Why would a mass market chocolate company buy a small dried beef producer? Hershey’s acquisition in January of Krave Beef-Jerky, whose gourmet flavors include Basil Citrus and Pineapple Orange, was not a bet on salt becoming tastier than sugar. It was the latest display of a Big Food company trying to buy its way in to the fast-growing market for natural and organic foods. Krave’s products are not necessarily healthy, but they are all natural. They are popular with Paleo dieters. And they have none of the artificial sweeteners and flavorings of Hershey’s Reese’s Peanut Butter Cup. Through Krave, Hershey bought into health consciousness. It reportedly paid more than $200 million for Krave’s $35 million in net sales.
Last year’s wave of deals in the US natural and organic foods niche confirms that “natural” and “organic” is no longer a niche. Mondelez bought Enjoy Life, a maker of allergen-free snack foods that lack wheat, nuts, and dairy. General Mills bought Annie’s Homegrown, which markets organic macaroni and cheese, for $820 million. Pinnacle Foods bought Gardein Protein, maker of vegan-friendly frozen foods.
The acquisitions build on a consumer trend away from bland, low nutrition foods and towards the notion that “Food Should Taste Good” – even when it is healthy. Food Should Taste Good is the name of an artisanal tortilla chip maker that General Mills bought in 2012. Not only are food brands with better-for-you claims entering the mainstream. Big Food companies are nudging them there, acknowledging their mainstream brands are not growing as fast as the likes of Krave.
Expo West, the biggest convention for the US organic food trade, brings together companies of all sizes for networking and dealmaking every spring. In March 71,000 people attended the event in Anaheim, California. Food and drink brands jostled for space on the convention floor, handing out free samples and making pitches for why they were the next big thing perhaps the next target for General Mills. The sheer number of attendees, the largest in Expo West’s 35-year history, is another sign of the category’s growing power in the food industry.
Silverwood Partners is a boutique investment advisory focusing on the natural food and drink space. It has facilitated dozens of private placements and sales. Silverwood hosts an annual event at Expo West for private, high-growth food companies. Michael Burgmaier, a partner at Silverwood, spoke to FUSE about the state of the industry a week after Expo West.
FUSE: What were your takeaways from Expo West this year?
MB: There’s a lot of money in the space. There were a lot of investors there including strategic acquirers [big food companies] that had never been there before. The whole event was bigger, but most of the growth in numbers came from the presence of strategic acquirers.
FUSE: Why were there so many ‘strategic acquirers´ present this year?
MB: The only growth happening in the food industry is happening in small and medium-sized companies. They’re mostly private companies whose products all claim to be healthy or functional and taste good. There’s little growth among the mainstream food and beverage companies. And with their legacy brands in decline, the best way for them to grow is to look at the emerging winners in the natural and organic space.
What’s happening is that as millennial consumers and even older consumers age, they’re aging out of legacy food and drink brands. We’re seeing an almost wholesale reaction of a lot of legacy brands in many categories such as frozen food or cereals. A lot of the big food companies can’t reinvent brands that have been around for 20 years – brands like Lean Cuisine in frozen food or cereal brands that every single strategic acquirer has. They can’t Must put a label on it saying it’s now natural and healthy with new ingredients. Nor can these companies effectively create new brands themselves. They can’t create the authenticity that comes from a young company.
It’s a much better path to growth to acquire these emerging companies compared to reinvesting in legacy brands or trying to start new brands. Ninety-five out of 100 brands fail before they get to $5 million in wholesale sales. So if an independent emerges whose earnings are quality – where consumers love the brand, where there are strong repeat purchases – you’re better off buying that since it’s proven in the market.
FUSE: What recent deals stand out to you as the best representation of this trend?
MB: One of the big ones is Annie’s Homegrown [sold to General Mills in September 2014] that sold for $820 million, or four times sales of about $200 million. What General Mills essentially bought was growth. This is a multi-billion-dollar company that basically had no growth [$17.9 billion versus $17.8 billion in 2013] in sales. Even though it’s on the fringes, if they can acquire a $200 million platform that’s growing at 40 per cent a year, they’re buying a lot of growth. They can hopefully turn that in to a $500 million platform in a couple years, and then a billion-dollar platform. It shows you how much they wanted Annie’s, that the deal was priced at 39 times Enterprise Value to Ebitda. That’s the highest multiple paid for a food company since Unilever bought Ben and Jerry’s.
FUSE: Why do you think Hershey bought Krave Beef Jerky?
MB: Hershey has been looking to get into the healthy snacking space for a while. Krave with its growth can do that for them. It’s reinvented the whole Merky space. Like any great brand what it’s doing is taking market share at the same time that it’s growing sales in the whole category. It’s good for consumers who want protein from their snacks, and it doesn’t have much artificial preservatives.
A lot of the large strategics have been looking for companies that can serve as the foundation for a health-snacking platform. In 2011 Hershey bought Brookside, a confectioner that makes chocolate-covered berry snacks, with the berries healthy ones like goji and acai berries. Brookside has been making its way into convenience stores, and I can easily see Krave sitting alongside it on the shelf. These two companies provide a nice foundation for Hershey moving into healthier snacks, which I think will become central to Hershey’s business. Historically Hershey sells unhealthy indulgences, and the long-term trajectory for unhealthy indulgences is not looking too great.
FUSE: Valuations are hard to read in an industry where most of the transactions are private. Do you see any directional trend in valuations in the past year?
MB: Certainly with private placements we are seeing an increase in valuations. There are strong valuations for strong brands, but of course that is not the case when brands have stalled or have low growth. Right now strong, emerging health- focused brands are seeing a lot of availability of growth capital, and the exit environment is also strong. We’ve seen a number of companies that went out and tried to sell a few years ago and failed. They are now returning to the market and selling successfully.
FUSE: Private equity firms like TPG and TA Associates have accounted for some notable recent deals in the industry. Why are big PE firms interested in the space?
MB: There’s a new trend of big PE firms overbidding strategic acquirers [in the food industry] to take control of privately owned health food brands. The exit may be selling to a large public company or going public. One of the big deals is TA Associates buying Skinny Pop, which is a rapidly growing popcorn company and it’s fair to say that it has the potential to go public.
FUSE: The recent IPO of ShakeShack shows the market for public offerings. But perhaps that is not so relevant since ShakeShack is hamburgers – not exactly healthy organic food.
MB: Actually they are all playing in to the same genre of quality products made with fewer ingredients that are freshly made and higher priced. ShakeShack makes burgers but you eat it with a craft beverage, not a fountain Coke or Pepsi. It’s part of the whole ‘real food’ experience to eat your burger there. A bunch of burger chains are even doing grass-fed beef now. In the fast food space, much like in the food industry as a whole, healthier fast food is driving all the growth.