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WINTER 2017<br />
THE RISE OF A NEW FOOD INDUSTRY MANDATE:<br />
<strong>Trust</strong>, <strong>Truth</strong> <strong>and</strong> <strong>Transparency</strong><br />
HeadwatersMB.com
Many concerns are weighing heavily on the minds <strong>and</strong> hearts of<br />
consumers today, <strong>and</strong> among them are the availability of healthy<br />
foods <strong>and</strong> the impact food has on their health <strong>and</strong> wellbeing. In this<br />
environment, one concern has surged in importance – the dem<strong>and</strong> for<br />
greater transparency from food companies.<br />
Today’s food industry is in the midst of an extraordinary revolution that is as disruptive as it is dynamic.<br />
As outlooks <strong>and</strong> lifestyles veer further away from questionable diets <strong>and</strong> unrealistic weight-loss fads,<br />
consumers have become increasingly aware of the importance of transparency <strong>and</strong> the food choices they<br />
<strong>and</strong> their families are making.<br />
Consumer priorities now range from clean eating <strong>and</strong> labeling to farming, processing <strong>and</strong> sourcing<br />
practices, as well as the humane treatment of animals. Additional influences that are awakening new<br />
consumer values include the mounting distrust of legacy Big Food companies <strong>and</strong> the importance of<br />
serving as citizens of the planet. The cumulative effect is a measurable <strong>and</strong> unmistakable impact on the<br />
dem<strong>and</strong> for healthy food products, <strong>and</strong> changing consumer shopping behaviors <strong>and</strong> purchase decisions:<br />
• Nearly all consumers (94 percent) believe it is important that the br<strong>and</strong>s <strong>and</strong> manufacturers they<br />
purchase products from are transparent about what is in their food <strong>and</strong> how it is made. 1<br />
• Only 12 percent of consumers rank br<strong>and</strong>s as<br />
their most trusted source of food-ingredient<br />
information. Yet, nearly 70 percent believe<br />
the br<strong>and</strong> or manufacturer is responsible<br />
for providing consumers with ingredient<br />
information. 2<br />
• Sixty-five percent of consumers purchased<br />
goods or services from socially responsible<br />
br<strong>and</strong>s in the past 12 months. Additionally, 32<br />
percent are planning to spend more with socially<br />
responsible br<strong>and</strong>s in 2016, including 41 percent<br />
of 18- to 24-year-olds <strong>and</strong> 38 percent of 25- to<br />
34-year-olds. 3<br />
“Today’s food industry is in the midst<br />
of an extraordinary revolution that is as<br />
disruptive as it is dynamic. As outlooks<br />
<strong>and</strong> lifestyles veer further away from<br />
questionable diets <strong>and</strong> unrealistic weightloss<br />
fads, consumers have become<br />
increasingly aware of the importance of<br />
transparency <strong>and</strong> the food choices they<br />
<strong>and</strong> their families are making.”<br />
– BILL HARRISON, MANAGING DIRECTOR,<br />
HEAD OF CONSUMER INVESTMENT BANKING,<br />
HEADWATERS MB<br />
Food companies large <strong>and</strong> small that recognize <strong>and</strong><br />
support consumers’ priorities can win their longterm<br />
loyalty <strong>and</strong> capitalize on the competitive advantages of consumer-focused business strategies <strong>and</strong><br />
leadership. They also have a genuine opportunity to become part of the massive consumer shift that is<br />
dramatically transforming the food industry <strong>and</strong> ultimately, br<strong>and</strong> performance <strong>and</strong> marketplace position.<br />
THE RISE OF A NEW FOOD INDUSTRY MANDATE: TRUST, TRUTH AND TRANSPARENCY | 1
Road to <strong>Transparency</strong><br />
Authenticity, sustainability <strong>and</strong> transparency have never been more important for<br />
consumers <strong>and</strong> for the food br<strong>and</strong>s they look to when making purchase decisions across<br />
