big food’s health kick food...april!11,2016! director,!fung!global!retail!&!technology!!!...

1

April 11, 2016

DEBORAH WEINSWIG, MANAGING DIRECTOR, FUNG GLOBAL RETAIL & TECHNOLOGY [email protected] US: 917.655.6790 HK: 852.6119.1779 CN: 86.186.1420.3016 Copyright © 2016 The Fung Group. All rights reserved.

• Millennial consumers—those born between 1980 and 2000—are leading the charge to healthier and more natural food.

• This has impacted the “Big Food” firms: the 10 biggest US packaged-‐food firms have posted sluggish aggregate revenue growth in recent years and, as a result, have lost aggregate share of the overall US packaged-‐food market.

• Many Big Food companies have taken steps to build share in the natural food category, principally through M&A. Big packaged-‐food names such as Campbell’s and General Mills have acquired firms selling healthier, natural or organic foods.

• At the same time, major natural food firms have increased their own M&A activity as they have sought to build scale and fend off the threat from Big Food’s encroachment.

• Many millennial consumers are entering their peak spending years, so the market for healthier yet convenient options is almost certain to see continued growth. We expect the world’s biggest food companies to make sustained efforts to tap this demand.

Big Food’s Health Kick: Changing Consumer Demands Fuel Food

Industry M&A

D E B O R A H W E I N S W I G

M a n a g i n g D i r e c t o r , F u n g G l o b a l R e t a i l & T e c h n o l o g y d e b o r a h w e i n s w i g @ f u n g 1 9 3 7 . c o m

U S : 6 4 6 . 8 3 9 . 7 0 1 7 H K : 8 5 2 . 6 1 1 9 . 1 7 7 9

C H N : 8 6 . 1 8 6 . 1 4 2 0 . 3 0 1 6

2

April 11, 2016


TABLE OF CONTENTS FOCUSING ON FOOD: THE IMPORTANCE OF EATING RIGHT ............................................................... 3

“ORGANIC” AND “NATURAL” FOOD—A FEW DEFINITIONS ................................................................ 5

TOP FOOD COMPANIES IN THE US AND THEIR REVENUE GROWTH TRENDS ....................................... 6

THE RISE OF PACKAGED FRESH .......................................................................................................... 8

M&A DOMINATES BIG FOOD FIRMS’ STRATEGIES ............................................................................ 10

CASE STUDIES: FOOD FIRMS MOVE TO STRENGTHEN THEIR “PACKAGED FRESH” POSITIONING ....... 11

CAMPBELL’S ............................................................................................................................................. 11

Product and Range Initiatives .......................................................................................................................... 12

Technology and Funding Initiatives ................................................................................................................. 12

C-‐Fresh Division’s Performance in FY15 ........................................................................................................... 13

GENERAL MILLS ....................................................................................................................................... 14

Acquisition of Annie’s ...................................................................................................................................... 14


Marketing Initiatives ........................................................................................................................................ 14

Natural and Organic Foods Division’s Performance in FY15 ............................................................................ 14

WHITEWAVE FOODS ................................................................................................................................ 15

Acquisition of Earthbound Farm ...................................................................................................................... 15


Marketing Initiatives ........................................................................................................................................ 16

Americas Foods & Beverages and Americas Fresh Foods Divisions’ Performance in FY15 ............................. 16

WHERE DOES BIG FOOD STAND NOW? KEY TAKEAWAYS ................................................................. 17

3

April 11, 2016


Big Food’s Health Kick: Changing Consumer Demands Fuel Food Industry M&A

If the 20th century was the age of meal-‐preparation convenience, promised by canned and packaged food, the 21st appears to be the age of healthier food. Consumers are becoming increasingly aware of the long-‐term health risks of consuming processed, packaged foods, and manufacturers are pulling out all the stops to cater to the new and growing demand for “packaged fresh”—healthier, packaged options that provide ready-‐to-‐eat or ready-‐to-‐prepare convenience.

In this report, we examine some of the initiatives companies have taken to tap this market, including mergers and acquisitions (M&A) and new product development. Consumer demand for healthier options has driven waves of M&A in the food industry, including acquisitions of natural and organic food companies by traditional “Big Food” firms and consolidation within the natural and organic segment itself.

