When to Grow, When to Sell

Sept. 1, 2015

The food industry is awash with entrepreneurs with new ideas and different products. As they nurture their start-up companies, many wonder when and if they should sell their enterprises to larger manufacturers.

Given the dominance of multi-billion-dollar corporations, it’s tempting to write off the food industry as another corporate oligarchy, where a handful of companies dominate and small firms compete for the few remaining scraps.

Mercifully, that’s not the reality. True, a few players may claim the majority of sales in any given category, but there’s usually plenty of growth opportunity for nimble start-ups and feisty family firms that can react to shifting popular tastes and offer something a little different. The beer segment is an example: three brewers account for four-fifths of U.S. sales, but growth and excitement belongs to the thousands of small brewers and brewpubs who claim most of the rest and, more importantly, post year-over-year sales increases in the double digits.

Today’s craft beers enjoy mass appeal, but that wasn’t always the case. Most of the start-ups from 20 or 30 years ago are no longer around because they couldn’t crack indifferent distributors that couldn’t be bothered with them. The same roadblock confronts pioneers in today’s natural and organic, vegan friendly and GMO-free space. For every Amy’s frozen entrée success story, there are thousands of failed attempts to find space in the freezers of major retailers.

That reality isn’t lost on food companies in the free-from and better-for-you space. Store shelves represent some of the most expensive real estate in America. No matter how well received their products are, these firms reach a point where they either need the safe harbor of a large corporate parent or they have to become Big Food themselves, suggests Joel Warady, chief sales & marketing officer at Enjoy Life Foods in suburban Chicago. Decision time arrives around the $300 million sales mark: after that, the supply-chain leverage, capital access and other strengths of large organizations are needed. The options are be acquired or start acquiring, just as the Hain Celestial Group did on the road to becoming a multi-billion corporation.

Enjoy Life reached its buy-or-sell crossroad considerably before the $300 million mark. After launching a dozen gluten-free baked goods in 2002, Enjoy Life grew to 41 products and $45 million sales by the time Mondelez International acquired it in February. Internet retailers and mail order sales still are keys to Enjoy’s distribution, but mainstream retailers likely will be a bigger part of the mix going forward.

“Our approach pre-acquisition was to focus on the consumer, build our customer base and share our story,” recalls Warady. “We felt the world would find us, and it did.” Product innovation and speed to market are a start-up firm’s advantages, but understanding its customers may be even more important. “I put my mobile phone number out there because I want people to call me directly, not go through a consumer line and several other layers before reaching me,” he says.

That kind of customer connection was a big part of Enjoy’s appeal, and Mondelez management is giving the Enjoy team enough slack to maintain that connection. “Smaller companies are absolutely capturing consumer dollars because they are in tune with people’s needs, they’re transparent and they’re committed to making good tasting, safe products,” adds Warady.

General Mills is another Big Food player that’s being careful not to drown the New Food baby it bought: it paid a four-times multiple of sales in September when it acquired Annie’s Inc, the $204 million natural and organic processor. Now it’s backing new ventures like Annie’s entry into the organic soup business.

“Big Food can win when it acquires smaller, nimble companies that understand their consumers,” concludes Warady. Reallocating capital away from dwindling brands like Green Giant and toward those nimble innovators is a better route to remaining big than a cost-cutting strategy aimed at short-term margin gain.