product categories.<br />
As these priorities have become more strongly embraced<br />
by mainstream consumers, the dem<strong>and</strong> for <strong>and</strong> sales of<br />
healthy products have climbed to record levels.<br />
a number of industry studies indicates that consumer<br />
concern regarding food consumption spans age<br />
brackets, geographic regions <strong>and</strong> income levels.<br />
In a recent Acosta survey, The Why? Behind the Dine,<br />
US diners affirmed the importance of feeling good<br />
about the food they are eating.<br />
These widespread consumer attitudes <strong>and</strong> behaviors<br />
have transformed a once niche advocacy group into<br />
a powerful marketplace force that dem<strong>and</strong>s food<br />
companies offer not only healthy products but also<br />
product <strong>and</strong> process transparency. Also, while in many<br />
cases Millennial voices are resonating strongest when<br />
proclaiming their food-related positions <strong>and</strong> opinions,<br />
“Forty percent of consumers believe<br />
the food system is headed in the right<br />
direction, up from 30 percent in 2012.<br />
Those who believe the food system is<br />
on the wrong track has dropped by 11<br />
percent in the last two years.”<br />
– A CLEAR VIEW OF TRANSPARENCY AND HOW IT<br />
BUILDS CONSUMER TRUST (2015), THE CENTER FOR<br />
FOOD INTEGRITY (CFI)<br />
% US DINERS – EATING HEALTHY ATTITUDES<br />
Thinking about the last year, please indicate how much you agree with each of the following statements.<br />
(% Agree Strongly/Agree)<br />
It’s important for me to feel good about<br />
the food I’m putting into my body<br />
65%<br />
I actively seek out nutritious<br />
foods that are good for me<br />
I usually look for healthy options<br />
when ordering at restaurants<br />
I’m very health conscious<br />
I’m eating smaller portions than<br />
I was last year<br />
I eat healthy meals, even though they<br />
may be more expensive<br />
I’d like to eat healthier, but I can’t afford it<br />
49%<br />
47%<br />
45%<br />
43%<br />
37%<br />
31%<br />
Source: The Why? Behind the Dine (2nd edition), Acosta<br />
2 | THE RISE OF A NEW FOOD INDUSTRY MANDATE: TRUST, TRUTH AND TRANSPARENCY
A 2015 Deloitte survey, Capitalizing on the Shifting<br />
Consumer Food Value Equation, analyzes both<br />
Traditional <strong>and</strong> Evolving drivers of consumer behavior.<br />
Traditional drivers include taste, price <strong>and</strong> convenience,<br />
while Evolving drivers focus on health <strong>and</strong> wellness,<br />
safety, social impact, <strong>and</strong> transparency.<br />
The survey shows that approximately one-half of<br />
consumers weigh Evolving drivers more heavily than<br />
Traditional drivers. It also reveals that Evolving drivers,<br />
when compared with Traditional drivers, equally<br />
represent geographic regions (Midwest, Northeast,<br />
South <strong>and</strong> West), ages (18 to 34, 35 to 49 <strong>and</strong> 50 to 80)<br />
<strong>and</strong> annual income brackets (less than $25K, $25K to<br />
$75K, more than $75K to $100K <strong>and</strong> more than $100K).<br />
Notably, the survey found slightly higher Evolving-driver<br />
levels among survey participants located in the West<br />
<strong>and</strong> earning more than $100,000 per year.<br />
The diverse consumer demographic uncovered by the<br />
Deloitte survey is of paramount significance for food<br />
companies. It demonstrates that consumers, regardless<br />
of their geographic location, age <strong>and</strong> income, are now<br />
prioritizing the Evolving drivers of health <strong>and</strong> wellness,<br />
safety, <strong>and</strong> other factors that extend beyond taste, price<br />
“Forty-seven percent of US consumers<br />
look at the ingredients list before<br />
purchasing a packaged-food item in<br />
2015, compared to 40 percent who<br />
made a similar claim in 2014.”<br />
– INTERNATIONAL FOOD INFORMATION COUNCIL<br />
(IFIC)<br />
<strong>and</strong> convenience. What this means for food companies<br />
