The choice is stark: innovate or decline
As attitudes towards health, wellness and sustainability continue to cause disruption within food and beverage markets, large companies are being forced to adapt their approach to innovation. Western markets are under pressure with low growth and input cost volatility, while many heritage products are losing their relevance to consumers. Innovative products are satisfying the desire for healthier, more sustainable eating and this is reflected in strong growth performance for these segments.
The food and beverage consumers' demand is changing. As demonstrated by the free-from movement, it is becoming healthier, more transparent and sustainable in its production and packaging.
This shift is also represented in the way new products are undergoing development. With consumers looking for a different experience, companies are responding by widening their product offering. These dynamics are taking place against the backdrop of lower consumer confidence, fluctuating input costs and uncertainty surrounding Brexit. Adding to this pressure is increasing own-label competition from traditional grocers and discounters.
Companies are responding by adapting existing product portfolios to meet key health and wellness trends, pushing new product development or acquiring existing brands to improve top-line growth. However, agile start-ups are well placed to deliver successful new product development within the UK’s F&B sector. Large companies are far less nimble than smaller competitors, so it is difficult for large companies to adapt at pace. With the need to get new products to market quickly to exploit these new growth sectors, large companies have been increasingly looking to acquisitions as a means of fast-tracking innovation. As an alternative to investing in new product development, acquisitions offer the opportunity for large companies to acquire an emerging leader in a growth segment or channel rather than build from scratch.
Paying the price for innovation
The market is seeing more and more acquisitions of smaller founder-owned businesses by larger companies as they seek to buy their way into the health, wellness and sustainability sub-sectors. This method of acquisition as a shortcut for innovation is increasing as these emerging sub-sectors continue to show strong growth in an F&B industry that is under pressure to regularly announce improving revenue and profitability figures.
Companies are seemingly willing to pay over the odds for acquisitions in the scramble to exploit these new opportunities. Recent deals, such as Unilever’s purchase of graze and Lotus Bakeries' acquisition of Kiddylicious, have taken place for significant multiples.
While on the surface this may seem a panicked approach to the pursuit of growth, there are understandable motivations behind these eyewatering deals:
- Companies need to adapt their existing portfolios to meet long-term shifts in consumer tastes towards health, wellness, and sustainability;
- These acquisitions are typically strategic investments with less need to generate swift returns in the short run; and
- Companies can gain significant revenue synergies by expanding the acquired businesses into existing channels or internationally. In addition, cost synergies can be achieved by realigning operations or through increased bargaining power with retailers.