A healthy outlook for 2020
Over the last few years, Australian consumers have demonstrated a growing interest in health and wellness, resulting in an uptake of demand for “healthy” food and beverage brands in the market.
In 2016, market research by IBISWorld valued Australia’s organic industry at $919 million and predicted it could be worth $1.2 billion by 2022. In the last three years, the nation’s organic industry has grown so rapidly that, according to the Australian Organic Market 2019 Report, the industry is now worth $2.6 billion. This is already more than double IBISWorld’s predicted value for 2022, demonstrating the strength of Australian demand in this sector.
Health and wellness has become one of the fastest-growing food and beverage categories, and new products are emerging all the time.
Growth of plant-based meat market
The emerging plant-based meat market is a good example of rapid market response to growing consumer demand, in this case for what are perceived to be healthy alternatives to red meat. New market research from Food Frontiers revealed that more than 30 per cent of Australian consumers are decreasing their consumption of conventional meat. Restaurants, supermarkets and even traditionally meat-driven fast food chains such as Hungry Jack’s and Grill’d, now offer alternative meat options.
The report finds that the plant-based meat sector currently generates almost $30 million in economic value and $150 million a year in consumer expenditure, and is expected to reach $1.1 billion in value in the next decade. That’s a big opportunity for companies that are investing in this sector.
Businesses leveraging this trend are those that are pitching to the whole meat market and whose brands are positioned as healthier than red meat. There is still a degree of time for this to play out.
Consumers should remain cautious as to whether some of the plant-based “meat” products are as healthy as red meat given its saturated fat and sodium content, and the levels of refinement and processing involved. Brands that can gain trust with customers around these key health points are those that have been and will be successful.
There is no denying the demand for the sector from an M&A perspective and there have been several high-profile investments in plant-based products including: Bill Gates’ investment in Impossible Foods, the creator of “The Impossible Burger”; Sergey Brin’s (co-founder of Google) investment in Mosa Meat, which is developing a lab-grown hamburger; the initial public offering of Beyond Meat; and in Australia, the launch of v2food, a plant-based meat start-up formed by CSIRO’s Innovation Fund.
Multinationals and their approach to the emerging health market
While large multinationals in the food industry were traditionally accustomed to meeting consumer appetite for “junk food”, they are now looking to capitalise on the shift to healthy products by diversifying their product range.
To stay relevant with consumers, the food and beverage groups at the top end of town are increasingly acquiring healthier, home-grown brands positioned as “better for you”.
We have seen this through Coca-Cola’s 2018 acquisition of local South Australian brand, Organic & Raw Trading Co., which makes the MOJO brand of organic kombucha. This acquisition resulted in the expansion of MOJO’s distribution from around 4000 retail outlets – mainly health-food stores and organic markets – to more than 100,000 outlets around Australia.
Only six months after this deal came Lion Dairy & Drinks’ acquisition of a minority stake in Australia’s largest kombucha maker, Remedy Kombucha. As of late 2018, the kombucha industry in Australia had an estimated value of $200 million.
Meanwhile The Foundry, an investment firm founded by former owners of Swisse Wellness, recently acquired a minority stake in WelleCo, a plant-based supplement business founded by Elle MacPherson and others.
For the “big guys”, buying smaller brands provides quick access to market share in the health and wellness sector and increases their competitive advantage. Conversely, the smaller health brands being acquired gain immediate access to scale in distribution, a larger market and capital resources to support their rapid growth.
Are smaller companies ready to sell?
Looking into the future, an economic analysis by the CSIRO finds that Australian demand for healthy lifestyles could be worth up to $25 billion and make up about 10 per cent of the food and agribusiness sector by value, by the end of the next decade.
With this outlook, we can expect to see more transactions between corporate groups and independent, fast-growing brands.
For the businesses being acquired, the question becomes, are they positioned to sell for the maximum price when the time comes? In the last 12 to 24 months, we have seen several vendors face value erosion because they haven’t stepped back to look at their business “through the eyes of a buyer” before going to market.
There are some key tips that smaller businesses should consider when approaching a transaction to ensure they are ready, appear attractive to a buyer, and carry a high valuation:
- Fiercely protect your brand. It is often the most valuable asset and you need to be clear on who owns it and why it is valuable to someone else.
- Where possible, invest in people, systems and processes so the business is ready for the next phase of growth, rather than playing catch-up.
- Reduce reliance on (i) key business partners i.e. diversified customer and supplier base; and (ii) key people in your organisation – have a succession plan in place.
- Be prepared for a “knock on the door” from a potential purchaser, by doing the seemingly boring things with precision. Clear and meaningful financial information, properly documented contractual relationships and efficient legal, tax and operational structures can be lost in the day-to-day of running a business, but are key areas of value erosion that can appear in due diligence.
- Of course, improve profitability, cash conversion and reduce debt levels.
My advice to business owners geared to the health and wellness segment who may be contemplating a sale is to obtain quality advice at the outset. Urgent sales can be successful but the overwhelming evidence from my experience is that great outcomes come from great planning and preparation, which could take six to 12 months before you even “go to market”. It is critical to evaluate operations and financials constantly, so that if and when an opportunity presents itself, owners are ready to respond and achieve an outcome that maximises value.
David Barnaby is a partner at McGrathNicol Advisory.