is that in order for them to maintain market share <strong>and</strong><br />
grow, they will need to address these new consumer<br />
priorities.<br />
Among the ways food br<strong>and</strong>s are responding to<br />
health-driven consumers, <strong>and</strong> in the process moving<br />
progressively closer to transparency <strong>and</strong> consumer<br />
engagement, is by proactively informing consumers<br />
of food ingredients. In some cases, br<strong>and</strong>s are also<br />
advising consumers on why specific products are good<br />
for them nutritionally, <strong>and</strong> setting new st<strong>and</strong>ards for<br />
quality in research, consumer advocacy <strong>and</strong> disclosure.<br />
Additional approaches are company website sections<br />
dedicated to nutrition <strong>and</strong> ingredient information.<br />
EVOLVING DRIVERS ARE STILL HIGHLY RELEVANT ACROSS<br />
INCOME GROUPS<br />
TRADITIONAL<br />
DRIVERS<br />
Taste, price <strong>and</strong> convenience<br />
EVOLVING<br />
DRIVERS<br />
Health <strong>and</strong> wellness, safety,<br />
social impact, <strong>and</strong> transparency<br />
$75k-$100k 49%<br />
51%<br />
>$100k 46%<br />
54%<br />
Source: Capitalizing on the Shifting Consumer Food Value Equation, Deloitte<br />
THE RISE OF A NEW FOOD INDUSTRY MANDATE: TRUST, TRUTH AND TRANSPARENCY | 3
Platform of <strong>Trust</strong><br />
<strong>Trust</strong> is food companies’ anchor for success, making its pursuit <strong>and</strong> retention a missioncritical<br />
goal.<br />
According to a recent survey performed by The Center<br />
for Food Integrity (CFI), A Clear View of <strong>Transparency</strong><br />
<strong>and</strong> How It Builds Consumer <strong>Trust</strong>, the responsibility<br />
for demonstrating trust-building transparency in the<br />
most important food-production areas rests first <strong>and</strong><br />
foremost on the shoulders of food manufacturers –<br />
not farmers, grocery stores or restaurants. Areas of<br />
greatest concern to survey participants are food’s<br />
impact on health, food safety, the environment, labor<br />
<strong>and</strong> human rights, animal wellbeing, <strong>and</strong> business ethics.<br />
Food companies earn trust when they consistently,<br />
authentically <strong>and</strong> proactively live up to their healthyproducts<br />
commitment in all aspects of their business,<br />
<strong>and</strong> remain in lockstep with consumers’ evolving<br />
priorities. In the process, they can positively influence<br />
purchase decisions <strong>and</strong> become strategically positioned<br />
to excel in the healthy-food sector.<br />
However, with the rise of technology <strong>and</strong> social media,<br />
<strong>and</strong> the empowerment they bestow on consumers,<br />
particularly on Millennials, maintaining consumer<br />
trust requires more than tried-<strong>and</strong>-true engagement<br />
strategies. Here are three top reasons why:<br />
1.<br />
There is greater consumer diligence when<br />
investigating the extent to which food<br />
companies live up to their healthy-product claims.<br />
Consumers are also being more empowered in their<br />
research each year by the Internet, social-media<br />
networks <strong>and</strong> smart-phone apps that can range from<br />
HarvestMark <strong>and</strong> ShopNoGMO to True Food <strong>and</strong><br />
GoPure.<br />
2.<br />
Consumers’ investigative efforts are reaching<br />
beyond food company backgrounds to<br />
include product ingredients, labeling, sourcing<br />
methods, consumer feedback, <strong>and</strong> other social <strong>and</strong><br />
environmental issues.<br />
3.<br />
Digital “soap boxes” now serve as vocal <strong>and</strong><br />
influential platforms from which consumers<br />
are broadcasting their own opinions as well as those<br />
of public-health activists, watchdog groups, media<br />
pundits, celebrity nutritionists, <strong>and</strong> self-appointed gurus<br />
<strong>and</strong> evangelists. The outcomes are rewards for food<br />
