The pace of mergers and acquisitions in the food industry has gained steam in 2017, and experts are expecting more to come as companies struggle with shrinking margins in a low-price world.
News this week that McCormick & Co.
is acquiring Reckitt Benckiser Group PLC’s food business for $4.2 billion is just the latest deal in an industry that is already bracing for a new and scary competitor.
offer to purchase Whole Foods Market Inc.
is expected to drastically change the food landscape, putting fresh pricing pressure on food companies, already feeling the squeeze on margins from discounter Wal-Mart Stores Inc.
It is also expected to speed the adoption of online grocery and overhaul an industry—grocery retail—that many say hasn’t changed in years.
“The robust level of deal making in consumer-packaged goods will continue into the second half of 2017 as big food companies remain hungry for innovation—seeking transactions that can drive top lines in a challenging growth environment,” said Greg Stemler, EY Americas consumer product and retail leader in transaction advisory services.
See: McCormick buys Reckitt Benckiser’s food unit
Read: Amazon’s Whole Foods deal makes online grocery ‘prime’ for acceleration
The deals are coming at a time of changing eating habits. The focus on health and wellness has led to growing demand for fresh produce and clean labels, especially among younger shoppers like millennials. That trend has led to changes throughout the supply chain, as food companies drop chemicals and additives and other artificial ingredients. For smaller companies, keeping up with the changes is expensive, making deals more attractive.
There were 505 food industry M&A deals in 2016, according to data provided by The Food Institute, an organization founded in 1928. In the first half of 2017, there were 273 deals, the organization says.
Read also: Amazon is taking away the power of brand names, throwing another industry into turmoil
“We continue to foresee this pressure to precipitate accelerated industry consolidation through M&A, smart divestitures of non-core categories, and stepped up reductions of ineffective spending—largely through analytically-driven promotion and supply chain efficiency efforts,” RBC Capital Markets’ David Palmer wrote in a note.
Growth in online grocery means higher costs for things like delivery. Many leading grocers, like Wal-Mart Stores Inc.
and Kroger Co.
have large, suburban locations, which will lead to an emphasis on services like buy-online-pickup-in-store, said CFRA equity analyst Joseph Agnese.
“With Amazon aiming to increase its exposure to the fresh foods industry, food retailers who do not choose, or are unable, to pursue e-commerce strategies are at risk of losing market share,” he wrote in a recent note. “An Amazon/Whole Foods combination has the potential to both exert pricing pressure on competitors while increasing convenience to customers through expanded e-commerce offerings.”
Don’t miss: Amazon ‘will be a top 5 grocer in the U.S.’ with Whole Foods acquisition
That’s a reality that food makers are trying to get a handle on. At an investor event on Wednesday, Campbell Soup Co.
Chief Executive Denise Morrison said the company is aiming to be “the leading health and well-being food company,” detailing a revamp that focuses on fresh food, transparency and technological advancements.
Read: Campbell Soup to withdraw from food industry group by year-end
“Campbell Soup is setting a foundation for real portfolio change in an effort to combat revenue headwinds from channel migration and declining demand in core categories,” wrote UBS analysts led by Steven Strycula, in a note. “Amid intensifying industry challenges and weaker CPG [consumer packaged goods] pricing power the recovery path to sustainable low-single-digit percent sales and high-single-digit percentage earnings per share growth remains uncertain.”
Food makers that come to the industry with the offer of authenticity are better positioned, said Jesse Laflamme, chief executive of Pete & Gerry’s Organic Eggs.
See also: How Pete & Gerry’s cage-free eggs are a model for other small farmers
“That’s something that these companies can’t manufacture in their R&D labs,” he said. “It is a daunting time because of the competitiveness. But it’s more daunting for conventional food companies than something like ourselves.”
While it’s still early days for e-grocery, Laflamme believes food companies have to change their value proposition to meet changing needs. His company is investing in the online future, and his company’s eggs, produced by family farmers nationwide, are available at Whole Foods. While a dozen of his eggs will cost more than eggs from most other companies, his eggs come with a promise that hens are raised in a humane environment to produce a better product.
“Everyone’s margins are going to be compressed to some degree,” said Laflamme. “The story that we have warrants the price to consumers. If your product is going to cost more, the value needs to be there.”
But as smaller companies continue to appeal to consumers, it makes them more attractive to large companies with deep pockets in search of revenue growth.
“There’s an opportunity for smaller players,” said Darren Seifer, food and beverage industry analyst at market research firm NPD Group, “which can make them an eventual target for acquisition by some bigger player out there.”
The PowerShares Dynamic Food & Beverage Portfolio ETF
is down 4% for the year so far while the S&P 500 index
is up 10.6% for the period.