Editor’s note: This story is the first installment in a monthly series looking at the benefits of industry consolidation. Previous articles sponsored by BMO Harris Bank can be foundhere.
When Hormel Foods doled out $775 million to acquire Applegate Farms in 2015, the companies wasted little time analyzing the potential synergies that could be mined from the deal by delving deeper into the production, research and development, and marketing practices of each company.
But for the first 18 months, the companies made the decision to keep operating largely as they had before in order to give them more time to get to know each other and how each side could benefit in the long run. This move bucked the M&A norm in corporate America, which often has the acquiring company instilling its culture on the new business, while identifying ways to boost revenue to justify the purchase.
Last February, Applegate, which has carved out a niche selling refrigerated natural and organic meats, marked its first foray into the shelf-stable side with the introduction of pepperoni — the only product on the market that Applegate and Hormel Foods have collaborated on so far.
"It was really the best of all worlds, where Applegate is Applegate and Hormel is Hormel, and we came together to create a really great synergy" in creating this pepperoni, Nicole Glenn, vice president of marketing and research and development at Applegate, told Food Dive. "What Hormel really helped us do was stay true to our attributes and leverage their expertise. All of a sudden, it just opens up so much more opportunities to be aware of" in the market.
The new pepperoni was a key brand extension for Applegate because it moved them out of just the refrigerated section that had come to define it during its 31-year history into other parts of store where it didn't have a meaningful presence. At the same time, it opened up new food areas where Applegate's products could be used to a broader array of applications like topping on a pizza.
Before the pepperoni made it to the shelf, however, the companies had to overcome a few essential obstacles.Hormel Foods, which already had a rich history in meats and pepperoni similar to the segment that Applegate was aiming to enter, assisted the company in getting the ideal ratios of fat, lean protein and moisture that would allow the pepperoni to be sold outside of the refrigerator. Applegate oversaw other importantproduct facets, includingthe flavor, texture, appearance and packaging designthat were synonymous with the brand.
"It was really the best of all world's where Applegate is Applegate and Hormel is Hormel and we came together to create a really great synergy" with this new product. "What Hormel really helped us do was stay true to our attributes and leverage their expertise. All of a sudden, it just opens up so much more opportunities to be aware of."
Nicole Glenn
Vice president of marketing and research and development, Applegate
Glenn is no stranger to mergers, having worked for Procter & Gamble when the consumer goods giant bulked up through deals, and employed by salad maker Earthbound Farm after it was purchased by WhiteWave (now part of Danone) in 2013. She said spending time out of the gate to better understand the businesses coming together, and what offerings they can bring to the consumer, is a prudent step for M&A deals — an approach that
has made the Hormel Foods and Applegate merger work.
"(Hormel Foods is) taking thelonggame. It’s not about 'Hey, we need to have this short term fix and let’s bring in the acquiree and get the most of of it, ' " Glenn said. "That’s one of the best things from a standpoint that’s set (Hormel Foods and Applegate) up for success.”
MmmMmmGood?
As food and beverage companies struggle with slowing growth and shifting consumer tastes, they increasingly turn to mergers and acquisitions — often as a way to rapidly gain insight into areas where they lack sufficient knowledge and need to catch up.
The urge to merge has left some companies struggling to digest their acquisitions. Dr Pepper Snapple, now known as Keurig Dr Pepper, initially faced challenges integrating the $1.7 billion purchase ofBaiBrands— a price tag some on Wall Street viewed as too high.
The beverage giant was looking to innovate, create new products and expand Bai abroad, moves that came only a few months after the deal closed in January 2017 and my have upset the culture at the startup.After early evidence that it was having difficulties,Dr Pepper dismissed the founder of Bai as CEOand replaced him with a 10-year corporate veteran.
Ultimately, companies are unlikely to ease up on making deals anytime soon, and they will continue to publicly tout the benefits of any transactions they make even though many of the eventual synergies are all but impossible to predict.
Campbell Soup may be symbolic of the challenges and uncertainty that can plague one company in taking over another, especially if the purchase gets them into an area where they lack enough expertise. The nearly 150-year old soup maker spent nearly $2 billion to diversify away from its core packaged food business in favor of fresher, better-for-you products through a string of acquisitions.
