How CPGs Are Using M&A To Boost Manufacturing Amid Supply Disruptions

While dealmaking often focuses on food or beverage brands, more companies are buying plants to ramp up production, widen an offering’s reach and lessen dependence on outside manufacturers.

As chocolate and snacking giant Hershey was preparing last year to embark on the purchase of Dot’s Homestyle Pretzels, the $1.2 billion transaction was as much about acquiring the brand as it was the production capability to make it.

The fast-growing Dot’s, founded more than a decade ago, has become the third-largest pretzel brand by market share in the U.S. through the introduction of bold flavors like Southwest and Honey Mustard.

Its expansion, which has come predominantly through word of mouth, was largely concentrated in the Central and Western U.S. Hershey saw an opportunity to broaden the brand’s reach as part of a company-wide effort to increase its presence in salty snacks.

But as Hershey conducted its due diligence on Dot’s ahead of the deal, it discovered the company used a proprietary process to apply its special blend of flavor to the pretzel that the CPG wanted to control in order to grow the brand — especially with the supply chain challenges impacting the U.S. economy.

It was “paramount to the deal that we brought [the brand and the manufacturing capacity] together just given the whole current macroeconomic environment on manufacturing today, labor shortages, supply chain issues that are there,” said Jeff Lilla, Hershey’s vice president of snacks and grocery. “If we want to see a sustainable long-term growth, we need to be able to control end to end and what we make and what we get out to the market.”

The purchase of Dot’s and its co-manufacturer has paid off so far for Hershey. Retail sales have grown about 50% during the past 3 months, with its market share increasing 3.7% over that period, Michele Buck, the company’s CEO, told Wall Street in July.

As companies struggle to keep up with demand while navigating an at-times unpredictable supply chain, many companies such as Nestlé and J.M. Smucker have announced plans to build new facilities costing hundreds of millions of dollars. But the facilities can take up to a few years to get built, a time during which CPGs risk losing out on meeting the growing demand for their products and the sales that come with it.

Instead, many food companies are turning to acquisitions of existing plants as a faster way to ramp up production or widen a brand’s reach. Buying manufacturing capacity — either separate or as part of a product acquisition like Hershey did with Dot’s — can make sense for a variety of other reasons, too.

“The challenge is everybody [who has a plant to sell] realizes they’re sitting on gold right now. If it was out there, someone would be buying it.”

Vice president, foodservice marketing, Hormel Foods

Purchasing a plant can allow the company to keep proprietary information close, or that would be complicated to put in place with a co-manufacturer through education or equipment. It also can accelerate product innovation, improve margins, provide a safe place to put money to work and lessen the dependence on the supply chain, which in the current climate can be unreliable or overworked.

Hormel Foods, the Minnesota-based producer of Skippy peanut butter, Planters nuts and Jennie-O turkeys, is on the lookout for additional manufacturing capacity, said Annemarie Vaupel, vice president of foodservice marketing. The problem: so are other many food producers.

“The challenge is everybody [who has a plant to sell] realizes they’re sitting on gold right now,” Vaupel said on the sidelines of the National Restaurant Association Show in Chicago in May. “If it was out there, someone would be buying it.”

When Hormel dolled out $3.35 billion to purchase Planters from Kraft Heinz last summer, not only did the Minnesota company acquire a food portfolio that included the iconic nut offering, but it also inherited three valuable production facilities in California, Arkansas and Virginia.

These plants were invaluable because Planters uses a unique manufacturing process and equipment to package the nuts into plastic bottles, tubes and pouches that were not used anywhere else in Hormel’s portfolio, Vaupel noted. Without these assets, Hormel would have had to go buy the machinery or find a copacker to make the product and package it.

“That’s a distraction from making a purchase and then hitting the ground running. It would have taken us a long time to deliver the [return on investment] on this,” Vaupel said. “These plant assets were a pretty critical part of the whole purpose for buying the brand, which was to grow it.”

Brian Choi, CEO of The Food Institute, a food industry media and market research company, agreed that much of the “low-hanging fruit” has been acquired when it comes to plants. Still, he said for companies rich in cash and desperate to meet soaring demand, they may have to pay up and meet a buyer’s asking price.

“They’re left with no choice but to acquire because to build a facility just takes too much time,” Choi said. “It’s going to make these types of assets even more attractive even as people are thinking this might be a short-term recession over the next six to 12 months.”

It wasn’t all that long ago that CPGs were distancing themselves from manufacturing.

Companies were divesting factories as part of an asset-light model that allowed them to focus their attention on innovating and finding ways to keep existing products relevant to consumers. They didn’t want to divert their attention to issues that come with keeping a plant running like repairing equipment, managing overhead or finding and training workers, said Henk Hartong III, chairman and CEO of Brynwood Partners, the private equity owner of SunnyD beverages, Buitoni pasta and Juicy Juice.

