4 billion according to Grant Thornton. The volume of transactions also grew – rising to 206.

And it’s not just trade buyers driving M&A activity: close to a quarter of all Food and Beverage transactions 22% involved private equity firms in 2017 – the highest share on record.

The demand for quality mid-level acquisitions and growth investments offers a window of opportunity for SME owners.

These opportunities may well originate from distant shores. While cross-border M&A was once reserved for ‘big-bet’ scale deals (think Kraft’s 2010 Cadbury’s takeover), buyers and investors are increasingly finding value in mid-tier targets overseas.

International investors were behind 33.7% of UK Food and Beverage acquisitions in 2017, compared with 32% the previous year. A global marketing strategy is increasingly vital for businesses looking to sell or attract investment.

Preparing for a new landscape

Food and beverage firms are in a privileged position in many respects, but they face specific challenges as well.

With nearly a third of its 117,000-strong workforce made up of EU migrant workers, the UK Food and Beverage segment is particularly exposed to a possible Brexit-induced labour shortage.

In a recent industry survey, 36% of Food and Beverage businesses said they would not be able to operate without access to EU workers. Mid-tier firms, without the broad recruitment channels of larger employers, may be especially vulnerable.

For investors and acquirers, this presents a potential weak spot. As a countermeasure, owners need to put themselves in the shoes of potential investors: is there a post-Brexit hiring strategy in place? And is the management team strong enough to set a course through choppy waters?

Whether looking to sell or to expand further, those SMEs that prove themselves most adaptable and resilient over the coming months will be best placed to thrive in a fast-changing landscape. The cream always rises to the top, after all.

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