FOCUSING ON FOOD: THE IMPORTANCE OF EATING RIGHT Millennial consumers—those born between 1980 and 2000—appear to be driving demand for healthier and more natural food. The abundance of information available via the Internet in their formative years has helped make them a more informed consumer base, and so has shaped their decisions regarding health, wellness and food.

Our recent report, Millennials and Grocery Shopping: New Priorities, New Preferences considers habits that are typical of consumers in this age group and that, we believe, will bolster the growth of the organic and healthy food categories. In short, these are the main trends among millennial grocery shoppers:

Millennial consumers—those born between 1980 and 2000—appear to be driving demand for healthier and more natural food.

4

April 11, 2016


• Healthy options: Most millennials think factors associated with healthy food choices are more important than previous generations thought they were. For instance, in their food and beverage purchases, millennials tend to give more importance to an “organic” label than older customers do.

• Information: The accessibility of information is important to millennials in deciding what food to buy. In the US, 80% of millennials value having access to information about how their food is produced, according to marketing firm FutureCast.

• Labels: Many millennials consider food labels a valuable tool for informing their purchasing decisions. According to a survey by Euromonitor International, 40% of millennials in the US look for limited or no artificial ingredients when reading food labels, compared to 33% of baby boomers.

• Snacks: Snacking, or grazing, is very much part of the lifestyle of people aged 16–36 who tend to eat outside regular mealtimes more often than other generations do. More than half of US millennials snack at least once per week, according to Euromonitor International, compared to only 20% of baby boomers.

• Guilt-‐free food: Many millennials pay attention to what they eat even when snacking, and snacks that are marketed and perceived as healthy tend to attract consumers in this age group. For instance, high-‐protein snacks have been particularly successful, as protein is possibly the only nutrient that has never been questioned by mainstream media, unlike sugar, fat and carbs. In the US, the market for high-‐protein snacks has grown substantially. For example, Greek yogurt—higher in protein than regular yogurt—grew from 4% of the total US yogurt market in 2008 to 52% in 2014, according to Nielsen.

Many millennials pay attention to what they eat even when snacking, and snacks that are marketed and perceived as healthy tend to attract consumers in this age group.

5

April 11, 2016


According to a 2012 survey of US millennials by investment bank Jefferies, traditional grocery stores, including supermarkets, account for 41% of food expenditure among millennials. Among US grocers, Kroger has been a frontrunner in introducing the natural and whole foods categories in its offering. It has built its Simple Truth whole foods and organic label into a $1.5 billion brand, as we noted in our report The Middle-‐Aisles Exodus: US Shoppers Flee to Healthier, More Natural Foods. Target, too, is ramping up its natural, local, organic and “clean” product offering.

Walmart is also investing in fresh foods, with a particular focus on supply chain improvements that will allow it to bring fresher produce into its stores; since November 2014, it has also ramped up its organic offering.

While the grocers have taken note of the health-‐conscious food shopper, packaged-‐food companies have increasingly begun to make changes, too, and are offering more products that are healthier, natural or organic.

But what qualifies as an organic product and how is that different from something labeled as “natural”? We rely on the definitions as laid out by the United States Department of Agriculture (USDA), a federal executive department that is responsible for developing and implementing government policy on agriculture, farming, forestry and food.

“ORGANIC” AND “NATURAL” FOOD—A FEW DEFINITIONS Most people tend to use the terms “organic” and “natural” synonymously with regard to food products, but these words have different meanings, and regulations regarding their use on product labels and packaging vary across the globe.

Packaged-‐food makers may label a product “natural” even if its ingredients have been produced with the use of synthetic substances.

6

April 11, 2016


The distinction between these two terms in the US was made official when the USDA published its policy on organic food in 2000. The policy outlines that, in order to be labeled “organic,” a food must be produced without the use of artificial fertilizers and pesticides, synthetic substances, genetic engineering, and other chemical/artificial means.

A food product is labeled “natural” when it has been minimally synthesized or when fewer preservatives and additives are used in its production. But there is no regulation on the use of this term, so its usage is inconsistent. Packaged-‐food makers may label a product “natural” even if its ingredients have been produced with the use of synthetic substances.

