The pressures on the big players in the US food and beverage sector are well-documented. The likes of Nestlé, General Mills, Kellogg and Mondelēz have recently struggled to find meaningful growth and align their supply chain with evolving consumer tastes.
Rob Haile, Managing Director of BB&T Capital Markets’ Food & Agribusiness group, one of the largest financial services companies in the US, recently shared his insights with us about opportunities and investment in the US market.
Opportunities in the US market
A change in trends and habits of both middle America and millennials has driven a wave of consolidation and divestment in the industry as the giants of FMCG bid to reposition their portfolios. Consequently, it has been the more nimble and innovative emerging brands in the non-alcoholic beverage, non-dairy, plant-based protein, spreads and snacking categories that have benefited most.
However, it is not just brands that can exploit the seismic changes in the massive US market. UK private-label suppliers have a huge opportunity to enter a space that is as strong as ever in the US, but still lags behind the UK private-label market.
Despite US consumer confidence hovering near historical highs, a vast proportion of the population has not been party to the recovery that has shown no signs of stopping since June 2009. About 50% of Americans have not seen real wage or earnings growth, have no savings and have been living paycheck to paycheck. While the trend for premiumisation continues, pricing and value still matters a great deal, allowing private-label to benefit.
Private-label businesses in the UK have a strong card to play thanks to both the quality of the manufacturing base and the food safety record of the industry in the UK.
“You have to play to the strength of ‘Brand Britain’,” said Haile. “The US retailers and foodservice industry want capable manufacturers, manufacturing redundancy, R&D capability, nimble recipe formulation and to be able to track all ingredients through the supply chain.”
US retailers have also had some very successful private-label launches, for example the Kirkland Signature brand at Costco, which accounts for almost a quarter of the company’s $126.2 billion in annual sales, with the percentage growing.
An extensive range of everyday items alongside more unique and speciality products – at a lower price than comparable brands – have helped the banner stand out and attract shoppers into stores, with other retailers realising they need to get in on the act.
This provides a good entry point for UK private-label producers to be viewed as reliable vendors and to develop longstanding relationships with supermarkets.
Alongside the growing appetite for foods and beverages viewed as ‘better for you’ – such as clean-label, plant-based, organic, non-dairy and natural – portable convenience remains important for time-pressed shoppers. Particularly during breakfast and lunch, consumers want food in a form that is convenient, with grab-and-go increasing in popularity.
Specialty and ethnic food is another growing area within the food and beverage industry, and is now a firmly established segment in stores. “There is huge opportunity for the UK to get into that space as the perception of British food has changed in the US,” said Haile. “The question is how do you do that and what does it cost?”
Taking time to sufficiently research is paramount in order to tackle a market as vast in scale and scope as that of the US. The various regions across the US are very different, so it is important to understand that what works in New York won't necessarily work in New Orleans or Memphis.
The same is true for any export strategy into the US. A successful strategy would require a multi-year effort, including a tour of the country and discussions with distributors.
The distance between different locations requires efficient distribution channels. Since US brands tend to build more room into their cost structure, emerging brands benefit greatly. Therefore, when it comes to entering the US market, all businesses, even those with a hundred years of heritage in the UK, need to think like an emerging brand.
US consumers have an enormous range of choice, so brands must do research and identify a regional plan of attack over a three-to-five-year period.
An everywhere-at-once launch is risky, hard to manage, and often leads many to pull back from the US when immediate results fail to materialise, while a smaller, tactical and sustained approach is effective and risk-adjusted. Retailers and consumers want to see brands that stick with it and build progressively in each region.
Investment in the US market
Mid-market M&A in the US food and beverage sector is coming off a particularly strong year, with almost 200 deals worth $78 billion announced, and confidence heading into 2018 has been high.
Strategic trade buyers and private equity groups have record amounts of both cash on their balance sheets and uninvested equity capital. Valuations are heading upwards, and the median transaction EBITDA multiple in the US food and beverage market climbing to 10.9x in 2017, the highest level since 2012. Several factors may have contributed to this increase, including easy access to low-cost capital, the need for consolidation by large FMCG players in search of growth and an increasingly selective approach to pursuing assets.
However, it has recently become easier for UK brands with proven track records to exit the UK in favour of the US market. If a company can show what percentage of sales come from the US, and over what time period, as well as where distribution gains have been made, then the case for an acquisition is much more credible to an investor.
Additionally, Amazon's presence in the US has become an increasingly important factor in many M&A processes. The ecommerce giant has caused a major disruption in the retail industry.
Ecommerce is steadily increasing its share of all US retail sales, and despite still being in the early stages of growth. With a compound annual growth rate of 17.9% from 2000 to 2017, the $452 billion market is predicted to balloon to $632 billion by 2020.
“Amazon is the bogeyman in the closet on the M&A sell side process,” Rob said. “If you as a company don’t have exposure to Amazon, the question is ‘why?’. Or if you are overexposed, it becomes ‘why are you so reliant on them?’. You can allow buyers in a process to beat the Amazon bogeyman to death, affecting your overall success, your valuation and your attempt to position the business.” The ability to understand Amazon, the opportunities it presents and how to keep these opportunities in check can be a very powerful and potent weapon for sellers.
If you would like more information about the opportunities and investment in the US market, please contact Trefor Griffith.
BB&T Capital Markets is a division of BB&T Securities, LLC, a wholly owned nonbank subsidiary of BB&T Corporation and Member FINRA/SIPC. Securities or insurance products and annuities sold, offered or recommended are not a deposit, not FDIC insured, not guaranteed by a bank, not guaranteed by any federal government agency and may go down in value.