companies’ perceived “good behavior” <strong>and</strong> punishment<br />
for perceived “bad behavior.”<br />
“Br<strong>and</strong>s that meet customer<br />
expectations for product information,<br />
<strong>and</strong> deliver that information instantly,<br />
develop a new dynamic of convenience,<br />
trust <strong>and</strong> long-term value.”<br />
– 2016 LABEL INSIGHT FOOD REVOLUTION STUDY<br />
Best practices for building consumer trust in an<br />
environment seemingly overrun with skepticism <strong>and</strong><br />
doubt are founded on both the security consumers<br />
experience from full ingredient disclosure <strong>and</strong> a kinship<br />
with the company that is formed through shared values.<br />
In fact, internal sustainability groups are winning as<br />
much applause from food companies as they are from<br />
consumers. These groups respond directly to consumer<br />
diligence <strong>and</strong> help guide food companies as they<br />
continually meet health <strong>and</strong> sustainability commitments.<br />
Additionally, food companies are exp<strong>and</strong>ing their<br />
compliance departments to ensure they are in sync<br />
with regulatory dem<strong>and</strong>s <strong>and</strong> marketplace changes, <strong>and</strong><br />
offering more consumer-engagement opportunities to<br />
demonstrate transparency.<br />
4 | THE RISE OF A NEW FOOD INDUSTRY MANDATE: TRUST, TRUTH AND TRANSPARENCY
Good for Business, People <strong>and</strong><br />
the Environment<br />
Each year, food br<strong>and</strong>s launch better-for-you products that gain both significant consumer<br />
traction <strong>and</strong> loyalty as well as br<strong>and</strong> awareness.<br />
These br<strong>and</strong>s are usually mission-driven in their<br />
marketing <strong>and</strong> consumer messaging, which often<br />
resonates with consumers. In the process, br<strong>and</strong>s are<br />
able to grow from the competitive opportunities <strong>and</strong><br />
financial rewards that the healthy-food sector has to<br />
offer.<br />
Though each food company is unique in its product<br />
offerings, market-entry strategy <strong>and</strong> goals, they all<br />
share a universal DNA – the ability to underst<strong>and</strong> <strong>and</strong><br />
meet the complete range of consumer expectations,<br />
from health <strong>and</strong> nutrition claims to animal <strong>and</strong><br />
environmental protection.<br />
The following three companies st<strong>and</strong> as real-life<br />
examples of how transparency, <strong>and</strong> the consumer trust<br />
that follows, can be catalysts for growth, success <strong>and</strong><br />
corporate citizenry.<br />
KIND<br />
KIND, whose products are better-for-you fruit <strong>and</strong> nutsnack<br />
bars, was founded in 2004 with eight bar varieties<br />
<strong>and</strong> now offers more than 22 bars <strong>and</strong> six Healthy<br />
Grains snackable clusters.<br />
KIND has taken a number of steps that have led to<br />
strong performance <strong>and</strong> market differentiation,<br />
including using transparent packaging so that<br />
consumers can see the contents of the product when<br />
displayed on store shelves. The company also focuses<br />
its br<strong>and</strong>ing <strong>and</strong> marketing efforts around the KIND<br />
belief that “there’s more to business than just profit.”<br />
For example, rather than rolling out a traditional<br />
product-sampling strategy, KIND selected br<strong>and</strong><br />
ambassadors who distributed coupons to the public in<br />
a wide range of US cities. Members of the public could<br />
then redeem their coupons for KIND bars as a reward<br />
for their r<strong>and</strong>om acts of kindness. The marketing<br />
strategy was an unequivocal success. It not only<br />
honored kindness, a principle on which the company<br />
was founded <strong>and</strong> named, but also emboldened the<br />
authenticity of the KIND br<strong>and</strong>.<br />
Although KIND remains privately held, in 2012 it<br />