TOP FOOD COMPANIES IN THE US AND THEIR REVENUE GROWTH TRENDS So, which companies constitute the Big Food segment that is apparently under threat from changing consumer demand? The biggest packaged-‐food firms, from Tyson Foods to Hershey’s, make up the core of the segment, and we show their scale, in terms of 2015 revenues, below. The data are for the US packaged-‐foods industry only.

Figure 1. Top 10 US Packaged-‐Food Companies, by FY15 Revenue

Company FY15 Revenue (USD Bil.)

Tyson Foods $41.4

Mondelez International $29.6

General Mills $17.6

ConAgra Foods $15.8

Kellogg’s $13.5

Hormel Foods $9.3

Pilgrim’s Pride $8.2

Dean Foods $8.1

Campbell’s $8.1

Hershey’s $7.4

Source: S&P Capital IQ

Since 2009, revenue growth in the top 10 companies has slowed even while industry-‐level revenue growth has accelerated. For our industry benchmark, we use reported annual revenues of the top 50 publicly traded packaged-‐food companies in the US.

• While the combined revenue of the top 50 packaged-‐food companies in the US grew at a CAGR of 5.4% since 2009, the combined revenue of the top 10 companies climbed slowly, at a CAGR of 1.9%.

• The market share of the top 10 companies as a percentage of the top 50 companies also dropped dramatically, from 80% in 2009 to 65% in 2015, possibly indicating growing consumer distrust of Big Food.

Since 2009, revenue growth in the top 10 companies has slowed even while industry-‐level revenue growth has accelerated.

7

April 11, 2016


Figure 2. US Packaged-‐Food Companies’ Revenues: Top 50’s, Top 10’s and Top 10’s Share of Top 50’s

Source: S&P Capital IQ/Fung Global Retail & Technology

Most of the top 10 companies have shown a positive CAGR in revenue since 2009 except for Mondelez International, whose revenues have declined by 4.4% and Dean Foods, whose revenues have declined by 5.1%.

Figure 3. Top 10 US Packaged-‐Food Companies: Revenue CAGR, 2009–2015

Source: S&P Capital IQ/Fung Global Retail & Technology

178

245

142 159

80

65

50

60

70

80

90

100

200

300

2009 2010 2011 2012 2013 2014 2015

%

USD

Bil.

Revenue of Top 50 Packaged-‐Food Firms

Revenue of Top 10 Packaged-‐Food Firms

Top 10 Packaged-‐Food Firms’ Share of Top 50 Packaged-‐Food Firms’ Revenues (Right Axis)

7.6%

(4.4)%

3.2% 4.2%

1.2%

6.0%

3.1%

(5.1)%

1.1%

5.7% 5.4%

Tyson Food

s

Mon

delez Internano

nal

Gene

ral M

ills

ConA

gra Food

s

Kellogg’s

Horm

el Foo

ds

Pilgrim

’s Prid

e

Dean Foo

ds

Campb

ell’s

Hershe

y’s

Indu

stry CAG

R

The market share of the top 10 companies as a percentage of the top 50 companies dropped dramatically, from 80% in 2009 to 65% in 2015, possibly indicating growing consumer distrust of Big Food.

8

April 11, 2016


But how has this decline in revenue share affected the top 10 food companies’ performance in the stock market?

The 10 biggest companies’ market capitalization has declined as a share of the top 50 US companies’. In 2009, the top 10 companies accounted for nearly 76.7% of the top 50 companies’ market capitalization. At the end of 2015, the top 10 companies’ share had declined to 67.8% (the lowest point was seen at the end of 2014, when the top 10 companies accounted for a 65.2% share).

Figure 4. US Packaged-‐Food Companies’ Market Capitalization: Top 10 Companies’ Share as a Percentage of Top 50 Companies’

Market capitalization as of December 31 Source: S&P Capital IQ/Fung Global Retail & Technology

So, while Big Food has taken a beating, who has gained from its downfall? Packaged fresh and organics, of course!

THE RISE OF PACKAGED FRESH While a number of Big Food firms have seen faltering growth, four of the largest names in natural and organic packaged food—Hain Celestial, WhiteWave Foods, Boulder Brands and Lifeway Foods—have surged ahead. These four companies gained dramatically in terms of revenue growth and market capitalization between 2009 and 2015. Figure 5, below, charts the CAGR of annual revenues for these four companies.

