As the Canadian food and beverage (F&B) landscape changes, business owners must strengthen their understanding of key trends impacting the industry. I’ve observed three notable trends from recent transactions:
- Robust buyer demand and emerging product categories are driving strong valuations.
- Operating margins are remaining resilient despite inflationary pressures.
- Stable profitability and growth are generating mergers & acquisitions (M&A) activity.
Strong sector M&A fundamentals
F&B is one of the highest revenue growth sectors, which has seen persistent M&A activity over the last 18 months. There are two reasons for this: First, we’re seeing an increase in the mix of Canadian buyers who remain active and competitive in F&B transaction processes; Second, numerous emerging product categories are fueling buyers’ growth strategies and overall M&A activity.
Emergent product categories driving innovation, growth and M&A activity
There has been a flurry of consolidation activity, with over 170 North American F&B transactions over the last six months. F&B businesses with innovative product categories continue to garner significant interest in the market. For example, plant-based proteins anddairy alternatives are high-growth subsectors. According to Grand View Research, the market for these products is growing in size at a CAGR of more than 12%. As the market matures beyond first-moving brands, categories such as plant-based dairy products have ridden the wave of shifting consumer trends, driven by successful product R&D and a rapid rate of new product launches.
Another example is the revitalization of private-label brands. According to a McKinsey Report (1), nearly 20% of consumers bought more private-label CPG (consumer packaged goods) brands during the pandemic, and 90% expect to continue purchasing private-label brands at the same rate or higher going forward. Retail F&B players such as grocery chains are increasingly using M&A as a tool to strengthen their private label product portfolios.
Resilient operating margins
The last 12-18 months have been an interesting time with input costs rising significantly across most industries due to factors such as political risks and economic uncertainties. While supply chain issues are beginning to ease, general inflationary price increases persist, and F&B companies have largely been successful at passing along cost increases to the end consumer. Broadly, the sector has seen more than 15% (2) revenue growth in the last 12 months, while median gross margins remained relatively stable.
Compared to other sectors such as technology and building products where consumers tend to scale back discretionary spending, the F&B sector has historically remained resilient in recessionary environments, making F&B companies attractive investment opportunities in the current environment.
Supply chain considerations
“Supply chain issues” is a buzz phrase that is not going to go away, both domestically and abroad. Sellers who have been able to maintain competitive pricing on raw materials and a high degree of stability over their supply chains are well-positioned to receive premium valuations in a transaction.
A well-considered supply chain strategy will mitigate some of the noise in the market. In F&B we’re seeing a pullback from reliance on offshore suppliers simply because it makes sense for the business. With rising labour costs, political risk, and shipping challenges, a company’s supply chain can present a substantial risk.
Key planning considerations when selling your business
While most entrepreneurs are extremely busy managing business operations, it’s critical that you have proper planning in place prior to a transaction.
First, you’ll need to consider your management team ⸺ will there be a steady hand at the wheel once the business is passed on? Will the executive team be comfortable with that leadership? The succession plan in place can have a direct impact on the pool of potential buyers for a transaction.
Second, you should consider the quality of your financial data ⸺ is there assurance over the financial statements to aid potential buyers in making an informed decision? Do internal management reporting systems provide a sufficient quality of information to drive sound business analysis and decision-making?
Third, have you given enough consideration to the company’s growth opportunities? After all, buyers need to understand both current market conditions and potential areas for growth. An actionable growth strategy can make the business more attractive to buyers.
Fourth, you should have a clear grasp of your business’ unique strengths, differentiators, and competitive advantages. This could be proprietary technology, intellectual property, established customer relationships, strong brand recognition, or an integrated supply chain. These qualities are key to effectively communicating the investment opportunity to buyers.
Words of wisdom
Keep your eye on the ball of value creation: Manage your supply chain risk and straighten out your succession planning. Focus on product innovation and consumer trends and hit that home run.
About the author
This blog was authored by Ivan Ma, Senior Vice President, Corporate Finance at KPMG Vancouver. Ivan has over a decade of M&A and financial advisory experience and specializes in advising business owners on M&A transactions including divestitures, strategic financings, mergers and acquisitions.
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1 Begley, S., & McOuat, A. (2021). The potential for powerhouse Private Brands: An updated view. McKinsey & Company. https://www.mckinsey.com/industries/retail/our-insights/the-potential-for-powerhouse-private-brands-an-updated-view
2 (March 31, 2023) KPMG Corporate Finance Quarterly F&B Sector Update