Factors Driving Demand in the Sector
Changes in buying patterns for frozen foods accelerated during the early stages of the pandemic, and they have proven sticky thereafter. These conditions pave the way for continued growth, more mergers and acquisitions (M&A) and further consolidation to scale. Overall, the main drivers of investment interest in frozen food include the following sub-sector attributes:
- Convenience
- Value
- Improved quality and healthier options
- Reduced food waste due to long shelf life
- Higher household penetration
- Increased outsourcing to frozen prepared food suppliers due to rising labor costs
Prior to the COVID-19 pandemic, frozen foods had seen a rise of new activity marked by upgrades to more elevated options. Research and development (R&D) has enabled “cleaner” labels with fewer and more premium ingredients that meet the growing preference for fresh and nutritious meals.
Even as the trend of cocooning at home has waned and more people return to on-site work, retail sales of frozen food have remained above 2019 levels in terms of unit volumes and have grown year-over-year in total dollar value. Pandemic-related factors elevated the baseline level of frozen food consumption and prompted more trial purchases among consumers, which exposed more households to the range of available products.
Price points are another important factor for frozen food companies. Budget and premium products have each grown in the dollar value of sales compared to 2019, and they align with the habits and needs of different buyers. Inflationary pressures have made the combination of value and quality an even greater priority. A study led by the American Frozen Food Institute found a 19.4% increase in spend per buyer during 2021, and 30% of consumers had also increased their freezer capacity since the start of the pandemic.
Growth and wider consumer penetration of frozen foods has occurred alongside innovations in niche eating categories, and a wealth of high-quality options are now available in many freezer sections. In particular, frozen appetizers / snacks and frozen breakfast foods have each enjoyed double-digit growth in the dollar value of sales this year (per SPINS MULO channel data for the 52-week period ending 10/2/22).
Changes in packaging have had an impact as well. The growth in small-batch and mini-sized products helps reduce food waste, which is especially important for older populations on a fixed budget. Due to inflationary pressures, some food suppliers will continue to use smaller packaging sizes to maintain retail price points or mitigate increased costs. Sustainable packaging innovations can also help businesses address their goals for environmental, social and governance (ESG) compliance.
Lincoln Perspective
Deal flow in frozen foods has remained strong since 2017 in both the U.S. and Europe—albeit with a pandemic-related dip in activity in 2020—and it is less dependent on the valuation cycle than other segments. 2022 deal activity has also been impacted by geopolitical tensions and a range of macroeconomic factors. In the U.S. there are multiple deals that could close before the end of 2022, which would put volume on par with pre-pandemic levels. Lincoln International anticipates that 2023 and 2024 will see strong deal activity in the space, particularly as some market players look to exit and capture return on the growth investments made in recent years, such as those to support capacity expansion and automation.
Many frozen food companies have experienced substantial sales growth in recent years, which has helped drive greater efficiencies and economies of scale. The additional scale has also accelerated exit timing for certain sellers. At the same time, growth has pressed some frozen food suppliers against capacity constraints, which will limit their future growth without additional capacity expansion. Those frozen food suppliers that have achieved strong growth and still have ample excess capacity for the future are best positioned to maximize value in a near-term exit.
There are still challenges in the space, but companies that have successfully addressed those challenges will make for especially attractive targets. With the promising M&A outlook for frozen food companies, we highlight some key considerations for prospective buyers:
| Challenges: Most food companies have faced rising costs related to ingredients, transportation, labor, energy use and other factors, which makes managing margins more challenging. However, we have also seen that frozen food companies are able to pass along price increases and offset these rising costs. While supply chain disruption and labor shortages have also impacted product availability, with related challenges in lead times and production capacity, many of those issues stem from transitory conditions that we anticipate will improve over the coming months.
Consolidation and efficiencies at scale: The frozen food space is conducive to growth through acquisitions to help scale market presence. There are multiple privately held target companies that have not yet been acquired, so more opportunities for consolidation exist. Additional investments in capacity expansion will also help scale, and automation will likely be a focus area to streamline operations, reduce exposure to rising labor costs and capture efficiencies. Private equity (PE): PE firms have an opportunity to partner with frozen food companies to help them scale by providing capital for investments in internal resources and infrastructure that can create additional value. Many firms seek category expansion and geographic expansion, with the latter objective taking on even greater importance in Europe. Ideal targets have mature internal capabilities, internal capacity to leverage and strong management teams. The potential for value creation during the hold period makes frozen food a particularly attractive segment. Strategic buyers: Strategics have a healthy appetite for frozen food businesses with significant scale and profitability. Those companies that have promising growth potential, including substantial distribution whitespace and cross-selling opportunities, can make for attractive targets. When a strategic buyer believes they have the ability to meaningfully accelerate a target’s already compelling growth outlook, such targets are of even greater interest. As always, the target needs to align with the strategic buyer’s strategy and priorities. |
Contributors
Meet Professionals with Complementary Expertise
Related Perspectives
Recent Transactions in Consumer
Promising M&A Outlook for Frozen Food Companies
Frozen foods have seen notable growth since 2019 as a result of shifting consumer behavior. Strong sales have enabled more efficiencies at scale, but some companies also face capacity constraints… Read More
Surging Medical Inflation Fuels Continued Interest in Self-Funding and Cost Containment
During the past 18 months, inflation has accelerated to levels not seen since the early 1980s. The cost of energy, food and other staples has increased rapidly and is expected… Read More
Midterm Elections Are Imminent, But Investor Eyes Remain Trained on the Fed and Inflation
The term “uncertainty” has dominated headlines much of this year. Election season exacerbates that sense of uncertainty, leaving investors and company executives to weigh the different scenarios each outcome might… Read More
Software Sector Shows Resilience in Recurring Revenue Financing
Amid recessionary pressures, the software sector has proven resilient with low default rates and healthy cash flows for most companies. Lenders continue to see opportunities with software companies—even those with… Read More
UK M&A: Getting the Deal Done in Challenging Times, Through Value Creation and Due Diligence
Evolving market dynamics and the ever-shifting macroeconomic backdrop present significant challenges, but also opportunities for investors and corporates alike.