Of these firms, Hain Celestial had the strongest revenue growth: at a CAGR of 20.2%, the company’s revenue grew from $1,123 million in 2009 to $2,689 million in 2015. WhiteWave Foods had the second-‐highest revenue CAGR at 13.4%, with revenue growing from $1,535 million in 2009 to $3,866 million in 2015.

We used the consensus estimate numbers for the 2015 revenues of Boulder Brands, as the actual results had not yet been published at the time of this writing. The company was acquired in January 2016 by Big Food titan Pinnacle Foods. Boulder Brands’ 2015 revenue is estimated at $510 million, up from $240 million in 2009. In terms of revenue CAGR, it followed closely behind WhiteWave Foods with a CAGR of 13.2%.

76.7%

67.8%

2009 2010 2011 2012 2013 2014 2015

While a number of Big Food firms have seen faltering growth, Hain Celestial, WhiteWave Foods, Boulder Brands and Lifeway Foods have gained dramatically in terms of revenue growth and market capitalization between 2009 and 2015.

9

April 11, 2016


0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

2009 2010 2011 2012 2013 2014 2015

USD

Mil.

Lifeway Foods

Boulder Brands

Hain Celesnal

WhiteWave Foods**

Lifeway Foods, one of the largest kefir (fermented milk drink) and probiotic product makers, earned $119 million in 2015, growing at a CAGR of 12.6% from $54 million in 2009.

Figure 5. Four Largest US Organic Food Companies: Revenue and Revenue CAGR, 2009–2015*

*FY15 revenues for Boulder Brands and Lifeway Foods are consensus estimates. Source: S&P Capital IQ/Fung Global Retail & Technology

The market capitalizations of these companies gained considerably between 2009 and 2015. WhiteWave Foods went public only in 2012, and its market cap has grown by an impressive 155% since then.

Figure 6. Four Largest US Organic Food Companies: Market Capitalization, 2009–2015*

*Market capitalizations as of December 31 **No data for WhiteWave Foods for 2009–2011, as the company did not go public until 2012. Source: S&P Capital IQ

1,535

CAGR: 13.4%

3,866

1,123

CAGR: 20.2%

2,689

240 CAGR: 13.2% 510

54 CAGR: 12.6% 119 0

1,000

2,000

3,000

4,000

2009 2010 2011 2012 2013 2014 2015

USD

Mil.

WhiteWave Foods Hain Celesnal Boulder Brands Lifeway Foods

Lifeway Foods, one of the largest kefir (fermented milk drink) and probiotic product makers, earned $119 million in 2015, growing at a CAGR of 12.6% from $54 million in 2009.

10

April 11, 2016


M&A DOMINATES BIG FOOD FIRMS’ STRATEGIES In response to the definite threat from the growing organic and natural food companies—and the waning demand for packaged food—many Big Food companies have taken steps to build share in the natural food category, principally through M&A. At the same time, major natural food firms have increased their M&A activity as they seek to build scale and fend off the threat from the Big Food firms’ encroachment.

Charting the M&A Wave

Below, we show major organic and health food acquisitions by Big Food companies in recent years, ranked by deal value. The biggest of these was Tyson Foods’ $8.9 billion acquisition of Hillshire Brands in 2014, but there have been several other high-‐value deals in the last decade or so.

Figure 7. Notable Acquisitions of Organic Food Brands by Packaged-‐Food Companies, 2000–2015

Buyer/Acquirer Target Deal Value (USD Mil.) Date Completed

Tyson Foods Hillshire Brands $8,932.1 August 28, 2014

Campbell’s Bolthouse Farms $1,550.0 August 6, 2012

Pinnacle Foods Boulder Brands $991.4 January 15, 2016

General Mills Annie’s $823.0 October 21, 2014

Hormel Foods Applegate Farms $775.0 July 13, 2015

WhiteWave Foods Natural Selection Foods/Earthbound Farm $604.0 January 2, 2014

Campbell’s Kelsen $349.6 August 8, 2013

Campbell’s Plum Organics $249.0 June 13, 2013

Campbell’s Garden Fresh Gourmet $231.0 June 29, 2015

Hillshire Brands Van’s Natural Foods $165.0 May 15, 2014

Hain Celestial Danival $26.0 February 4, 2011

ConAgra Foods Blake’s All Natural Foods $20.7 May 12, 2015

General Mills Cascadian Farm/Small Planet Foods N/A* January 13, 2000

Kellogg’s Kashi N/A* June 29, 2000

Coca-‐Cola Honest Tea N/A* March 1, 2011

Danone Stonyfield Organic Yogurt N/A* January 12, 2014

*The deal value has not been disclosed. Source: Althealthworks.com/company press releases/Reuters/Fortune/S&P Capital IQ

The big advantages that M&A provides over starting from scratch include:

• Instant scale: Big Food firms can take share without having to build sales incrementally.

