Can Big Food buy its way into innovation?
Despite some early bungles, food giants appear to be doing a better job with their acquisitions.
Peter Frost, Crain's Chicago Business
August 09, 2019†
For the better part of a decade, Big Food has been in a scramble to restructure and reinvent itself amid a massive shift in consumer preferences that's given rise to gluten-free, low-sugar, non-GMO and "clean" options.
Looking to innovate and move faster to respond to ever-evolving trends, packaged-food makers have tried developing niche products to compete against a wave of upstarts. They've carved out internal venture-capital arms that throw cash behind minority stakes in startups in the hope that one hits. And, most significantly, they've put big money into snapping them up and attempting to scale them through sophisticated distribution networks and deep-pocketed marketing budgets.
Conagra Brands in 2016 scooped up Rick Bayless' Frontera Foods for $108.9 million and last year paid a whopping $10.8 billion for Pinnacle Foods, the owner of brands such as Smart Balance and Udi's.
Mondelez International sunk some $81 million into allergen-free food manufacturer Enjoy Life Foods in 2015, followed by a $527 million acquisition of Tate's Bake Shop in 2018. Then this year it purchased refrigerated protein bar maker Perfect Snacks in a deal for which terms were not disclosed.
And Kraft Heinz, hamstrung by a mountain of debt, has nonetheless begun its own acquisition spree, taking over Canadian coffee brand Ethical Bean and meal-planning tech startup Wellio last year in separate deals worth a combined $27 million, and better-for-you condiment maker Primal Nutrition in January for about $200 million.
But folding into a much-larger organization with its own ideas and systems carries a host of potential pitfalls, many of which became apparent during the early years of this cycle, in the 2000s. The problems were particularly acute in transactions in which larger companies attempted to force their systems, processes and culture onto their shiny new toys, says Thierry Jean, a former brand executive at Conagra and Kellogg.
The acquisition highway is paved with high-profile stumbles. Kellogg floundered with its handling of Kashi, one of the first and highest-profile deals. And Campbell Soup botched two fresh-food acquisitions in recent years, taking four write-downs in its Fresh unit to the tune of $1.35 billion. This year it sold Bolthouse Farms for about $510 million, about a third of the price it paid for the brand in 2012. It also recently sold Garden Fresh, which it acquired in 2015 for $231 million, after a prolonged period of shrinking sales.
"There's been a feeding frenzy over the past 10 years, with valuations that don't make sense and multiples that could not financially be justified," Jean says. "And in many cases, these deals didn't turn out very good for anyone except the founder" of the acquired company.
The good news is, the big guys appear to have learned from the mistakes in the past, say analysts and industry observers.
Because the majority of these deals are relatively small, judging their performance thus far under their multibillion-dollar parents is difficult to ascertain.
"It's so hard to tell how they're actually progressing with many of these acquisitions because the deals have been extremely small relative to the overall size of the business," says Erin Lash, an analyst at Morningstar.
The exception is Conagra's Pinnacle acquisition, which helped boost overall sales by 35.7 percent in the most recent quarter. That came as the biggest Pinnacle brandsóBird's Eye, Duncan Hines and Wish-Boneócontinue to shrink. Nonetheless, Conagra CEO Sean Connelly said in March the company is working to address "the executional challenges" with those brands and noted, "It will take some time to return these Pinnacle businesses to growth."
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