What could a $20 billion food-processing giant possibly want with a relatively new organic nut-butter company? On the surface, Hormel Foods Corp.’s acquisition of Justin’s in May makes little sense.
But this acquisition—like so many others in today’s consumer packaged goods (CPG) space—has everything to do with appealing to consumers’ evolving tastes and preferences.
“CPG companies have seen over the past several years that their market shares have been eroding,” says Joe Pawlak, managing principal for Chicago-based Technomic, a division of Winsight LLC (owner of CSP magazine). “They see that their revenue growth has been slowing and that they’re losing share to these smaller, upstart companies that are offering a lot of different things.”
Small brands that are winning with consumers—and drawing the attention of bigger food companies—often promote products that are premium, natural, organic or otherwise more healthful, with messages focused around corporate responsibility and sustainability. Hormel has been positioning itself in the fresh and natural space for the past five years, acquiring Fresherized Foods, maker of Wholly Guacamole; CytoSport, the company behind Muscle Milk; and Applegate, a natural and organic meat company.
And Hormel isn’t alone. Just this year, The Hershey Co. purchased Ripple Brand Collective LLC, a privately held company that owns the barkThins snacking-chocolate brand, and General Mills Inc. acquired Epic Provisions, a meat-snack company. Both barkThins and Epic tout premium offerings—a “growing and on-trend category,” according to Michele Buck, president of the North America division for Hershey, based in Hershey, Pa.
Of the billions of dollars in recent food industry sales growth, just a fraction flowed from large CPG companies. True growth is coming from the small guys.
“The largest CPGs may have large sales but exhibit slow growth,” said Dennis Moore, formerly of Nielsen, during the March webinar “Think Small for Big Growth.”
From 2011 to 2015, larger companies generated 3% growth in the food and beverage categories, while midsize companies brought in 44%, according to Nielsen.
That certainly makes acquiring these smaller manufacturers attractive, but Pawlak says it won’t “move the needle initially from a profitability and sales standpoint” for these multibillion-dollar CPG companies.
Instead, he says, expectations need to be set that these are platforms large CPGs can learn from and eventually grow, which could then give them more credibility in the perimeter of the grocery store. The purchasing company shouldn’t overstep its boundaries, either.
“The big company comes in and provides support as needed; a lot of it is distribution and maybe some brand assistance,” Pawlak says. “In terms of how they operate, how they connect with the consumer and how they develop their products and how they innovate, that’s pretty much left to the individual business unit.”
Successful acquisitions follow this formula, with the acquired brand operating independently and often out of its original headquarters. Take the Campbell Soup Co. and Bolthouse Farms: In 2012, Campbell bought Bolthouse—which is focused on high-value-added natural and healthy products—with plans to operate Bolthouse Farms as a separate business unit. Jeff Dunn retained his position of president and CEO, and Bolthouse still operates out of its original headquarters in Bakersfield, Calif.
“They’ve had a formula for success and [to] have them operate separately is the best way to move forward,” says Pawlak.
Hormel, Austin, Minn., is following suit. Justin’s will continue to operate out of its office in Boulder, Colo., as a subsidiary in the company’s grocery products segment, and founder Justin Gold will remain on board.
Oreo maker Mondelez International operated the same way in 2015 when it acquired Enjoy Life Foods, a snacking company specializing in the “free from” segment—a $12 billion market in the United States that, according to Euromonitor, is growing at strong double-digit rates. (Enjoy Life’s products are free from the eight most common allergens: wheat, dairy, peanuts, tree nuts, egg, soy, fish and shellfish.)
“People, quite frankly, were like, ‘Can’t believe you sold out. They’re going to change everything,’ ” Enjoy Life Foods CEO Scott Mandell told the Chicago Tribune. “What we told our consumers was, ‘Listen, we hear you, No. 1. But No. 2, Mondelez bought us because of our brand promise, not in spite of it. This brand promise is not going to change.’ ”
Enjoy Life Foods operates as a separate, wholly owned subsidiary in Schiller Park, Ill. However, due to growing demand and plans for global expansion—a result of the acquisition—Enjoy Life Foods is outgrowing its headquarters and plans to move to a new plant in Jeffersonville, Ind., later this year, Crain’s Chicago Business reports.
As evidenced by Enjoy Life Foods, smaller companies do have a lot to gain, but they also have the most to risk.
“Now they are associated with the big CPG companies. So are they still niche? Do they still have that cachet? Are they truly still special?” Pawlak says. “Also, does the big company then start meddling too much? Do they start operating that company and start infusing their own philosophies in there that may not align with what made those companies successful?”
Risks aside, these acquisitions can be a win-win for both sides.
“I think we are going to see more and more companies, bigger CPG companies, making acquisitions in these spaces,” says Pawlak, “because they have to evolve with the consumer.”
Where’s the Growth?
Midsize manufacturers are generating the most growth in food and beverage sales.
| Manufacturer | 2011 sales | 2015 sales | CAGR* | Category growth |
|---|---|---|---|---|
| Large | $185 billion | $186 billion | 0% | 3% |
| Midsize | $94 billion | $110 billion | 4% | 44% |
| Remaining nonprivate label | $22 billion | $33 billion | 11% | 31% |
| Private label | $74 billion | $82 billion | 3% | 23% |
Source: Nielsen | * Compound annual growth rate
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