• Brand equity: Big Food companies can gain known and trusted natural food brands.

• Other forms of intellectual property: Big Food firms can shortcut time-‐consuming R&D by buying the knowledge of natural food firms.

Major natural food firms have increased their M&A activity as they seek to build scale and fend off the threat from the Big Food firms’ encroachment.

11

April 11, 2016


Increased Demand for and Limited Supply of Organic Food Companies Drives Valuations Up

In 2014 alone, 67 M&A transactions were completed in the packaged-‐food industry in the US. And it is interesting to note that the number of M&A transactions per year increased between 2010 and 2014, denoting the heightened pace of consolidation in the industry.

The trend in the average deal value has been mostly irregular since 2006. Though 2014 saw the highest number of transactions, the average deal value was lower in 2014 than it was in 2015.

Figure 8. US Packaged-‐Food Industry: Average Deal Value and Number of M&A Transactions Closed, 2006–2015

Source: S&P Capital IQ

CASE STUDIES: FOOD FIRMS MOVE TO STRENGTHEN THEIR “PACKAGED FRESH” POSITIONING

M&A has been a growth strategy used by Big Food firms and natural food firms alike as they seek to tap the growing natural food market. But it has not been the only strategy that these companies have employed. Below, we offer case studies of three major food firms, and outline the diverse nature of their strategies to build share in this market:

• Campbell’s

• General Mills

• WhiteWave Foods

CAMPBELL’S

Acquisition of Bolthouse Farms, Garden Fresh Gourmet, Kelsen and Plum Organics Campbell’s, famous for producing canned soups and other products, announced in July 2012 that it would acquire Bolthouse Farms, a maker of beverages, fruit and vegetable juices, smoothies, protein drinks, and vegetable snacks. The transaction was completed for $1.55 billion in August

50 24 49 13 47 29 19 29 40 58

54

58 55

42

65 62 63 62

67

49

40

50

60

70

0

20

40

60

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

USD

Mil.

Average Deal Value Number of Transacnons Closed (Right Axis)

In 2014 alone, 67 M&A transactions were completed in the packaged-‐food industry in the US.

12

April 11, 2016


the same year, and Campbell’s instantly added a range of “healthy” food products to its offering.

Campbell’s acquired Garden Fresh Gourmet in June 2015. Garden Fresh began by making packaged salsa that became famous for its almost-‐natural quality. It has since diversified into making more preservative-‐free food products that cater to health-‐conscious consumers.

In addition to these two companies, Campbell’s acquired Kelsen and Plum Organics. Altogether, these four companies have added$1.2 billion in revenues to the company and expanded its exposure to higher-‐growth markets.

At the most recent Consumer Analyst Group of New York (CAGNY) conference, held in February 2016, Campbell’s President and CEO Denise Morrison outlined several new initiatives the company has undertaken this year to cater to the growing demand for healthy/organic food.

Product and Range Initiatives To strengthen its product offering, Campbell’s is developing new products across its suite of brands:

• It is strengthening the Campbell Fresh (C-‐Fresh) division, which includes fresh and healthy packaged food, beverages and snacks.

• It will introduce 14 new products under the Bolthouse Farms brand in spring 2016, including the first plant-‐based protein drink in the ultra-‐premium juice category.

• It is creating organic versions of center-‐of-‐the-‐store and middle-‐aisle products, such as Campbell’s organic soups, Swanson organic stock, Pace organic salsa and Campbell’s dinner sauces, using familiar ingredients and no artificial colors or flavors.

Technology and Funding Initiatives Campbell’s had previously made only limited forays into the investment and funding of food-‐tech startups. At the CAGNY conference in February, Morrison announced that Campbell’s has formed a new, $125-‐million venture fund called Acre Venture Partners in order to participate more actively in the fresh food technology space and strengthen its competence.

