Why companies are leaving low-growth food: summary
- Large companies are divesting food units amid low growth and volatility
- Capital is shifting to higher margin sectors, like beauty and care
- Food faces pressures from climate volatility, supply chains, regulation and consumers
- Growth remains in premium differentiated foods, nutrition and specialised ingredient segments
- Portfolio polarisation is splitting commoditised food businesses from higher value segments
Big businesses are shedding their food segments.
UK multinational Unilever recently announced that it planned to merge its foods businesses with US giant McCormick, excluding India. The deal, which has been controversial among investors, would mean that Unilever would have almost no food businesses to its name.
Meanwhile, ingredients giant IFF is planning to divest 90% of its food business to CVC Capital Partners, a Jersey-based private equity firm.
Food appears to be increasingly viewed as less attractive for large companies.
Why is big business shedding food?
So is big business done with food?
The short answer is ‘no’. Food will always be a crucial part of the business landscape.
“Food remains a very large, resilient and strategically important consumer market,” says Nandini Roy Choudhury, principal consultant at food and beverage analytics group, Future Market Insights.
The real story is that businesses are increasingly moving away from a certain type of food business.
Many food portfolios are operationally complex and growing slowly, Choudhury explains. Large companies are being more selective, choosing categories associated with health, premiumisation, convenience and specialist technology whilst separating those that rely on scale, incremental brand renovation and manufacturing efficiency.
Big food companies also have many challenges to deal with today that they once did not, says Kate Cawley, founder and managing director of industry association, Future Food Movement. Factors such as climate volatility, health challenges, supply chain fragility, regulatory scrutiny and changing consumer expectations exert pressure on these companies.
Exposure to these factors makes food a less attractive sector than it once was.
Food businesses struggle with margins
While food is not an inherently low-margin business, some food categories do struggle from a margin perspective, says Future Market Insights’ Choudhury.
For example, commodity ingredients, basic food manufacturing and heavily retailer-dependent packaged foods often face substantial pressure. The volatility of agricultural inputs and energy prices, as well as factors like manufacturing complexity, negotiation with retailers, and even transportation and refrigeration, can all affect profitability.
Passing costs on to consumers is becoming more difficult because they remain price-sensitive. Private label products are also improving, providing stiff competition.
Furthermore, larger brands must often spend a lot on promotions, advertising and packaging renovation to defend market share.
In comparison, beauty and personal care, with their higher gross margins and better pricing flexibility, look more attractive to many businesses.
Nevertheless, some areas, including branded spices and seasonings, premium sauces, flavours, speciality ingredients, clinically supported nutrition, sports nutrition and differentiated functional products can produce good margins, Choudhury says.
Businesses in these areas derive value from proprietary tech, customer relationships, brand equity and formulation. They are less dependent on the underlying cost of agricultural inputs.
“The more commoditised a food business is, the more its margins depend on procurement and operating efficiency,” says Choudhury. The more differentiated it is, the more it can price according to the value it provides.”
Why are Unilever and IFF moving away from food?
Companies such as Unilever and IFF are “concentrating capital behind businesses that offer stronger growth prospects, higher margins or a clearer story for investors,” says Future Food Movement’s Cawley.
For Unilever, explains Choudhury, food does not align with the wider business, which is increasingly focused on beauty, skincare, supplements and personal care. McCormick is seen as a more suitable home for Unilever’s food brands, which, she stresses, are still doing well.
For IFF, the transaction is more about portfolio simplification, with its food segments often more asset-intensive and with lower margins than its businesses in flavours, fragrances and biosciences.
“In both cases,” says Choudhury, “management is asking the same question: is this business merely large or does it improve the growth, margins and strategic coherence of the wider group?”
The wider trend
Unilever and IFF’s transactions are part of a wider trend, believes Cawley. Nonetheless, she says, “I wouldn’t describe it as capital leaving food altogether – more, perhaps, capital is becoming more selective.”
Big business isn’t leaving food as a whole behind. Rather, it is reorienting towards areas of food that it sees as having more growth potential. The segments that continue to attract investment are those that can demonstrate a clear role in the future of food.
The trend that can be seen here is “portfolio polarisation”, says Choudhury.
Businesses are dividing portfolios into two groups. On the one hand are “mature, operationally intensive businesses with limited volume growth and significant exposure to agricultural commodities, retailers and private-label competition”. Such businesses are more vulnerable to being sold or separated.
On the other are those with “strong exposure to health, functionality, convenience, premiumisation or proprietary technology”, she says. These continue to attract investment, frequently getting high valuations.
Recent transactions show that businesses are divesting the first kind, says Choudhury, whilst acquiring the second. On the one side are transactions like Unilever’s demerger; on the other, Lactalis is acquiring Protein Works and Nestlé the remainder of German meal replacement brand Yfood.
“Capital is moving from conventional categories into food propositions that can deliver faster growth or stronger consumer relevance”, says Choudhury.
While big business isn’t done with food, it is moving towards higher-margin food segments that are less exposed to volatility from energy costs and commodity prices.
