Why major food companies are hungry to acquire smaller brands

By Carolyn Heneghan | June 6, 2015

The practice unfolds largely the same across all industries: A larger, more established company swoops in to acquire a smaller, fast-growing company while costs are still low and before the smaller brand reaches its peak. These acquisitions are commonplace in food and beverage.

According to the Rabobank report, "Dude, Where's My Consumer?" Rabobank analysts believe that larger food and beverage brands are in trouble, but there is hope. The report lines out a few suggestions, including some for strategic acquisitions, which the report calls, "buy, not build."

These suggestions are meant to help big food and beverage companies adapt to a new class of consumers, the Millennials, who tend to be more experimental in their food choices, more health-conscious, and more willing to spend more of their income on the food that appeals to them most. Many major food and beverage brands are already looking to this strategy to become more appealing and/or diversified.

Acquisitions in the news

This month, Coca-Cola Co. will finalize its 16.7% minority stake in Monster Beverage Corp., which will enable the soft drink giant to capitalize on the burgeoning energy drink market, currently a $10 billion industry. However, what Coca-Cola could also inherit with its minority stake are the legal issues Monster faces as lawsuit after lawsuit is filed against the company. Coca-Cola is weighing risks, but the reward for expanding into such a fast-growing market could help save its bottom line as soda sales continue to fall.

For some contrast, last year, Coca-Cola also increased its minority stake in Keurig Green Mountain, which Coca-Cola is likely pursuing for completely different reasons. Instead of trying to enter a new market segment, Coca-Cola partnered with Keurig to launch the Keurig Kold, an at-home cold beverage maker akin to Keurig’s original successful coffee and hot drinks machine. Coca-Cola sees this partnership as an opportunity to place its existing iconic brands into consumers’ homes via Keurig’s K-Cup single-serving podtechnology.

Hormel Foods, Inc. has made a strategic acquisition of a smaller company, Applegate Farms, the country’s leading natural and organic meats producer. The $775 million deal was Hormel’s largest acquisition offer ever and signals Hormel’s drive to be a part of the growing healthy meats market. Through Applegate, Hormel can enter the health food retail space and capitalize on the smaller company’s reputation for responsible farm animal handling. Hormel isn’t alone in these types of moves— as consumers demand healthier meats, more companies, particularly poultry industry giants, such as Tyson Foodsand Pilgrim’s Pride are leaving antibiotics behind.

6 reasons big food companies buy smaller brands

Big food companies may have any number of reasons for wanting to acquire a smaller brand, but often they fall into one of these categories.

1. Innovation

More than anything else, big companies look to small companies for innovation. Big brands run the risk of growing stale and retiring along with their older core constituency, while small companies often have a finger on the pulse of what’s new and appealing to the Millennial generation. Small companies’ ideas can inspire innovation for established brands.

2. Health and Simplicity

Healthy and simple ingredients are another key aspect of small companies that big companies are after. Big companies may tweak ingredients to make their products healthier, but they still have a legacy of ingredients now perceived as less-than-healthy. Big companies may show their dedication to delivering healthier products to consumers when they begin acquiring smaller brands popular with health-conscious consumers.

3. Sustainability

Small companies often have sustainability measures in place from the beginning, whereas big companies that have been around for a long time may have to overhaul certain operations to make a significant impact. Small companies can show big companies the minor and major changes that can be made to improve sustainability in several aspects of operations, from water and energy conservation to land usage and employee diversity.

4. Corporate responsibility

Many consumers don’t buy products from brands they don’t trust. Now more than ever, corporate reputation is everything, as consumers want products that taste good, are good for them and that make them feel good about spending their money. Quality of products and ingredients, employee pay, transparency, and other factors make companies seem more relatable and respectable. When big companies acquire small companies with good reputations, that reputation may rub off on the big companies.

5. Efficiency

Small companies often have efficiency figured out from their experience as scrappy startups with tight finances in their early days. From alternative distribution methods, such as online delivery, to alternative marketing, such as social media, and other immersive technology, small companies can demonstrate efficiency.

6. Consumer interaction

Small brands also offer a sense of intimacy that consumers enjoy. A small brand can be more relatable, and consumers feel they can get to know the brand, the story and people behind it. Through social media and branding, small companies have become experts at engaging with consumers and creating a tribe of loyal followers and customers, who the small company could bring with it in the acquisition. Also, a big company can pick up on a small company’s engagement tactics to reconnect with its own customer base.

Major food companies may be right to think that acquiring smaller companies is the key to success in adapting to all of the changes brought on by Millennials and food culture today. The next question is how small companies stand to benefit as these types of acquisitions pick up in the future, such as whether the smaller company is able to retain its authenticity without being seen as having “sold out” to a major company.

Striking the right balance in the midst of an acquisition is important for both sides of the deal to see real benefit as consumers adapt to the new company structure. In the future, whether the organic health food market will move into the mainstream via a proliferation of niche companies or through major company acquisitions—or both—remains to be seen.