Food and Beverage Industry M&A Overview
2020 brought focus to a particular segment of the food and beverage industry – frozen food wholesaling. Starting in the second quarter of 2020, panic-buying drove sharp increases in frozen food demand. According to Euromonitor, sales in the segment for the period doubled compared to the previous year by 30%. The reasoning behind this trend is simple – the frozen food category provides longer shelf-lives and therefore, limits trips to the grocery store amid concerns regarding the pandemic and social distancing measures.
E-commerce and delivery services have continued to benefit the frozen food category. The retail value of store-based distribution (including grocery retailers such as convenience stores, supermarkets, hypermarkets, and discounters) in 2020 decreased by 3.9% since 2015. Meanwhile, online orders of frozen food items rose by 12% compared to pre-pandemic levels. The increased consumption of frozen food items has led consumers to discover other benefits of the frozen category, such as the ease of preparation and faster cook times. This change in consumer preferences will lead to the sustained growth of frozen food items within the food and beverage industry. Consequently, M&A activity has been targeted towards companies that have a strong footprint in these sub-sectors.
Post-COVID Outlook for the Food and Beverage Industry
Besides the predicted sustained growth of frozen food items, the industry is driven by a combination of factors including shifting demographics, environmental impact, and desire for more information. Aging Baby Boomers, the growing purchase power of Millennials, and increased ethnic diversity are the demographic changes leading to the shift in food preferences.
These demographics will lead to a boost in demand for products with enhanced nutrition, ethical choices (such as animal welfare and fair trade), as well as new taste profiles. These concerns have led to the rising popularity of environmentally friendly products branded with organic, grass-fed, carbon footprint, and biodegradable or recyclable packaging labels. Moreover, the push to buy locally will continue to boost small business sales within the environmentally-conscious food and beverage segment.
The industry faces pressure to produce more food for the growing population but uses the least number of resources possible and minimizes its impact on the environment. Additionally, regulated food standards are failing to keep up with consumer preferences for ethically sourced products. This failure is resulting in third-party verification systems (i.e. fair trade, non-GMO, cage-free labels) gaining more importance. For businesses, this means aligning corporate behavior and products with consumer values.
Food and Beverage Processing Industry Performance
The food and beverage processing industry provides the equipment and solutions to produce, process, and distribute food to households. The industry has become increasingly important as the world’s population grows and dietary preferences evolve, reflecting higher incomes and a shift to value-added products. These factors directly boost demand for equipment and solutions to process, store, package, and cook food. The industry can be broken down into three core sub-sectors: processing, service equipment, and packaging.
According to Statistics Canada, food and beverage processing is the second largest manufacturing industry in Canada in terms of the value of production with sales of goods manufactured worth $117.8 billion in 2019; it accounts for 2% of the national Gross Domestic Product (GDP). What’s more is that it’s the largest manufacturing employer and provides employment for 290,000 Canadians. This growth can be attributed to margin expansions, more efficient use of capital, and the resurgence of M&A activity.
How did COVID-19 Affect the Food and Beverage Processing Industry?
The impact of COVID-19 is shining a spotlight on the health and safety of employees in the food industry. Because the federal government categorized food and agriculture industry workers as essential workers, they have continued to face health and safety risks in their workplace. For consumers, the pandemic has raised their concerns about product safety. According to McKinsey, 20-25% of consumers in developed markets are researching food brands and products before purchase, deeming healthy and hygienic packaging as the top decision-making considerations. Given this increased scrutiny, the industry is unlikely to maintain its pre-pandemic operational structure. In fact, brands pursuing growth will need to differentiate positively on social factors to capture market share.
Outlook for the Food and Beverage Processing Industry
The outlook for this market also depends on emerging technology’s role in food processing, preservation, and packaging. Digital temperature monitoring labels, biodegradable plastics, nanocapsules, and antibodies are just some technologies already in place. Technologies that improve operational efficiency, cut costs, and increase uptimes, leading to new requirements for automation will expand the market for the food and beverage industry. Note that the rapid development of emerging technologies requires regulatory systems to respond quickly, forcing the adoption of these technologies for operational efficiencies to be gradual rather than quick.
To learn more, read our insights on M&A, Distribution, Warehousing, and Logistics industry, and the Canadian Manufacturing industry.