Food & Beverage: Changing Consumer Habits Reshaping the Industry
May 2018 - According to Center for Disease Control and Prevention, there is a growing number of people impacted by weight-related health issues. Accordingly, consumers have become more health conscious when selecting food and beverage. The demand for health-oriented products has driven the food & beverage industry’s growth in the U.S., growing at 2.9% 5-year CAGR to $701.6bn in 2016, according to U.S. Census Bureau.
Changing consumer habits over health concerns has increasingly threatened traditional food and beverage strategies. Producers have responded by focusing more on healthy products, which promoted the additional tailwind of growing per capita income in the United States. Furthermore, food and beverage sales continue to move online, traditional bedrock for brick and mortar retail. Food and beverage sales accounted for 3.2% of total e-commerce retail sales in 2016 and are projected to grow to 4.1% of total e-commerce salesby 2022. These changes in the food and beverage industry provide opportunities for agile businesses to capture growth in specialized and differentiated food markets.
Drivers of Growth in Food & Beverage Industry
While the food and beverage industry boasts both a massive size and the ability to weather risks during economic downturn, it also suffers from low overall growth. Many companies are seeking to mitigate low overall industry growth by expansion into several rapidly growing subsectors. In particular, organic foods, meal replacement, and fast food restaurants ranked as the top-three highest annual growth rate from 2012 – 2017 at 10.5%, 5.9%, and 3.1%, respectively, driven by desires for health and convenience. Among the three, organic foods showed the greatest prospect of growth at 14.0% for the next 5 years.
Though consumer lifestyles still demand time-saving and convenient products, traditional “junk foods” such as fast foods are falling behind convenient alternatives like meal replacement products. Nevertheless, the industry has rapidly adjusted to changing tides by unveiling options focused on health to shore up their image, undergoing a sector-wide adjustment in fast food marketing and product offerings (you can now get a kale salad at McDonald’s). Though the actual health benefits of such menu items may be suspect, the message is clear: the industry is responding to the change in consumer values.
Mergers and Acquisitions Outlook
The first three quarters of 2017 were marked by 229 closed transactions, a 4.1% (QoQ) increase in M&A activities, with a 132.6% increase in total transaction value driven by a few supermassive transactions in addition to higher overall valuations. Current average EV/EBITDA multiples are approaching 5-year peaks at 10.7x EBITDA, significantly higher than the 5-year average multiple, 9.7x EBITDA.This has primarily been driven by increasing strategic investments by established corporations seeking to acquire strong positions in the aforementioned fast-growing markets and segments, increasing from 238 strategic acquisitions between Q3 2015 to Q3 2016, to 251 strategic acquisitions between Q3 2016 to Q3 2017.
In 2017, private equity involvement in F&B investments continued to reach new peaks with 139 taking place in the sector. Firms in this industry have been exposed to synergistic opportunities through M&A to capture additional growth from both economy of scale and economy of scope.