reportedly generated $120 million in revenue, with<br />
private equity investor VMG Partners selling its minority<br />
position for approximately $200 million in 2014.<br />
THE RISE OF A NEW FOOD INDUSTRY MANDATE: TRUST, TRUTH AND TRANSPARENCY | 5
Honest Tea<br />
Honest Tea was founded in 1998 with a mission to bring<br />
to market a bottled-tea beverage that was less sweet<br />
than its competitors <strong>and</strong> used organic ingredients,<br />
all while adhering to fair trade practices of improved<br />
trading conditions, sustainability, <strong>and</strong> social <strong>and</strong><br />
environmental st<strong>and</strong>ards.<br />
By 2006, Honest Tea had revenue of $13.5 million <strong>and</strong><br />
was selling approximately 1.5 million cases of product<br />
per year. In 2008, Coca-Cola purchased a 40 percent<br />
stake in the company for $43 million. Coca-Cola<br />
purchased the remainder of the company in 2011 for an<br />
undisclosed amount. It is estimated that Honest Tea’s<br />
2015 sales were $160 million.<br />
Freedom Foods<br />
Freedom Foods is an Australian food company that for<br />
more than 30 years has been producing nutritious <strong>and</strong><br />
allergen-free food. Today, its better-for-you product line<br />
includes cereals, bars, snacks, spreads <strong>and</strong> beverages.<br />
In 2009, Freedom Foods solidified its position as a leader<br />
in its region in the GMO- <strong>and</strong> allergen-free segment by<br />
constructing a 25,000-square foot production facility<br />
in New South Wales, Australia that is completely free<br />
of wheat, barley, triticale, peanuts, soy, dairy, eggs <strong>and</strong><br />
sesame seeds. Additionally, most of the company’s<br />
product ingredients are carefully sourced from family<br />
farmers in the Murrumbidgee River basin area.<br />
Freedom Foods’ 2016 revenues reached $127 million<br />
USD, 81 percent greater than the company’s total sales<br />
of $70 million USD in 2015. The company’s impressive<br />
growth <strong>and</strong> presence in Australia demonstrate that the<br />
dem<strong>and</strong> for better-for-you foods is increasing globally.<br />
Today, over 80 countries around the world have organic<br />
regulations <strong>and</strong> the US accounts for only five percent of<br />
the world’s organic acreage.<br />
6 | THE RISE OF A NEW FOOD INDUSTRY MANDATE: TRUST, TRUTH AND TRANSPARENCY
<strong>Truth</strong> behind the Talk<br />
Establishing <strong>and</strong> maintaining consumer trust is a never-ending priority, <strong>and</strong> requirement,<br />
for br<strong>and</strong>s that are leading in the healthy-food sector.<br />
However, there are hot-button concerns that provide<br />
fertile ground for discussion <strong>and</strong> debate, from the most<br />
heated <strong>and</strong> divisive to the most rational <strong>and</strong> inclusive,<br />
by the media <strong>and</strong> general public. These often spirited<br />
exchanges can confuse consumers <strong>and</strong>, in some cases,<br />
undermine their confidence in the sector.<br />
The following is a discussion of four top consumer<br />
concerns <strong>and</strong> the influence they are having on today’s<br />
healthy-food sector.<br />
“Natural” Claims<br />
The healthy-food sector includes unregulated “natural”<br />
products. However, “natural” has yet to be defined by<br />
the US Food <strong>and</strong> Drug Administration (FDA) or any other<br />
authoritative organization, leading to research-supported<br />
consumer uncertainty <strong>and</strong> skepticism over product<br />
claims. Consumer Reports’ National Research Center<br />
discovered that 62 percent of consumers already buy<br />
natural products <strong>and</strong> the group would also be willing to<br />
pay more for these items if they understood <strong>and</strong> trusted<br />
the natural claims. A clear majority of this group – 87<br />
percent – agreed they would pay a higher price if the<br />
natural label met their expectations.<br />
