CHICAGO -- When it comes to mergers and acquisitions in the consumer packaged goods (CPG) industry, the big fish keep eating the little fish—and there’s no sign that their appetite is satisfied. The trend, which began a few years ago, is being driven by the promise that the small CPGs offer their large acquirers a more diverse product portfolio and greater consumer loyalty.
In December 2017, The Hershey Co., Hershey, Pa., agreed to acquire Amplify Snack Brands Inc. for $12 per share. A month later, The Ferrero Group, Alba, Italy, agreed to acquire Arlington, Va.-based Nestle’s U.S. confectionery business for $2.8 billion. The acquisition made Ferrero the third-largest confectionery company in the U.S. market. And this March, the Campbell Soup Co., Camden, N.J., acquired Charlotte, N.C.-based snacking company Snyder’s-Lance Inc. for $6.1 billion, merging the two companies’ products into a U.S.-only division called Campbell Snacks.
There’s clearly a trend of large companies absorbing smaller companies. But why is this happening, and what does it mean for convenience-store retailers?
The M&A feeding frenzy by large corporations is being driven in part by a surge in small CPG companies.
Today’s digital world allows smaller companies to penetrate the market now more than ever, Steve Rosenstock, consumer products practice lead for Clarkston Consulting, a Durham, N.C.-based consumer products consulting firm, told CSP. “Digital marketing and social media have made it easier for smaller companies to scale market share from larger competitors who used to box them out,” he said. “It was hard to gain loyalty and shelf space in the past, and that has now flipped.”
Rosenstock said the bulk of today’s CPG industry growth is coming from smaller companies because of two reasons: product innovation and consumer loyalty. Larger brands have grown cautious and slowed their innovation engine, he said, while smaller companies are willing to take risks with unique products and potentially flop—something consumers appreciate. This is fueling growth of smaller companies, he said.
“[Retailers] want to ride the growth of a smaller brand and differentiate through their products,” he said. “Many large companies are publicly held and have stockholders to satisfy, so they’ll be willing to spend the money on brands like Amplify if it means they don’t have to risk their own failure.”
The acquisitions are a result of traditional CPG companies needing to sell products that portend consumer trends—and needing to stay relevant, Steve Montgomery, president of b2b Solutions, a convenience-store consulting firm based in Lake Forest, Ill, told CSP. Many large CPGs have found that their products no longer resonate with today’s consumers like they did in the past, he said.
“CPGs have determined an alternative strategy: to buy smaller companies whose brand can benefit from additional capital and better access to food-channel supply chains,” said Montgomery.
CPGs use two approaches to identify potential deals and build their acquisition strategies, said Montgomery. The first is when a large company seeks a smaller brand that fits under its product umbrella. This was seen in Ferrero’s acquisition of Nestle’s U.S. Confectionery, which allowed Ferrero to leverage its product knowledge and supply chain after the buyout.
The second approach is when a large company wants to enter a new market, such as Campbell buying Snyder’s-Lance. Campbell, a soup company, moved into the snack scene after acquiring Snyder’s-Lance. This acquisition established Campbell in the growing snacking marketplace and can now be the basis for further acquisitions, said Montgomery.
The surge in buyouts in the snack and candy space is occurring because smaller brands are nimble at innovation and brand-building, Laura Renaud, manager of corporate communications with Hershey, told CSP. She said Hershey was initially drawn to Amplify because its brands resonated with consumers of better-for-you salty snacks—an audience the chocolate giant wanted to target.
“For us, we were looking for scale U.S.-focused brands, like SkinnyPop, that would enhance our existing product portfolio,” she said.
And the buyouts are even beneficial for c-store operators, who often look to simplify their processes by using fewer suppliers, said Rosenstock. Retailers wanting to limit the number of manufacturers they use is a driver of these acquisitions altogether, he said.
“There are less products being carried on shelves, leading to a consolidation on the manufacturer side,” he said.
But this reduction of suppliers simultaneously presents a hurdle for c-store operators. Because large companies are placing their names on smaller, lesser-known brands, the variety of these products on shelves decreases with each acquisition, said Rosenstock. As a result, the acquisitions only bolster the need to differentiate product offerings, he said.
No Slowing Down
No buyout comes without its challenges, which often appear while integrating the businesses together, Rosenstock said. Maintaining each brand’s core integrity while leveraging the economy for future growth is at the forefront of these hurdles.
“Amplify is different than Hershey in terms of consumer base,” he said. “How do they protect the integrity of what makes Amplify Amplify? [And] how can Hershey leverage the economy and scale of businesses yet keep Amplify nimble and innovative? That’s where the magic happens.”
Rosenstock is confident that in today’s tech-focused, variety-demanding market, the CPG buyouts will continue at a rapid pace. “Smaller companies will be successful, and larger companies will look for their growth to be fueled by targeted acquisitions,” he said. “This will accelerate, with no indications of slowing down.”