Despite rising interest rates, high inflation, trade sanctions and market uncertainty, demand for food and beverage products remains relatively stable. Consumer purchasing trends, however, have changed as consumers lean toward products that are healthier and have clearer and cleaner labels. These changes may interest investors looking for opportunities to invest in significant trends in the food and beverage industry.
Food and Beverage Industry Showing Resilience
Although the cost of food has increased over the past year,
M&A activity in the food and beverage industry has faired
well.
Unsurprisingly, food and beverage companies have increased prices
at a historic rate. This is primarily due to increased input costs
associated with food and beverage products that stem from interest
rate hikes, high inflation, trade sanctions and increases in labour
and ingredient expenses. The food and beverage industry has
remained resilient because of its essential nature. In fact, people
tend to eat at home more during economic downturns, which increases
their consumption of food and beverage products.
In 2022, food and beverage deal activity in M&A increased each
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 subindustries (17%). Deal activity
is also projected to remain strong in 2023 with respect to the
grocery retail sector. Furthermore, it is predicted that investors
will begin investing in food producers, enabling them to secure
access to food and ingredient supply.
Opportunities Created by Changing Consumer Buying Habits
Consumers are no longer as loyal to brands as they once were.
They are increasingly willing to substitute for different food
products or brands that align with their values, despite tighter
budgets. These shifts in the food and beverage industry enable the
emergence of new companies that meet changing consumer preferences
and demonstrate the industry's significant growth
potential.
Industry trends are also leaning towards organic, chemical-free,
gluten-free, non-GMO, locally and responsibly sourced, plant-based,
sustainable, transparent, functional, and health-conscious
products. In addition, new products with cleaner labels and healthy
ingredients have gained popularity. This contradicts the notion
that consumers remain "loyal to the label," allowing new
products to enter the market if they align with consumers'
changing values.
Food and beverage companies can potentially capitalize on these
trends by incorporating more premium attributes in their products
and highlighting these attributes more clearly in marketing and on
product labels so they stand out to the consumer. They can also
take advantage of trends in consumer purchasing by customizing
their existing products. Some food and beverage companies have
begun adjusting ingredients in popular products to appeal to a
broader range of consumers. For instance, a company may take an
existing product and adjust certain ingredients, allowing them to
offer options that are vegan, gluten-free or organic in addition to
their usual offerings.
An increase in consumers' desire for transparency in food
ingredients has also increased the popularity of meal kits that
allow consumers to clearly identify the ingredients they are
consuming. Food and beverage companies have begun taking advantage
of this trend by breaking down their existing products into a set
of ingredients that consumers can put together to create a
meal.
Furthermore, while general disposable income has decreased since
2021, it is forecasted to grow 1.5% annually over the next five
years. This is predicted to increase the amount Canadians spend on
discretionary food and dining and will simultaneously increase the
growth potential of the industry.
Investing in Food and Beverage
The changes in consumer preferences may be of interest to
investors looking for opportunities to invest in significant
long-term trends.
To date, private strategic buyers are the most active buyers in the
industry (see our February 2023 Blakes Bulletin: Food and Beverage M&A
Landscape: Trends to Watch). In 2022, strategic
transactions represented 81% of reported deals, with 78% of
announced deals in the industry being completed by privately owned
buyers.
Furthermore in 2022, investors seemed to focus on deals under
C$25-million, which comprised 85% of all disclosed private equity
transactions. As a result, new, upcoming and privately owned food
and beverage companies that meet changing consumer preferences may
be of interest to investors aimed at middle-market deals. These
companies will enable investors to capitalize on changes in
consumer purchasing and invest in a stable industry with
significant growth potential.
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