6 reasons why Private Equity firms are investing in F&B
The restaurant industry is a hundred-billion-dollar industry.
According to Crunchbase – a platform for finding business information about private and public companies, 388 organizations have a funding status of Private Equity (PE) within the Food and Beverage (F&B) sector.
In addition to that, as many as 40% or more of the largest restaurant franchisees have private-equity ownership.
PE activity continues to flourish in the F&B sector as F&B brands are looking out to expand into new markets, roll out the prototypes they have been dreaming of, or deploy new technology to make it even easier for diners to get their food.
A large market that’s getting organized and moving towards higher value-added products has sparked investor interest in the F&B space where there’s rising demand for better, healthier, affordable and easy to access products, paving the way for entrepreneurs to jump in and build next generation brands.
Here are a 6 detailed reasons why PE firms are going for F&B sector investments:
Recession Proof
The F&B sector does appear to have been somewhat recession-proof amid the global economic downturn of recent years – be it the recent COVID-19 pandemic, or the financial crisis of 2008. This durability, set alongside a gradual but definite shift in eating and drinking habits, has led to the F&B sector being singled out as having huge growth potential, stimulating the appetite of PE investors interested in doing deals.
Which resulted in an unprecedented influx of $11.6 billion in the first three quarters of 2020.
As per Grant Thornton’s F&B insights round up – The second quarter of 2020 year saw 27 deals announced.
Total disclosed deal value for Q2 2020 was £2 billion across 11 deals with publicly disclosed values. This 578% increase on Q1 was propped up by two large deals with the combined value of £1.6 billion.
Food Tech
Food tech is getting attention as entrepreneurs try to replicate models of global comparisons and are imposing generous valuations as people try to build a business that can dominate in the long run. The drive to augment processing levels through Industry 4.0 is playing a major role in elevating the manufacturing as well as supply chain landscape in the F&B sector. By usage of technologies including the Internet of Things (IoT), Blockchain, Predictive Analytics, the sector is expected to witness a radical shift. The complete ecosystem is expected to evolve from being a linear model to a more complex dynamic chain with multiple inter-linkages enabled by technology interventions.
Ripe for Investments
The F&B sector is relatively safe to invest in compared to other sectors. Investments are comforted by steady growth and a sector that is familiar and accessible, given that everyone is a consumer. The market remains very fragmented so there are opportunities for investment and consolidation, which is particularly attractive to PE investors seeking a suitable platform for buy-and-build strategies.
F&B – Operationally intensive business
F&B is an operationally intensive restaurant business. Hence, keeping up product and service levels day in and out year after year is tough. However, if a brand can deliver this, then the returns are as good as or better than investments in any other sector.
Fundamental Need that is evolving
Interest amongst the PE investors remains strong because the F&B industry is also subject to changing consumer trends – a fundamental need which is also evolving and that creates opportunities to generate value.
The difference between now and 10 years ago is the emergence of a new consuming class of Millennials who consume more aggressively and eat out of both habit and need.
Being a lot more technology-friendly paired with their drive for equality and sustainability, they are embracing free-from segments (non-genetically modified, organic, and gluten-free), which collectively have a projected growth rate at a CAGR of 21 percent over the next five years.
Over the coming years, premium dining will expand to multiple non-metro towns too.
Valuable Investment
According to Deloitte’s Decoding the formula for superior performance of the Food & Beverage Industry, while faced between offering a better product or a cheaper product, leading F&B brands prioritize increasing value over reducing prices, by offering superior non-price benefits such as a great brand, an exciting style or packaging, by offering a niche product, or by focusing on sustainability. This in turns makes the PE investments in F&B valuable.
Owing to the relative safety of investing in the sector, and the significant investment opportunities available, interest in the F&B sector is expected to remain strong in the coming years, as an attractive proposition for PE investors.
