Consumer buying habits: new investment opportunities in the food and beverage industry | Blake, Castle & Graydon LLP
The food and beverage industry is showing resilience
Although the cost of food has increased over the past year, merger and acquisition activity in the food and beverage industry has been healthy.
Not surprisingly, food and beverage companies have raised prices at a historic rate. This is primarily due to increased input costs associated with food and beverage products that result from higher interest rates, higher inflation, trade sanctions, and increases in labor and component expenditures. The food and beverage industry has remained resilient due to its fundamental nature. In fact, people tend to eat more at home during economic downturns, which increases their consumption of food and beverage products.
In 2022, food and beverage deal activity in mergers and acquisitions will increase every quarter, despite economic changes. The majority of transactions in the first quarter of 2022 were in packaged foods and meats (41%), restaurants (25%), and beverage sub-industries (17%). Deal activity is also expected to remain strong in 2023 in relation to the grocery retail sector. Moreover, investors are expected to start investing in food producers, enabling them to secure access to food supplies and ingredients.
Opportunities created by changing consumer buying habits
Consumers are not as loyal to brands as they once were. They are increasingly willing to substitute different food products or brands that align with their values, despite tighter budgets. These shifts in the food and beverage industry allow new companies to emerge that meet changing consumer preferences and demonstrate the significant growth potential of the industry.
Industry trends are also leaning toward products that are organic, chemical-free, gluten-free, non-GMO, locally and responsibly sourced, vegan, sustainable, transparent, functional, and wholesome. In addition, new products with cleaner labels and healthier ingredients are gaining popularity. This contrasts with the idea that consumers remain “brand loyal”, allowing new products to enter the market if they align with changing consumer values.
Food and beverage companies can capitalize on these trends by incorporating more distinct features into their products and highlighting these features more clearly in marketing and on product labels so they stand out to the consumer. They can also take advantage of trends in consumer buying by customizing their existing products. Some food and beverage companies have begun modifying ingredients in popular products to appeal to a broader group of consumers. For example, a company might take an existing product and modify certain ingredients, allowing it to offer vegan, gluten-free, or organic options in addition to its regular offerings.
Increasing consumers’ desire for transparency in food ingredients has also led to the popularity of meal kits that allow consumers to clearly identify the ingredients they are consuming. Food and beverage companies are starting to capitalize on this trend by breaking down their existing products into a set of ingredients that consumers can put together to make a meal.
Moreover, while general disposable income has declined since 2021, it is expected to grow by 1.5% annually over the next five years. This is expected to increase the amount that Canadians spend on food and discretionary dining and at the same time increase the growth potential of the industry.
Invest in food and beverages
Changes in consumer preferences may be of interest to investors looking for opportunities to invest in important long-term trends.
To date, private strategic buyers are the most active buyers in the industry (see February 2023 Blakes Bulletin: M&A Landscape M&A Landscape: Trends to Watch). In 2022, strategic transactions accounted for 81% of reported deals, with 78% of reported deals in the industry completed by privately owned buyers.
Moreover, in 2022, investors appeared to focus on deals under C$25 million, which accounted for 85% of all private equity transactions disclosed. As a result, new, up-and-coming, privately owned food and beverage companies that cater to changing consumer preferences may be of interest to investors targeting mid-market deals. These companies will enable investors to take advantage of changes in consumer buying and invest in a stable industry with significant growth potential.