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Private Equity

Health Is Wealth for Food & Beverage Investors

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The food and beverage industry is quite literally ripe with opportunity, especially in the natural and specialty categories. Evolving consumer preferences are dictating which brands succeed and which fail, motivating investors who have historically invested in the general consumer space to lean towards food and beverage.

New Regulation and Consumer Behavior

Consumers today seek food and beverage options that support a healthier lifestyle — but they also have less time to make informed decisions about what they are consuming.

In a nod to the busy, health-conscious consumer, the FDA revealed the new Nutrition Facts label for packaged foods in May 2016. The label’s simplified design emphasizes a product’s calories, servings per container, and serving size, and promotes a more explicit connection of the link between diet and chronic diseases.

Brands too are responding with an effort to make it easier for busy consumer to make choices at the grocery store. “It’s just too much to expect the average consumer to read and understand a nutritional label,” says Austin Sharp of Hagley Partners, who is an investor with over twenty years experience in food and beverage.

Many brands have begun to use stamps like “natural,” “organic,” “cage-free,” etc., to drive sales in the segment. But as this branding gains ground, government regulators and other consumer advocates have made a real effort to uncover the true meaning (or lack thereof) of these monikers. Wall Street Journal reporter Jo Craven McGinty reports that “government regulators forbid outright dishonesty, but labels with narrowly defined, cleverly deployed or unregulated buzzwords can confound shoppers trying to figure out what’s what.”

Consumer Impact on Investing

Consumers’ inclination toward natural and specialty goods is evidenced by an increase in production of products like real maple syrup (sorry, Aunt Jemima — it’s nothing personal). Justin Demes of consumer goods and retail investment firm Grand Crossing Capital says that there’s been a shift in consumer behavior. “There used to be a certain amount of credibility and trust that came along with big brands and broad retail distribution…the decision was easy for consumers,” says Demes. “Now, with new data on ingredients, countless recalls, etc., consumers have lost trust in many big brands and are favoring smaller brands with transparent messaging and authentic stories.”

Here are a few characteristics that are attractive to investors in the industry:

  • Emphasis on consumer benefit: if the product is free from sugar or GMOs, the consumer feels there is an advantage to their health or well-being and therefore overlooks a big-box brand when they’re in the grocery aisle. To many investors, a unique or compelling consumer benefit is a more important factor than sales in the potential success of a brand.
  • Home-grown and local: “It used to be that a food or beverage product had to make $10M in revenues, but that’s not the case anymore,” says Sharp. “Now, you just need velocity off the shelf and you can replicate that across more markets with the right partner and capital.” Brands like Beanfields started manufacturing and distributing their bean and rice chips in Los Angeles in 2015 and now the kosher, vegan and gluten-free chips are available in 16 countries. Consumers favor brands that use locally-sourced ingredients or have displayed sales success in the company’s town/region, and that’s a marketing opportunity garnering a lot of attention from investors.
  • Ground-breaking or new: According to Sterling-Rice Group, a Colorado-based brand strategy firm, easy/to-go formats and texture-rich snacks will be on the rise during the remainder of 2016. Investors will be on the lookout for these and other innovative advances in food and beverage because they expose consumers to new ingredients or provide the consumer easier access to food they don’t regularly have.
  • Reinvention: Similar to awe-inspiring formats for food, the food industry is seeing great success in reinventing old faithfuls in the healthy and specialty categories. In a pilot study, Cornell University’s Food and Brand Lab found that apple consumption jumped 70 percent among children when the fruit was sliced.
  • Less is more: Whether it be gluten, sugar, lactose, salt, chemicals, or other harmful ingredients, products in the “free-from” category will continue to prosper in the months and years to come. According to a report by Packaged Facts, compound annual growth rate of 5.7% is expected in the healthy ingredient sector between 2016 and 2020. Simplification is a trend that not all products in the health food category will embrace, but brands with 10 or fewer ingredients like Larabar find success in marketing uncomplicated products that just taste really good.

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