Campbell’s CEO announced that the company has formed a new, $125-‐million venture fund called Acre Venture Partners in order to participate more actively in the fresh food technology space and strengthen its competence.

13

April 11, 2016


C-‐Fresh Division’s Performance in FY15 According to Campbell’s 2015 annual report and its presentation at the CAGNY conference, net sales for the year declined by 2.2% year over year, to $8,082 million. The newly formed C-‐Fresh division brought in $970 million, and the operating profit amounted to $1,327 million. As C-‐Fresh was formed as a reportable segment only in 2015, there are no numbers from the previous year for comparison.

At the CAGNY conference, Campbell’s CFO Anthony DiSilvestro noted that the C-‐Fresh division contributed nearly 12% of total sales and 4% of operating earnings, on a 5% operating margin. DiSilvestro said that the C-‐Fresh segment’s recent performance gives Campbell’s “a strong presence in the $19 billion packaged-‐fresh category.”

Figure 9. Campbell’s Key Metrics, 2015

Metric Company C-‐Fresh Division C-‐Fresh Division’s Share of Total

Sales (USD Mil.) $8,082 $970 12%

Operating Profit (USD Mil.) $1,327 $53.08 4%

Operating Margin 16% 5% N/A

Source: Company reports/CAGNY February 2016 Conference Transcript/ Fung Global Retail & Technology

Following the acquisition of Bolthouse Farms, Campbell’s revenues rose accordingly, but its net income and operating margins declined before recovering. The company states that the margins of three of its divisions declined due to cost inflation, higher supply chain costs, sales volume decline and the adverse impact of currency movements. The company also noted that Bolthouse Farms contributed to a margin decrease due to a lower gross margin percentage that reflected higher ingredient costs.

Figure 10. Campbell’s Key Metrics: Revenue, Net Income and Operating Margin, FY2011–2015

Source: S&P Capital IQ/company reports/Fung Global Retail & Technology

7,143 7,175 8,052 8,268 8,082

846 783 786 800 831

18.8 18.7

17.3 16.9

17.2

15

16

17

18

19

20

0 1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 9,000

2011 2012 2013 2014 2015

%

USD

Mil.

Total Revenue Net Income Operanng Margin (Right Axis)

Following the acquisition of Bolthouse Farms, Campbell’s revenues rose accordingly, but its net income and operating margins declined before recovering.

14

April 11, 2016


GENERAL MILLS Acquisition of Annie’s Food giant General Mills announced its decision to acquire natural and organic foods maker Annie’s in September 2014. Through an all-‐cash, $820-‐million transaction, Annie’s joined General Mills’ natural and organic products portfolio, which already included the Cascadian Farm, Muir Glen, Lärabar and Food Should Taste Good brands.

This acquisition is not General Mills’ only activity designed to tap demand for more natural foods. At the February CAGNY conference, General Mills COO Jeffrey Harmening outlined the company’s initiatives to strengthen its position in the healthier and organic food segment this year.

Product and Range Initiatives General Mills has also focused on new product development in order to expand its offering in the natural and organic segment:

• It has introduced three new cereal varieties under the Annie’s brand that are certified organic and that do not contain artificial flavors or colors or other synthetic substances.

• It is improving existing products in the snack bar range and growing the range with the introduction of gluten-‐free products.

• Harmening mentioned that “organic is one of the fastest-‐growing yogurt segments today”; the company launched an entry into this segment with Annie’s Yogurt in January 2016.

Marketing Initiatives Lärabar, another brand in General Mills’ organic and natural food portfolio, has posted double-‐digit revenue growth since the company acquired it in 2008. At the CAGNY conference, Harmening stated that the company will make additional investments in marketing Lärabar this year. General Mills also intends to grow the Annie’s brand’s product distribution this year, and will provide more information about its other strategic moves to expand the segment at its Investor Day in July.

Natural and Organic Foods Division’s Performance in FY15 In fiscal 2015, General Mills’ net sales totaled $17.6 billion; its natural and organic foods offering constituted $675 million (3.8%) of these sales. Harmening said that the company aims to reach a sales target of $1 billion in this segment by 2019.