Since its purchase by Campbell Soup in 2012,BolthouseFarms — a maker of carrots, smoothies, juices and dressings —has faced weather challengesand召回. At the same time, refrigerated salsa, hummus and dips producer Garden Fresh,acquired by the company in 2015, has struggled to generate consumer interest beyond its core audience in the Midwest.
Campbell Soup is now looking to sell this fresh segmentas part of a review of its broader business, a focus on paying down debt and a commitment to devote more attention to snacks that are popular with consumers.
Ioannis Pontikis, an analyst withMorningstar, said it's generally easier to predict cost savings — such as through the reduction of employees, combination of offices, or negotiation of better terms with vendors — than it is to know how a tie up will impact the pace of product development or the acceptance of an item made by one company in a market where the other entity has a presence.
"That’s the difficult part. That’s the million-dollar question,”Pontikis told Food Dive. "You don’t know when the revenue growth will come and what kind of impact that revenue growth will have to your bottom line. It’s the differentiating part of the deal. It really makes a deal value-adding for the shareholders, or not.”
A healthier meal
Campbell Soup is hopeful its decision to increase its presence in snacking will generate a more favorable outcome than its push into fresh foods. In March,Campbell Soup completed its $5 billion purchase of Snyder's-Lance, the largest acquisition in its history. Snacks now make up just under 50% of sales, compared to soups at 27%.
While Campbell Soup added high-profile snack brands like Pop Secret, Kettle and Emerald to a portfolio that already included household staples such as Goldfish crackers andPepperidgeFarm cookies, it could be some of the less-talked-about brands and assets acquired as part of the deal that could have a long-term impact on the company.
Campbell Soup has a handful of organic products in its Goldfish, Swanson andSpaghettiOs lines, along with its Plum brand that produces organic baby foods,but it wasn't until the Snyder's-Lance acquisition that theCPGgiant amassed a more meaningful presence in the fast-growing space.
首席营销官Chris Foley with Campbell Snacks, pointed to Late July — a maker of crackers, chips, salsa and popcorn produced withnon-GMOingredients and free from artificial colors, flavors and preservatives — as a brand that can add immediate value to the soup company.
With Late July, Campbell Soup will be able to tap into the brand's knowledge in sourcing organic ingredients, understanding when to plant the crops and partnering with farmers to secure an adequate supply in the future, Foley told Food Dive.
"With any merger, you look at what are those things that are uniquely value added from a particular piece of the business. For Late July, it's small, entrepreneurial, nimble, very well developed in some high-growth channels like Whole Foods. And in organic, a depth of expertise," Foley said. "All of that learning, as we start to work with the brand, that's a mindset that we want to make sure we adapt as we continue to grow in the organic space."
"That’s the million-dollar question. You don’t know when the revenue growth will come and what kind of impact that revenue growth will have to your bottom line. It’s the differentiating part of the deal. It really makes a deal value-adding for the shareholders, or not."
Ioannis Pontikis
Analyst, Morningstar
The Snyder's-Lance purchase also brought a cultural synergy that meshed well with Campbell Soup, he said, noting the importance the acquired company placed on accountability, bringing products to market quickly and a growth mindset that was especially valuable to theCPGgiant's snacks operation. Foley pointed to the benefits of a deeper supply chain it gained from the deal, including the addition of a Wisconsin plant that can quickly shift its production line to help Campbell Soup bring items to market faster.
"We want to make sure we get it right, but we're feeling very, very good in terms of the start we're off to," Foley said. "This is a huge integration for us, but we're starting to see some fantastic early wins and good momentum."
Bigger deal, more risk
BrittanyWeissman, an analyst at Edward Jones, told Food Dive that predicting whether a deal is successful largely depends on the track record of the acquiring company, the size of the deal and the underlying premise behind the purchase. Larger, more transformational deals carry with them a greater degree of execution risk, most notably the possibility that the promised synergies fall short or fail to materialize to justify the lofty price tag, she said.
"For every success story, there have been a few not-successful stories around the food industry as well,"Weissmansaid. "It really boils down to the management team's experience with integrating."
Successfully integrated deals include Hormel's purchases of Applegate and Justin's Nut Butter, as well asMcCormick's $4.2 billion buy of Reckitt Benckiser's Food Division, which added the iconic French's mustard and Frank'sRedHotbrands to a portfolio comprised of spices, seasoning mixes and condiments, she noted.