In a dramatic shift, several companies today are now turning to M&A to add extra capacity for brands they had previously acquired.

Utz Brands bought Festida Foods, the largest manufacturer of tortilla chips for the snack maker’s On The Border brand, for $41 million last year. Utz said the acquisition would improve the supply chain for On The Border, a brand it had purchased six months before, and increase the company’s ability to expand the geographic presence of the product and others in its portfolio throughout the Midwest.

In May, B&G Foods acquired the frozen vegetable manufacturing operations of Growers Express, a manufacturer, producer, packager and seller of frozen vegetable products, primarily under the Green Giant brand.

“By increasing the variety and volume of Green Giant frozen vegetable products produced at internal manufacturing facilities, we expect to reduce inefficiencies, reduce costs and reduce supply chain risk for certain Green Giant frozen products,” B&G CEO Casey Keller said in a statement. “This acquisition will enhance our innovation efforts for the Green Giant brand and improve our speed to market for new innovation.”

Erin Lash, a director of consumer equity research at Morningstar, said while acquiring existing assets rather than building them from the ground up can generally pay off for the buyer, it’s not without risk.

The acquirer needs to carefully gauge whether the facility is efficient, uses up-to-date technology and won’t require a significant investment to make improvements once it’s purchased. A buyer also needs to ensure the demand for the products it will be manufacturing will still be there well into the future to justify the price tag.

“Adding capacity for certain brands or businesses makes sense to the extent that they have staying power,” Lash said. “But to the extent that volumes are going to recede, does a firm potentially put themselves in a position where they’ve burdened themselves with excess capacity?”

At Brynwood Partners, owning the manufacturing capacity is key to its business strategy of buying an underperforming asset from a large CPG and then jump-starting sales by changing the product's packaging, pricing or marketing.

CEO Hartong said it’s much easier to do that on your own rather than with a co-manufacturer where you are dependent on how fast they move, their willingness to invest in new technology, the quality of their work and how much capacity they have to take on additional work. If any of these become problematic, it can reflect badly on the brand, slow the turnaround and ultimately lead to frustration with retailers.

“You’re making excuses for something you can’t control,” Hartong said. “But retailers don’t really care about excuses at that point. ... If the shelves are empty, then they’ll find someone else to replace them.”

He recalled that when Brynwood purchased the Pillsbury brand from J.M. Smucker in 2018, the manufacturing of its gluten-free cake mixes and brownies by a third party was “completely unreliable” and his firm was constantly explaining to customers why their shipments were being delayed. Brynwood decided to build its own plant for gluten-free products and since then, “service levels have been impeccable,” he said.

“Now, if there’s something that goes wrong with product availability we have ourselves to blame. You can’t blame it on somebody else,” Hartong admitted.

An estimated 95% of the $2 billion in sales from food and beverage products owned by his private equity are made in-house, he said.

For Eat Just, a co-packer’s unreliability led the plant-based food company to bring manufacturing in house. The proprietary process it uses to get the protein to make its plant-based eggs is complex and if not done properly, can lead to a mushy product that risks turning off consumers. Initially, Eat Just used a co-manufacturer but it found the results inconsistent, with even the slightest change altering the final product.

CEO Josh Tetrick and his team quickly decided that if they wanted to grow the brand and attract more shoppers, they needed to control this part of the process. The answer, Eat Just discovered, was in plain sight.

In 2019, it bought its Minnesota-based co-manufacturer where it had immediate familiarity with the company, its 45 workers and the small rural town in which they lived. The fortuitous purchase has paid off today, with the company less dependent on supply chain disruptions or unpredictability from an overworked and understaffed partner, Tetrick said.

“There are obviously cons to running a facility. There are more things on your to-do list. You’re worrying about more things,” Tetrick said. “But we can’t afford disruptions at all. We have to keep running at full speed, at full capacity.”

Three years later, Tetrick said there is little doubt Eat Just is in better shape than it would have been without the acquisition.

Eat Just’s eggs likely taste better and have a superior consistency, he said. It’s not only allowed the company to produce a more enjoyable product, but also make enough of it to meet growing demand — all while lowering the cost to get it on par with premium chicken eggs. Higher prices for plant-based foods across the industry as a whole often are a deterrent in getting consumers to switch from animal-based options.

Today, Eat Just’s products are found in more than 2 million households and the company said it dominates the plant-based egg market in the U.S. with 99% share.

“If we didn’t control [the process by purchasing this plant], the quality would be worse ... and the business would be a lot worse off for it,” Tetrick said.

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