After a muted 2023 for merger and acquisition activity in the food and beverage industry, dealmaking should rebound throughout 2024. Meanwhile, the industry continues to find ways to navigate a complicated macroeconomic environment and higher costs.

In a recent event hosted by the Food Institute, John Siegler, Head of Food, Consumer and Retail Middle Market M&A, BMO Capital Markets, presented his insights on the M&A market for the industry in 2024. Additionally, I offered my perspective on how the sector is responding to changing economic conditions.

Following is a summary of the event.

Siegler noted that the M&A market in 2023 had its share of headwinds, primarily driven by rising capital costs, which led to an abundance of caution in third-party due diligence. Also, large consumer packaged goods companies focused mostly on bolt-on acquisitions rather than transformational megadeals. For the deals that were made, investors focused on the quality of their targets.

“If you could not convince a potential buyer on your ability to scale, what the execution risks were and how they would be handled, and what additional necessary investments would have to be made, the transaction would be vulnerable in terms of its pricing and valuation,” Siegler said.

All told, food and beverage deal activity fell 13% in 2023, with 39 fewer transactions compared to the prior year. Elevated interest rates and general economic uncertainty drove the hesitancy. Strategic buyers accounted for 78% of deal volume.

But the prospects appear brighter in 2024. As Siegler noted, the abundance of dry powder, strong corporate balance sheets and the anticyclical nature of food and beverage products position the sector for strong M&A activity.

Although strategic buyers are still the most active in the market, Siegler said private equity firms will become more active through 2024. “They have capital to put out and they’ve begun to [invest] in certain areas of consumer products where they want to start rolling up companies,” he said.

While valuation multiples declined across food and beverage subsectors in 2023, Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) in the sector has remained stable. “Over time, if you can be stable like this, it gives you a lot of confidence about the future,” Siegler said.

Another reason for optimism: although pricing for transactions so far this year are down a bit from 2023, average multiples are still in the double digits. “Clearly the cash situation from private equity is very high,” Siegler said. “They are looking for opportunities. They have capital to put to work and they are focusing very much on returns right now.”

The main challenge now is on how the economic environment—particularly inflation—is impacting consumer behavior. While low unemployment has helped fuel strong consumer spending, Siegler said the focus is on where consumers are spending, and how companies can best serve consumer demands.

With that in mind, Siegler said deal activity has shifted to placing more emphasis on the alcoholic and non-alcoholic beverages, as well as confectionary and snacks. At the same time, there’s been a shift away from branded consumer products to private label, co-manufacturing and co-distribution.

“The fact is some people are nervous about investing in brands because of the capital it may take to be successful, so they’ve been investing around the brand,” Siegler said. “People want to control their supply chains, they want to control their manufacturing capabilities, so they develop relationships with co-manufacturers that allow them to do that. Investors like co-manufacturers because they can move in and out of different brands. If one brand fails, they can put another brand in.”

Like investors, banks spent 2023 being more selective in where they deployed capital. Syndicated loan volume declined 20% year over year in 2023. But 2024 began with markets in a much healthier position with more appetite for lending.

Then, the first week of April brought an unwelcome surprise in the form of higher-than-anticipated inflation data,which is changing the outlook on when the Federal Reserve would begin to cut interest rates. BMO economists had been forecasting potentially three rate cuts this year totaling 75 basis points. In light of the continuing inflation concerns, the extent and timing of those cuts are now in doubt.

Along with inflationary pressures, companies are looking for ways to manage higher costs in other areas, including labor and operations, and that’s been driving regional shifts in the food and beverage space. We’ve seen a lot of companies thinking strategically about the location of their businesses. They’re moving from the West Coast to the Southwest and the central U.S. for tax purposes, to tap into new labor pools, and to gain logistics advantages.

Since the pandemic, rising labor costs have been a major contributor to margin compression, and companies are taking steps to offset those costs. That’s why we’re seeing investment in new lines and building more efficient manufacturing plants. Companies are especially looking for ways they can cut costs through investments in robotics or other technologies that can improve efficiency.

While the rest of 2024 will certainly present its share of challenges, the continued resilience and innovation we’ve seen from the companies we serve bodes well for the industry.

Watch the Food Institute recording.