Like any old U.S. industry pressured by the widespread desire for instant gratification, encouraged by the Internet and its commerce, the beverage industry is making strides toward adaptation.
The giants of the industry have acted quickly to modernize their portfolios, a move that has been accelerated by the amalgam of a healthier economy, the ever-present cutthroat nature of the beverage industry and the developing market of healthier products, said Erika Kauffman, general manager at 5W Public Relations. The largest players, namely The Coca-Cola Company and PepsiCo, aren’t able to innovate fast enough, so they look to the smaller competition, said Brian Curry, a managing partner at Fairfield Partners, an executive search firm based in Norwalk, Conn.
“Instead of competing with them,” Curry said, “instead of trying to reinvent it themselves, just acquire them, get the product line in and then feed it into their internal channels.”
Big mergers and acquisitions that are either directly involved with the beverage industry or affecting it in terms of retailing and distribution started early this summer and they haven’t let up. Now, we won’t shed blame on those who have had a difficult time keeping track. But for housekeeping’s sake, and before we delve into more analysis, let’s review the major deals of the past month in chronological order.
Hormel Foods Corporation, best known as the maker of Spam and other meat products, announced in the last hours of June that it has acquired CytoSport Holdings Inc., the company that owns Muscle Milk, for approximately $450 million. The deal includes CytoSport’s manufacturing facility in Benicia, Calif., and several manufacturing and distribution agreements.
Nestlé USA, which has been busy divesting stake in a wide range of food and beverage products (Jenny Craig, Joseph’s Pasta Co., Bit-O-Honey, etc.) announced on July 2 that it has sold Juicy Juice to investment firm Brynwood Partners.
Lassonde Industries Inc., a North American food and beverage conglomerate, announced on July 3 that it will acquire Apple & Eve, LLC, for $150 million.
Archer Daniels Midland Company announced on July 7 that it will acquire WILD Flavors GmbH for approximately $3 billion.
Kainos Capital, a Dallas-based private equity firm, announced on July 11 that it has acquired the Slim-Fast trademark and its global product portfolio.
All Market Inc., owner of Vita Coco, announced on July 14 that it has sold 25 percent of its stake to the Reignwood Group, the parent company of Red Bull China, for $165 million. The investment has a valuation of $665 million and includes distribution of the brand’s portfolio throughout mainland China.
KeHE Distributors announced on July 18 that it has acquired Nature’s Best, combining two like-minded wholesalers of health, food and beverage products.
The New York Times reports that Dollar Tree has bid $8.5 billion to acquire Family Dollar Stores. When considering this transaction, Dollar Tree has its main competitors in mind: Dollar General and Walmart.
While these deals further globalize and consolidate the beverage industry, they don’t represent much of a shift in the paradigm. Ever since the beverage industry began tossing around the modifier “new-age,” bigger players have either been scooping up the latest in innovation (Muscle Milk, Vita Coco), or picking up businesses that may offer value via established customer bases or proven brand equity (Juicy Juice, Slim Fast).
The latter type of deal usually gets noticed in proportion to the brand’s visibility, but it’s the former that captures the imagination. Back when Vitaminwater still had a visage of health, Coke bought the brand in May 2007 for $4.1 billion. At the time, the cola giant wanted not just the hottest beverage in the country, but also the beverage that best exemplified the industry’s direction. The same can be said for PepsiCo’s acquisition of IZZE in September 2006.
Just like those deals of the past, several of these recent deals follow the tradition of big beverage companies choosing acquisitions over internal innovation. Curry has been told that it costs these major players $80-100 million for a proper new product launch.
“They’ve tried a lot of those,” he said, “and it doesn’t work.”
It takes the companies too long and it’s too big of an investment, he said. But as carbonated soft drink sales weaken in the U.S., and the companies record growth that’s flat, slightly negative or slightly positive, they seek relevance through portfolio developments. Therefore, they look at emerging brands with a proof of concept and an established consumer base. This method doesn’t always have to be more expensive, Curry said. The Vitaminwater acquisition was late in the game. But if the buyer can identify the right brand at an early enough stage, perhaps it costs $25-30 million, not $100-150 million or more, he said.
Curry said that many emerging brands are searching for buyouts. They don’t want to do an IPO on their own. These transactions tell the smaller companies that it’s buying season, so it’s time to get in shape. And if you’re hoping for international distribution, these deals can initiate the spread while letting the buyer do the work. It’s not so easy to go over to China and set up shop, Kauffman said. These deals make international distribution more of a reality.
“They’re coming back with these offers that you can’t refuse,” she said.
Alex Marx, KeHE’s category manager for coffee, tea and beverages, wrote in an email to BevNET that Hormel’s acquisition of Muscle Milk speaks to the strength of the functional beverage category. He wrote that KeHE sees healthy double-digit growth in this space and expects that growth to continue. That said, Marx doesn’t think that the Muscle Milk purchase had any kind of domino effect. Rather, he would “just assume this is a bold shade of coincidence.”
“The grouped timing of these deals may be surprising,” Marx wrote, “but consolidation will always be a natural tendency of a maturing industry. The good news is, we should not expect to see any less innovation as a result. We should actually see a minor spike in innovation due to the visibility of the category that a traditional protein company like Hormel brings to the table by adding a new protein delivery method into their product portfolio.”
This breed of acquisition has become so commonplace in the beverage industry that it could be seen as a confession of sorts. Coke and Pepsi are indirectly acknowledging that innovation happens elsewhere, and they’re happy to pay for it.
One big consumer trend is personalization, according to Marina Hahn, a director of the Hain Celestial Group, which acquired the BluePrint juice brand in November 2012.
Not just in the beverage industry, but in food, cars, fashion, jewelry, makeup, and other consumer goods, customization is king. And that means that while larger companies may spend a lot of their focus on balancing an international business, the niche players can customize products and brands that appeal to the gluten-free, protein-heavy, non-GMO consumers who help signal the future of consumer products. These transactions affirm the cycle.
“I think it points to the fact that more and more larger companies realize that the innovation is happening with probably the more nimble players, and it’s happening faster and probably better,” Hahn said.
As each deal drops, further consolidation ensues. However, as Hahn and Marx have elucidated, we’ve seen the type before. And they’re not going anywhere.
“This is the trend that’s going to stay for a while,” Hahn said.