Figure 11. General Mills Natural and Organic Foods Division’s Key Metrics, 2015

Metric Company Natural and

Organic Foods Division

Natural and Organic Foods Division’s Share of Total

Sales (USD Mil.) $17,630 $675 3.8%

Operating Profit (USD Mil.) $3,035 N/A N/A

Operating Margin 17.2% N/A N/A

Source: Company reports/CAGNY February 2016 Conference Transcript/ Fung Global Retail & Technology

General Mills mentioned that “organic is one of the fastest-‐growing yogurt segments today”; the company launched an entry into this segment with Annie’s Yogurt in January 2016.

15

April 11, 2016


General Mills’ revenues and net income have risen following the Annie’s acquisition, as the company has increased the number of products it offers. Its operating margins have mostly been declining slowly due to weakening sales volume in certain product categories, increased input costs and foreign exchange fluctuations, the latter of which mostly affect its international sales.

Figure 12. General Mills Key Metrics: Revenue, Net Income and Operating Margin, FY2011–2015


WHITEWAVE FOODS M&A and product initiatives are not confined to Big Food firms: natural food companies such as WhiteWave Foods have sought to tap market growth with similar moves.

Acquisition of Earthbound Farm WhiteWave Foods, known for manufacturing and selling plant-‐based and natural foods, acquired organic food manufacturer Earthbound Farm for $604 million in 2014. In its announcement conference call, WhiteWave outlined the reasoning for the acquisition and how it would add value to the company: Earthbound Farm, with its 100% organic offering of more than 100 products, would give WhiteWave access to a large customer base. And, in terms of the supply chain, Earthbound Farm had a large, organic-‐certified processing facility that was strategically located near its organic-‐farming base, with a highly experienced management team that knew the business well.

Product and Range Initiatives In its 2016 CAGNY conference presentation, WhiteWave identified key areas for growth and those that had plateaued. Management said that the company has based its product offerings for the year on the historical performance of these categories.

The company has three reportable segments: Americas Foods & Beverages, Americas Fresh Foods (which includes the Earthbound Farm division) and Europe Foods & Beverages. In our discussion and analysis below, we have presented the total figures and those of the Americas segments, as they both include organic and fresh products.

14,880 16,658

17,774 17,910 17,630

1,798 1,567 1,855 1,824 1,221

19.8

18.1 18.1 17.6 17.2

15

16

17

18

19

20

0

5,000

10,000

15,000

20,000

2011 2012 2013 2014 2015

%

USD

Mil.


Earthbound Farm, with its 100% organic offering of more than 100 products, would give WhiteWave access to a large customer base.

16

April 11, 2016


WhiteWave intends to make the following changes, among others, to its American product ranges:

• Yogurt brand Wallaby Organic is leading in the natural category. WhiteWave plans to introduce unsweetened, fruit-‐flavored variations of its organic Greek yogurt.

• Its Horizon Organic brand of dairy products is the largest organic brand in the US in terms of sales, with 2015 figures totaling approximately $838 million. For 2016, WhiteWave has introduced a lactose-‐free version of its dairy beverages and single-‐serve versions of its chocolate milk. It also plans to introduce variations to its cheese products, including cheddar blocks, shapes and slices.

• The Americas Fresh Foods segment, which includes salads, fruit and vegetables, saw a 2% decline from 2014 due to weather-‐related supply variability and disruptions to sales caused by an internal database software change. WhiteWave plans to innovate in this segment by introducing a ready-‐to-‐cook range, a slaw range and a flavored-‐blend range of organic, packaged greens.

Marketing Initiatives The company plans to highlight four key themes—non-‐GMO, no sugar, protein and afternoon pick-‐me-‐up—in its marketing campaigns for the plant-‐based Silk beverage brand. It also plans to introduce new packaging for its dairy-‐based food and beverages.

WhiteWave plans to continue its marketing partnership with the Peanuts franchise; the DVD of The Peanuts Movie was released in March 2016 and the company offers a range of products that have packaging bearing images of characters from the movie.

Americas Foods & Beverages and Americas Fresh Foods Divisions’ Performance in FY15 In fiscal year 2015, WhiteWave reported total revenue of $3,866.3 million, with the Americas Foods & Beverages segment accounting for $2,767.8 million (71.6%) and the Americas Fresh Foods segment accounting for $565.9 million (14.6%). Management projects reported net sales will grow by at least 10%–11% in fiscal year 2016.