Meanwhile, businesses like Campbell Soup that have struggled to integrate recent deals and follow through on their earlier promises have "opened themselves up to some skepticism" because of their track record,Weissmansaid.
Similar to Hormel Foods, Coca-Cola has taken a hands-off approach initially with some of its buys. In 2011, Coca-Cola, the world's largest non-alcoholicbeverage maker, fullyacquired Honest Tea, a maker of organic drinks after purchasing a 40% stake three years earlier.Honest broughta practiceof innovating and getting drinks to market faster to Coca-Cola. The purchase also gave Coca-Cola insight into organic. Honest helped open up new markets andallowed Coca-Cola to increase deliveries to existing customers like Whole Foods, where it previously had a small footprint.
"Coca-Cola didn’t go in with big boots that big companies sometimes wear and destroy the value of the brand. Coke has managed to keep the brand’s position in tact and has expanded it into a major line of business.”
Erik气油比don
Business professor, University of Michigan,
Seth Goldman, who co-founded Honest Tea in 1998, recalled a conversation he had with former Coca-Cola COO and CEO Muhtar Kent before the company invested in Honest about what it would take to make the deal a success for both companies.
"He said that as a result of this deal, if Honest Tea becomes more like Coca-Cola rather than vice versa then it's not successful. We really want to bring in the entrepreneurial culture, the entrepreneurial mindset and help you grow," Goldman said.
Erik气油比don, a business professor at the University of Michigan, told Food Dive that the transaction has benefited Coca-Cola in large part because of what the Atlanta company hasn't done with the Honest brand.
“他们没有去与大compani大靴子es sometimes wear and destroy the value of the brand,”Gordon said.“Coke has managed to keep the brand’s position in tact and has expanded it into a major line of business. Usually you do one or the other.”
'A healthy dose of skepticism'
Weissman with Edward Jones said the market overall has been skeptical of most larger acquisitions in the food space during the last two years because of the high price tags and concernas to whether the promised synergies — ranging from the development of new products to cost savings — will be enough to justify the price paid. With Big Food hungry for growth, she said companies could continue to pay high sums of money to expand their businesses.
"We've seen companies bounce back and recover (from a deal), so I just think it's a healthy dose of skepticism," Weissman said. "The market has been in a more of a 'believe-it-when-I-see-it' mode these days, but some of it also is compounded by the fairly bearish sentiment we've seen across (the food) group."
Nestlé's purchase last year ofSweet Earth, a plant-based foods manufacturer, may lack the buzz generated by the sale of its U.S. candy business or the $7 billion it paid to sell Starbucks’ tea and coffee in stores. But the synergies it is already generating may be an example of what companies are hoping to extract from their next M&A deal as they grapple for growth.
"We're always looking at our portfolio and assessing if we're in the right place or not."
Steve Presley
CEO, Nestlé USA
Six months after the September acquisition,Nestlé, which has a deep knowledge of the pizza business through its ownership of brands such asDiGiorno, Tombstone and Jack's, utilized Sweet Earth's insight of the plant-based food space to introduce a cauliflower crust pizza much faster than the Swiss giant could have done on its own. For Sweet Earth, the California business can now utilizeNestlé's雄厚的财力,全面的行业联系,知识edge of the ever-changing food space and thousands of employees to get its products into the hands of more consumers.
AsNestlé integrates the Sweet Earth platform into its operations, the company remains optimistic that consumer demand for plant-based products is in its infancy and having the brand in its portfolio will give it the opportunity to tap into that growth. There is even the possibility of moving Sweet Earth into additional segments like beverages or desserts.
Steve Presley, CEO of Nestlé USA, said companies like his are forced to constantly review their portfolios to make sure they are relevant in today's increasingly competitive market place where consumer tastes are constantly evolving. M&A will continue to be one prong of that ongoing analysis, he said.
"The ability to drive an organization to be able to thrive in that environment of an informed, agile consumer that is getting better every day is one of the core challenges as we move forward," Presley told Food Dive. "We're always looking at our portfolio and assessing if we're in the right place or not."
This series is brought to you by BMO Harris Bank, a leader in commercial banking. To learn more about their Food & Beverage expertise, visit their websitehere. BMO Harris Bank has no influence over Food Dive's coverage.
