Q2 food and beverage M&A volumes saw more deals than previous quarters fueled in part by distressed business acquisitions. Despite a sustained decline in food inflation, consumers have shifted their shopping habits and are prioritising ‘value’.
There were 42 food and beverage deals in Q2 2023, up 13% on Q1 and 61% on the same quarter last year.
Disclosed deal values stood at c. £191.1 million, which includes Glanbia’s sale of its cheese business for £158 million – the only significant mid-market deal within the disclosed deal values.
While business failures are never good news, there's solace in that there were only ten administrations in Q2 compared to 19 in Q1. Despite this, the environment remains challenging, and as businesses across the sector are facing substantial pressures we expect more administrations as the year progresses.
While Q2 deal volumes show a steady return of interest in food and beverage deals, six transactions (14%) involved an element of stress or distress. These include Black Sheep Brewery, Brick Brewery, The Meatless Farm, and Farmison.
The rescue deals show that there are opportunities for buyers with the capabilities to help stressed assets overcome their previous challenges.
Two key rescue deals
A consortium led by former Asda boss Andy Clark bought premium direct-to-consumer meat retailer Farmison from administrators. While the business experienced a sales boom during the pandemic, it fell into a loss due to a heavy cost base.
Plant-based 'chicken' brand VFC acquired the Meatless Farm brand. The deal allows VFC to move into substitutes for other meat products, such as burgers. VFC said that by integrating both brands, it could draw on supplier synergies and increase customer choice.
Private equity's appetite for food and drink shows signs of returning. Private equity was responsible for 43% of Q2 transactions – a 38% increase on the same quarter last year.
Half (nine) of private equity transactions were minority investments, as investors cautiously approached the consumer-facing sector. However, there was also activity from mainstream private equity houses.
In June, 3i Group acquired Irish bakery group, Panelto Foods. The acquisition adds a UK and Ireland arm to the private equity house's European Bakery Group, which was formed in May through the combination of Netherlands-based Dutch Bakery (a 3i investment since 2021) and German-based bakery, coolback.
In April, A&M Capital Europe announced a majority stake in World of Sweets and Bobby's, a brand owner and distributor of confectionery, baked goods, and savoury snacks.
CVC-backed Stocks Spirits went on the acquisition trail in Q2, announcing plans to acquire Germany-based tequila producer Borco, Clan Campbell whisky, and Etablissements Dugas SAS.
Though the majority (67%) of Q2 deals were domestic, there was an uptick in UK and Irish companies acquiring overseas assets, accounting for 21% of deals – the highest proportion since Q4 2021.
Spirits knocked plant-based foods off the top spot for the most active sub-sector. However, activity was boosted significantly by multiple minority stake investments from The Belsize Partnership (Distill Ventures) in innovative spirit brands in the UK and abroad. Stocks Spirit's aggressive buy-and-build strategy also contributed to three deals.
Plant-based food accounted for 10% of deals, including the rescue of Meatless Farm.
Notable Q2 deals include British startup Adamo Foods securing £1.5 million from SFC Capital to launch its whole-cut mycelium (fungi) steaks. Meanwhile, cultivated meat startup Uncommon (formerly Higher Steaks) raised a UK USD 30 million Series A round from investors, including Sam Altman, the CEO of ChatGPT-maker OpenAI.
Over the last two years, there's been a surge in pet food deals to capitalise on post-COVID-19 growth in pet ownership and as owners prioritise feeding their pets high quality natural food and supporting their diet with supplements. Now, investors are targeting companies with strong USPs or strategic synergies.
For example, Butternut Box has expanded into Central and Eastern Europe by acquiring Polish brand PsiBufet. Meanwhile, Burgess Pet Care acquired Naturevito, a company that produces premium dry dog foods based on holistic feeding principles.
Changing consumer habits
Food retailers and hospitality have felt the sharp end of inflation and tightened household spending. At the same time, they're getting to grips with new spending patterns. Our 2023 Cut Back Economy report revealed that, for most consumers, cutting back on the weekly food shop will involve switching to cheaper private-label brands or discounters (52%), using loyalty schemes and vouchers more often (40%) and buying more in bulk (32%).
A decline in food inflation?
July was the fourth consecutive month of easing in UK grocery inflation. This was the steepest decline since peaking in March, according to data from Kantar. The figures show that annual grocery inflation was 14.9% in the four weeks to July 9, falling 1.6% from 16.5% the prior month. Though this is still an incredibly high rate, it's a move in the right direction.
Although inflation is stabilising, the cost-of-living crisis continues to bite and shoppers are seeking value. Consolidation in the highly fragmented UK F&B market will enable suppliers to drive efficiencies and win market share by passing those savings onto the end consumer.
Plant-based investors chase innovation
In May sausage company Heck reduced its range of meat-free products, and the commentary on Meatless Farm's struggles produced speculation that consumers were falling out of love with veganism. The reality is more complicated, with the cost-of-living crisis making branded vegan options unrealistic for many, causing them to switch to own-label meat free products which are often significantly cheaper. Supermarkets are also realising that their meat free aisles have become confused and are seeking to rationalise ranges.
Q2 has shown that investors still view plant-based as a hot sector, but as with Q1, the focus seems to be on innovative technology. Despite the pressures on meat-free brands, we're expecting continued growth and development in this sector as ingredient companies will seek to develop more options. With a large proportion of global consumers considering themselves, flexitarian alternative animal protein products will be an exciting space for innovation.
Demand for supply-chain transparency
While consumers search for 'better for you' food, they're keen to learn exactly where ingredients come from and move away from ultra processed foods to seek more sustainable options. According to Mintel, almost three-quarters (73%) of consumers worldwide indicated positive feelings about companies with a transparent supply chain. This will lead to demand for innovative farming technologies, such as regenerative agricultural techniques, vertical farming, crop rotation, and plant breeding. For example, it's been interesting to see the recent expanse of GrowUp Farms produce into Tesco.
Q2's rising deal volumes are a chink of light in very challenging times for F&B. A clear view of inflation will be the key to unlocking activity as the year progresses.
For more insight and guidance, get in touch with Nicola Sartori.