Figure 13. WhiteWave Foods Americas Segments’ Key Metrics, 2015

Metric Company Americas Foods

& Beverages Segment

Americas Fresh Foods Segment

Americas Segments’ Combined Total Share

of Company Total

Sales (USD Mil.) $3,866 $2,767.8 $565.9 86.2%

Operating Profit (USD Mil.) $332* $333.9 $25.4 N/A

Operating Margin 8.6% 12.1% 4.5% N/A

*Total operating profit was lower than Americas segments’ combined operating profit due to transaction costs related to acquisitions and purchase accounting adjustments. Source: S&P Capital IQ/company reports/Fung Global Retail & Technology

WhiteWave plans to highlight four key themes—non-‐GMO, no sugar, protein and afternoon pick-‐me-‐up—in its marketing campaigns, in 2016, for the plant-‐based Silk beverage brand.

17

April 11, 2016


WhiteWave’s sales, operating margins and net income have been on an upward trend over the last five years. The company was able to sustain the acquisition of Earthbound Farm without depleting its operating margins possibly because it already had the various business and supply chain elements necessary to run an organic foods operation.

Figure 14. WhiteWave Foods Key Metrics: Revenue, Net Income and Operating Margin, FY2011–2015


WHERE DOES BIG FOOD STAND NOW? KEY TAKEAWAYS

The packaged-‐food industry has seen a seismic shift in consumer-‐buying habits over the last five years:

• Consumers are buying fewer packaged-‐food items that have artificial preservatives and synthetic ingredients.

• While buying packaged food, consumers actively look for ingredients that are natural, and those that they can recognize.

• To address the rise in demand for more natural, healthy and organic foods, the bigger packaged-‐food companies have been taking a range of actions, including acquiring organic and natural food companies.

• Natural and organic food companies have also undertaken M&A and product initiatives of their own to tap market growth.

• M&A has impacted acquiring packaged-‐food companies and organic food companies differently.

As we noted earlier, and as we explore in more detail in a forthcoming report, millennial consumers are driving the demand for healthier foods as well as convenience in grocery shopping. This age group spans 16–36, so many of them are entering their peak earnings years, which will also be their peak spending years.

2,044 2,306

2,542

3,437 3,866

69 104 129 169 201

6.9

7.5 8.2

8.8

9.7

5

6

7

8

9

10

0

1,000

2,000

3,000

4,000

2011 2012 2013 2014 2015

%

USD

Mil.


WhiteWave was able to sustain the acquisition of Earthbound Farm without depleting its operating margins possibly because it already had the various business and supply chain elements necessary to run an organic foods operation.

18

April 11, 2016


As a consequence, the market for healthier yet convenient options is almost certain to see continued growth. So, we expect the world’s biggest food companies to make sustained efforts to tap this demand. M&A and new product development are likely to continue apace. At the same time, the natural and organic food segment is likely to undergo internal consolidation, with M&A playing a big role in helping natural food firms close the scale gap with the conventional Big Food firms.

• For more on millennials’ food-‐shopping trends, please look at our recent report, Millennials and Grocery Shopping: New Priorities, New Preferences.

• And for more on how demand for healthier and more natural foods is impacting US retailers, see our July 2015 report The Middle-‐Aisles Exodus: US Shoppers Flee to Healthier, More Natural Foods.

This age group spans 16–36, so many of them are entering their peak earnings years, which will also be their peak spending years.

19

April 11, 2016


Deborah Weinswig, CPA Managing Director Fung Global Retail & Technology New York: 917.655.6790 Hong Kong: 852.6119.1779 China: 86.186.1420.3016 [email protected] John Mercer Analyst

Swarooprani Muralidhar

Research Assistant

HONG KONG: 10th Floor, LiFung Tower 888 Cheung Sha Wan Road, Kowloon Hong Kong Tel: 852 2300 2470 LONDON: 242-‐246 Marylebone Road London, NW1 6JQ United Kingdom Tel: 44 (0)20 7616 8988 NEW YORK: 1359 Broadway, 9th Floor New York, NY 10018 Tel: 646 839 7017

FBICGROUP.COM

big food’s health kick food...april!11,2016! director,!fung!global!retail!&!technology!!!...

Documents