As consumer eating habits continue to change, food giants are on the hunt for halo-glowing boutique brands to bolster their sagging revenues. Small is big business for U.S. food, and along the way, many producers of organic and artisan food products are seeing the benefits, and the challenges, of selling to larger companies. But will this Wild West of food mergers mean better food for the masses or just more consolidation in the marketplace? And does selling always have to mean selling out?
First, let’s consider the landscape. Organic and non-GMO products are no longer considered niche; their sales are growing nearly three times as fast as their conventional counterparts. Many Big Food brands’ bottom lines are careening as consumers seek out options they believe to be better for their health and the environment. In the last year alone, U.S. food mergers and acquisitions added up to $116 billion in deals, the largest total dollar amount in two decades. Some recent acquisitions to consider:
Campbell Soup Co.’s 2013 $249 million purchase of the baby food brand Plum Organics (the soup company also bought Bolthouse Farms for $1.22 billion in 2012); General Mills’ 2014 $820 million purchase of the organic mac n’ cheese company Annie’s; Perdue’s 2015 buy-out of humane-focused meat supplier Niman Ranch (for an undisclosed amount); and Hormel’s $775 million purchase of organic meat company Applegate last year and its recent grab of Justin’s nut butter company.
Earlier this month, Danone announced a $10 billion takeover of WhiteWave Foods Co., the company behind Silk soy and almond milk, Horizon organic milk, and Earthbound farms. While The Street’s Jim Cramer took note, calling the deal out, others are not so sure. Advocacy group Food & Water Watch called for the U.S. Federal Trade Commission to block the merger, citing that the deal would double Danone’s market power in the U.S. and the Cornucopia Institute, an organic industry watchdog, said they were formally challenging the acquisition “based on the serious erosion of competition it would create in the consumer marketplace and the negative economic impact it would have on U.S. organic dairy farmers.”
Consolidation in the food market is real. According to Philp H. Howard, Associate Professor in the Department of Community Sustainability at Michigan State University, at almost every key stage of the food system, four firms alone control 40 percent or more of the market, a level above which these companies have the power to drive up prices for consumers and reduce their rate of innovation.
In his new book, Concentration and Power in the Food System: Who Controls What We Eat?, he reports that researchers have identified additional problems resulting from these trends, including negative impacts on the environment, human health, and communities. (Professor Howard is also responsible for this important graphic [PDF] depicting the consolidation in the organic industry.)
The Food & Power blog by Leah Douglas at the think tank New America also expertly details consolidation in nearly every aspect of the food system. This includes supermarket mega mergers, Bayer’s failed $65 million bid to buy Monsanto (Bayer is now considering a hostile takeover), Dow Chemical’s planned merger with DuPont, and ChemChina’s acquisition of Syngenta. Senator Charles Grassley, chairman of the Senate Judiciary Committee, sent a letter this week to antitrust enforcers noting that the latter two major agriculture technology and seed company mergers could hurt competition in the industry and make it harder for smaller companies to compete.
The biggest players aside, I do wonder why the smaller brands are selling in the first place and whether these beloved companies are in fact “selling out.” Justin Gold, the founder of Justin’s, said he decided to sell his 14-year-old Boulder-based nut butter company to Hormel for $286 million because it promised to help scale up his company and because of the independence with which the parent company has treated Applegate and other brands. (For more on Hormel, read this fascinating piece in Fortune.)
The same can be said of the recent news that my neighbors, the much-heralded artisan cheese company, Cowgirl Creamery, would merge with Swiss-based Emmi, which also bought nearby Redwood Hill Farm and Creamery last year and Cypress Grove Chevre in 2010. For many fans, this came as a shock and disappointment. I couldn’t help but think: aren’t Peggy Smith and Sue Conley—the founders who are in their 60s, and have run the business for nearly 20 years—allowed to have some sort of exit strategy? Why is it that we expect small producers not to grow and succeed?
“We did not build our business to sell it,” Conley told me. “For the last 20 years, we’ve financed everything by mortgaging our homes, and borrowing money from banks and personal friends.” Conley said she and Smith are at an age where they’re not willing to take the risk of borrowing money and they needed capital for the purpose of building a new production facility. And she said that Emmi was the right company for them, because it’s allowing them to operate independently. Conley had seen how Emmi provided valuable guidance, capital investment, and expertise for Cypress Grove, while allowing them to retain their brand value.
The fact that selling often seems like the most practical option may ultimately speak to the bind in which many artisan companies find themselves. Most have invested a great deal more capital into hand-crafted ingredients than today’s conventional food companies do, and—as Conley suggests—getting out from under the debt of the initial investment isn’t always possible otherwise.
“Evaluating the options from a variety of perspectives, it was clear that there is only a limited level of debt that the company can take on prudently,” said New Resource Bank’s Founder Peter Liu, who advised the Cowgirls. “Technology companies have access to IPOs and venture capital, options that are not really available to artisanal food businesses. Finding patient equity capital is a challenge for small businesses and a common issue that comes up in succession planning discussions.”
Sometimes it works out for the small guys when they sell, sometimes not. Starbucks bought up San Francisco-based bakery chain La Boulange for $100 million and ended up closing all of its 23 locations just three years later, much to the horror of some Bay Area bread lovers. (After that fiasco, some San Francisco locations were reborn last year under a different company.) Starbucks itself is struggling against pressure from the small guys and is opening a new line of higher-end café stores, perhaps to compete with the cool kids?
Other tales of corporate marriages gone awry include the plummet in sales that occurred when Kellogg Co. bought Kashi, the change in consumer perception that happened when Coca-Cola bought Odwalla juice company (and more recently, acquired a minority stake in Suja cold-pressed juices), and Hersey’s purchase of bespoke chocolate companies Scharffen Berger and Dagoba.
Small food companies risk a lot by scaling up this way because if they’re owned by a public company they may have no choice but to keep growing until they’re doing something very different than what they started with. As artisan food becomes All-American, it’s unclear whether or not the quality—let alone the identity—of the products can be maintained, threatening the authenticity their consumers sought in the first pace.
Is it possible for small brands to scale and retain their uniqueness and their local fan-bases? Maybe. Small companies are often distinct, which is great, but not if they can’t survive. That’s why companies are attracted to big players like Hormel and Emmi, which will provide capital to grow, but agree to leave the small companies alone. Still, I keep wondering why there isn’t more capital available to the small businesses in the first place? Why isn’t there some sort of major good food fund for the small guys who don’t want to sell? And how do small businesses protect vision and mission in without having to become public?
Long-time entrepreneur and investor Will Rosenzweig pointed out that it’s not just capital that’s missing; big companies bring bigger ecosystems and better infrastructure that small companies just can’t build—even with financial support. “It isn’t just a linear equation; it’s a step-function equation,” he explained. “From buying power, to processing and distribution power, as they move up the food chain, small companies are forced into this situation.”
Observing that the artisan grab is the same play made by big food scooping up organic over the past few decades, Rosenzweig urged today’s entrepreneurs and investors to sharpen their pattern recognition skills. “The warfare for the consumer’s long-term share of stomach is a brutal, expensive game.”