2021 saw M&A in the food and drink industry bounce back from a tumultuous 2020 laden with supply chain issues, challenges from Brexit, and workforce disruption. According to findings by commercial law firm EMW, the value of M&A deals for UK food and drink companies jumped 950% to £4.5 billion in 2021, up from £430 million the previous year. Interest from private equity helped drive the rise in M&A. In total, 24 UK deals in 2021 were PE backed, making up 42% of M&A deals in the sector. This is up from 31% in the previous year.
Whilst plant-based, free-from and sustainable food and drink have been upward trending for the past few years, it is now clear that they are entering a new stage of growth, with M&A transactions rocketing in the last year. Investments in the ‘low and no’ alcohol and premium soft drinks market also continue to thrive; consumption of these is currently forecast to grow 31% by 2024. And across all subsectors, transactions in healthier and low sugar options continue to rise as trends point towards healthier food and drink options being more attractive to consumers. This is mirrored by a decline in food-to-go, confectionery and frozen foods transactions.
You need only visit the seasonal aisle of your local supermarket to see that vegan easter eggs and sugar-free chocolate are the big trends this Easter, and initial market data is also signaling this. According to research by B2B online marketplace ShelfNow, online searches for ‘vegan easter eggs’ in the UK rose by 79% between 2020 and 2021, while online searches for ‘sugar-free’ reached their highest point in the last five years. To this end, the UK has launched the largest number of food and drink products with a ‘no added sugar’ label in Europe.
Sustainability in food and drink is also catching our attention, with demand for British produce and environmentally-friendly products on the rise. The emerging agritech subsector is booming, with new investment in the global market receiving a record $10.5 billion injection. The UK continues to lead the way in Europe, with the 2021 AgriFoodTech Investment Report outlining $1.1 billion of investment and 164 deals recorded in 2020.
This could be explained by private equity’s spiked interest in environmental, social and governance (ESG) issues over recent years, as investors increasingly acknowledge the role such factors play in influencing M&A decision making. There is now widespread recognition in the investor community that ESG considerations continue to move from after-thought to essential hygiene factor. There is certainly a recognition that investment should align with an organisation’s embodied values. We witnessed this in action recently when many businesses ceased operations in Russia following its invasion of Ukraine. Furthermore, the adoption of a formal ESG strategy is increasingly seen by some investors as a value-creation mechanism. Shifts in mindset like this are closing the gap between the corporate treatment of ESG and its standing within the investor community. With organisations returning to growth mode, we expect the role of ESG to continue to increase at pace.
The Covid-19 pandemic has altered the government’s approach to addressing obesity. As part of the Obesity Strategy, the government will introduce a ban on advertising foods high in fat, sugar or salt (HFSS) on TV before 9pm and a total ban on online advertising. Restrictions on the placement and promotion of HFSS products in stores will also be introduced. With the spotlight growing on childhood obesity, these issues are firmly set in the political landscape.
Similarly, the government has outlined proposals for reducing plastic waste in England, which will impact food and drink packaging. Plans include banning certain products, a new Deposit Return Scheme for drinks bottles and an enhanced producer responsibility regime to incentivise a reduction in plastic packaging. The Plastic Packaging Tax came into effect on 1 April 2022, introducing a levy on plastic products containing less than 30% recycled plastic content. As this regulatory direction of travel continues, under mounting public pressure and in light of increasingly disturbing IPCC climate reports, investors should expect regulations to become increasingly restrictive.
Investors should also expect the rising prices of energy and raw materials to be a significant issue in 2022. Russia’s invasion of Ukraine and the subsequent sanctions, trade restrictions and supply chain disruption are likely to translate into rises in food prices and temporary shortages, according to the Food and Drink Federation. We saw global wheat prices spike at over 80% higher than last year, while sunflower oil becomes rapidly scarce. Global transport problems and workforce shortages will also continue to be disruptive to the industry and full custom controls introduced for goods moving between the EU and UK are causing headaches for food and drink importers.
We expect private equity to capitalise on this in the coming year. Plant-based, free-from, low sugar, healthy food and drink with a low environmental footprint is likely to bear the most fruit, and that should give investors plenty of food for thought this Easter weekend.
To discuss the government’s current approach to food and drink regulation, please email Thea Southwell Reeves on firstname.lastname@example.org.