Discovering the Investment Opportunity in Pre-Clinical CROs
The process to bring a drug to market is likely to be extensive and costly, from the starting points of research and development (R&D) across all phases of clinical trials… Read More
Outsourced Healthcare Logistics: Ripe for Private Equity Investment
Ample consolidation opportunity for private equity (PE) to capitalize on accelerating healthcare trends and consistent well-above GDP growth rates Favorable market fundamentals supporting the mid-and-long-term outlook for healthcare third-party… Read More
A New Standard for Beauty and Apparel: Inclusive Products and Sustainable Brands
Investor interest in environmental, social and governance (ESG) increases daily. As a result, companies and brands are now being called upon to prioritize ESG activities in an authentic and transparent… Read More
Reality Check: Assessing Private Equity’s 2022 Predictions
In Q4 2021, Lincoln International surveyed nearly 400 private equity investors on their expectations for dealmaking in the year ahead. In the three quarters since, public equity markets have seen… Read More
Lending Opportunities Abound for PE Investments in Digital Infrastructure
COVID-19 flipped the script on infrastructure investments. Lockdowns and travel restrictions have proven certain traditional infrastructure assets, like airports and public transportation hubs, are not always as low-risk an investment… Read More
Facilities & Industrial Services: 2022 Market Perspectives
Long-Term Trends Driving Growth and Underpinning Facilities and Industrial Services M&A Investor interest in facilities and industrial services remains high, given the numerous attractive tailwinds that underpin the sector’s resiliency… Read More
Pet Trends Impacting M&A in 2022
The pet industry has evolved significantly over the past few years with several trends impacting the way pet product brands, manufacturers, retailers, customers and investors view the sector. In 2020,… Read More
M&A Activity in Fire and Life Safety Services Continues to Heat Up
Long-Term Trends Underpinning the Fire and Life Safety Services Industry Amid mounting regulatory oversight and compliance expectations in the fire and life safety services sector, investors are pursuing roll-up strategies.… Read More
Joint Ventures & Partnering: Q&A with Lincoln Directors Emma Blackley and Claire Heuberger
Traditionally, joint ventures and partnering (JV&P) were the preserve of capital-intensive industries such as oil and gas or aerospace and defense. They were also a common mechanism used for expansion… Read More
Lincoln Private Market Index Experiences First Decline Since Q1 2020
Public market volatility driven by heightened recession fears trickled to private market enterprise values in Q2 The Lincoln Private Market Index (Lincoln PMI), the only index that tracks changes in… Read More
All Systems Protected? Cybersecurity Trends in 2022
Accelerated digitalization post-COVID-19, convergence of cyber and military power projection and the increasingly complex threat environment are forcing rapid transformation of the cybersecurity industry. Organizations are hungry to protect systems… Read More
A Deeper Look at the Technical Textiles Market
The technical textile market is one of the fastest growing segments of the overall textile field. The market is sizable at north of $200 billion globally with GDP+ growth rates… Read More
The Evolution of Value Creation for PE Portfolio Companies
Why companies are staying private longer and how they’re evaluating their options How have companies’ timelines to exit evolved in the last two decades? For private companies and their investors,… Read More
Automated Storage and Retrieval Systems – Combining Efficiency, Speed, Accuracy and Safety
E-commerce sales are currently approximately 22% of retail sales and are expected to increase to approximately 30% by 2025.[1] Increasing order volume, combined with an expectation of fast delivery and… Read More
Even as Possible Recession Looms, Prospects for Private Markets Look Strong
It is no secret that public markets are facing notable volatility. But from where I sit in the trenches of private market dealmaking, the near-term prospects for private equity remain… Read More
M&A in Home Furnishings: Q&A with Lincoln Managing Director Tosh Dhanalal
Lincoln International recently welcomed Tosh Dhanalal to the firm as a Managing Director in the Consumer Group. Tosh comes to Lincoln with extensive experience advising founder-led, private equity (PE)-backed and… Read More
Request Form: B2B eCommerce Report
The B2B eCommerce space is growing steadily in India. There are several unicorns and many high quality emerging players addressing different industry segments. Lincoln International presents the industry landscape with… Read More
Investing in U.S. Food Remains Competitive
Financial and strategic investors often mention the competition to acquire a food company. Investors frequently ask Lincoln International for ideas and perspectives on approaching the food mergers and acquisitions (M&A)… Read More
Beauty and Apparel Sectors: Always in Vogue
Beauty and apparel trends are constantly evolving. Yet one constant is the resiliency of both sectors during previous economic downturns. The “lipstick effect,” or notion that consumers will spend on… Read More
Sustainable Energy Investment Trends: Insight from Private Equity
As stakeholder priorities on environmental, social and governance (ESG) continue to crystallize at a rapid pace, investors are often allocating capital aligned with sustainable energy efforts to incorporate more environmental… Read More