Q: WHY ARE WE SEEING SO MUCH M&A IN THE FOOD AND BEVERAGE INDUSTRY?
DM: M&A is a growth mechanism, which accomplishes a few things: First, it reduces overall costs by creating economies of scale, particularly back office processes and inputs such as the commodities food companies are buying and processing. Second, it opens up new market segments or geographies. Consider Smithfield Foods, the largest U.S. pork processor, which was recently purchased by a Chinese pork processing company looking to expand its global footprint, including access to the U.S. market. Finally, M&A can also be a means to remove a competitor and improve market pricing. Companies are motivated by these factors, and many have conserved cash coming out of the recession that they need to invest. This, along with an abundance of cash in private equity, has created a market with more buyers than sellers. Consequently, when an opportunity arises, there are often multiple companies ready with offers. Bidding wars are not uncommon, such as the rivalry we saw recently between Tyson Foods and Pilgrim’s Pride for the takeover of Hillshire Brands. Tyson ultimately won.
Q: IS PRODUCT INNOVATION IMPORTANT AS A GROWTH STRATEGY IN TODAY’S MARKET?
DM: It’s absolutely essential. Consumers have changed, and companies need to innovate to hold on to their existing customer base and attract new consumers to their products. In the past, brands ruled. Consumers today, however, are not particularly loyal to specific brands. Food processors and manufacturers need to understand the generational differences between baby boomers and millennials, two groups fueling many of the changing preferences. Aging baby boomers looking for the fountain of youth want healthier products, which we’re seeing reflected in many product offerings. Millennials are even more health-conscious than their boomer predecessors, plus they care about sustainability, ethical issues, the origins of their food and related concerns. Today’s companies don’t have the luxury of simply doing what they’ve always done—they need to innovate continually to win.
Q: WHY DO COMPANIES NEED TO INVEST IN R&D?
DM: You can’t talk about innovation without talking about R&D, which is how companies innovate. There is a product-innovation revolution going on right now, with companies investing heavily in R&D. But the focus of R&D has changed somewhat; in the past the focus was how to lengthen the life cycle of a product—for example, adding preservatives to extend shelf life. But tastes and consumer values have changed and today preservation and presentation are less important.
Instead companies innovate in areas such as bio-friendly and sustainable packaging and the removal of additives to achieve simpler, healthier foods. Much of Coca-Cola’s packaging contains materials that are 60-to-80-percent biodegradable. Even the iconic Heinz ketchup bottle is now biodegradable. Less has become more. And it’s also worth noting that not all companies are taking maximum advantage of the incentives and tax credits that promote sustainable R&D and manufacturing at the federal, state and local levels. The bottom line is that companies have to have a robust pipeline of ideas in R&D. Those not investing are going to be left behind. //
DEXTER MANNING is an audit partner at Grant Thornton and national practice leader for food and beverage. He has more than 20 years of experience in financial accounting and advisory services specializing in the food industry, including eight years as CFO of a regional beverage distributor.