Consumer Buying Habits: New Investment Opportunities in the Food and Beverage Industry

Despite rising interest rates, high inflation, trade sanctions and market uncertainty, demand for food and beverage products remains relatively stable. Consumer purchasing trends, however, have changed as consumers lean toward products that are healthier and have clearer and cleaner labels. These changes may interest investors looking for opportunities to invest in significant trends in the food and beverage industry.

Food and Beverage Industry Showing Resilience

 Although the cost of food has increased over the past year, M&A activity in the food and beverage industry has faired well.
 
Unsurprisingly, food and beverage companies have increased prices at a historic rate. This is primarily due to increased input costs associated with food and beverage products that stem from interest rate hikes, high inflation, trade sanctions and increases in labour and ingredient expenses. The food and beverage industry has remained resilient because of its essential nature. In fact, people tend to eat at home more during economic downturns, which increases their consumption of food and beverage products.
 
In 2022, food and beverage deal activity in M&A increased each quarter, despite economic changes. The majority of transactions in the first quarter of 2022 were in packaged foods and meats (41%), restaurants (25%) and beverage subindustries (17%). Deal activity is also projected to remain strong in 2023 with respect to the grocery retail sector. Furthermore, it is predicted that investors will begin investing in food producers, enabling them to secure access to food and ingredient supply.

Opportunities Created by Changing Consumer Buying Habits

Consumers are no longer as loyal to brands as they once were. They are increasingly willing to substitute for different food products or brands that align with their values, despite tighter budgets. These shifts in the food and beverage industry enable the emergence of new companies that meet changing consumer preferences and demonstrate the industry’s significant growth potential.
 
Industry trends are also leaning towards organic, chemical-free, gluten-free, non-GMO, locally and responsibly sourced, plant-based, sustainable, transparent, functional, and health-conscious products. In addition, new products with cleaner labels and healthy ingredients have gained popularity. This contradicts the notion that consumers remain “loyal to the label,” allowing new products to enter the market if they align with consumers’ changing values.
 
Food and beverage companies can potentially capitalize on these trends by incorporating more premium attributes in their products and highlighting these attributes more clearly in marketing and on product labels so they stand out to the consumer. They can also take advantage of trends in consumer purchasing by customizing their existing products. Some food and beverage companies have begun adjusting ingredients in popular products to appeal to a broader range of consumers. For instance, a company may take an existing product and adjust certain ingredients, allowing them to offer options that are vegan, gluten-free or organic in addition to their usual offerings.
 
An increase in consumers’ desire for transparency in food ingredients has also increased the popularity of meal kits that allow consumers to clearly identify the ingredients they are consuming. Food and beverage companies have begun taking advantage of this trend by breaking down their existing products into a set of ingredients that consumers can put together to create a meal.
 
Furthermore, while general disposable income has decreased since 2021, it is forecasted to grow 1.5% annually over the next five years. This is predicted to increase the amount Canadians spend on discretionary food and dining and will simultaneously increase the growth potential of the industry.

Investing in Food and Beverage

The changes in consumer preferences may be of interest to investors looking for opportunities to invest in significant long-term trends.
 
To date, private strategic buyers are the most active buyers in the industry (see our February 2023 Blakes Bulletin: Food and Beverage M&A Landscape: Trends to Watch). In 2022, strategic transactions represented 81% of reported deals, with 78% of announced deals in the industry being completed by privately owned buyers.
 
Furthermore in 2022, investors seemed to focus on deals under C$25-million, which comprised 85% of all disclosed private equity transactions. As a result, new, upcoming and privately owned food and beverage companies that meet changing consumer preferences may be of interest to investors aimed at middle-market deals. These companies will enable investors to capitalize on changes in consumer purchasing and invest in a stable industry with significant growth potential.
 
For more information, please contact:
 
Michael Stevenson                 +1-416-863-2458
Mariangela Asturi                    +1-416-863-2296
 
or any other member of our Food, Beverage & Agribusiness group.