In comparison, the US Department of Agriculture<br />
(USDA) has created strict certification requirements<br />
<strong>and</strong> a national, uniform qualification st<strong>and</strong>ard for<br />
organic products, though organic products have<br />
historically generated a less positive consumer<br />
response than natural products. Despite general<br />
skepticism, there has been tremendous growth in<br />
the organic market, with sales of organic products<br />
surpassing $40 billion annually. Additionally, a 2016<br />
Organic Trade Association survey reveals that 47<br />
percent of US families are “very familiar” with the USDA<br />
organic logo, up from 27 percent in 2010.<br />
“Non-GMO is the fastest-growing food-label claim, with 15.7 percent of new products<br />
introduced in 2015 making “Non-GMO” or “GMO-free” claims – an increase from<br />
10.7 percent in 2014 <strong>and</strong> 2.8 percent in 2012. Similar strong growth is seen in organic<br />
products, with 13.5 percent of new products making organic claims in 2015, up from<br />
10.7 percent in 2014.”<br />
– MINTEL’S GLOBAL NEW PRODUCT DATABASE (GNPD)<br />
THE RISE OF A NEW FOOD INDUSTRY MANDATE: TRUST, TRUTH AND TRANSPARENCY | 7
<strong>Truth</strong> in Labeling<br />
In the midst of a “We Want to Know What’s in Our<br />
Food” movement, where consumers are dem<strong>and</strong>ing<br />
more product information, labeling has become a<br />
greater concern. Market Research Group’s recent<br />
Packaged Facts Consumer Survey found that 39 percent<br />
of consumers actively purchase grocery products with<br />
“GMO-free” on the labels. However, during a time when<br />
food companies are not required by law to list every<br />
ingredient, some companies use misleading claims to<br />
convince health- <strong>and</strong> socially conscious consumers to<br />
purchase their “healthy” products.<br />
For example, some br<strong>and</strong>s are committing Economically<br />
Motivated Adulteration (EMA), or Food Fraud, that<br />
involves an undeclared substitution or addition of an<br />
ingredient(s) for financial advantage. Other companies<br />
are using more specific “free of” claims in product<br />
packaging that often identify certain unwanted<br />
ingredients while including other ingredients that<br />
consumers want to avoid.<br />
MANY NEW ATTRIBUTES ARE NOW PART OF CONSUMERS’<br />
DEFINITION OF SAFETY<br />
62%<br />
Criteria not traditionally considered as part<br />
of “safety” definition<br />
51%<br />
47%<br />
42%<br />
41%<br />
Free of harmful<br />
elements<br />
Clear <strong>and</strong> accurate<br />
labeling<br />
Clear information<br />
(ingredients/<br />
sourcing)<br />
Fewer ingredients,<br />
processing,<br />
no artificial<br />
Nutritional<br />
content<br />
Source: Capitalizing on the Shifting Consumer Food Value Equation, Deloitte<br />
8 | THE RISE OF A NEW FOOD INDUSTRY MANDATE: TRUST, TRUTH AND TRANSPARENCY
“More than one-third of<br />
consumers (37 percent)<br />
would switch br<strong>and</strong>s if<br />
another br<strong>and</strong> shared<br />
more detailed product<br />
information.”<br />
– 2016 LABEL INSIGHT FOOD REVOLUTION<br />
STUDY<br />
Mistrust<br />
A measurable level of mistrust clouds the opinions of<br />
consumers across demographics, which undermines<br />
the credibility of food-product health <strong>and</strong> safety claims,<br />
<strong>and</strong> results in consumer reluctance to purchase healthy<br />
products. The roots of consumer mistrust can be<br />
traced to a number of causes.<br />
For example, although Genetically Modified<br />
Organisms (GMOs) were generally viewed as safe<br />
by food manufacturers, <strong>and</strong> not disclosed in food<br />
products’ ingredient labeling when introduced in 1990,<br />
controversy <strong>and</strong> consumer outrage began to occur in<br />
2013 when safety concerns heightened. Also, a 2016<br />
Stanford University study, a first-of-its-kind national<br />
sample <strong>and</strong> published in Environmental Research,<br />
unveiled a link between canned foods <strong>and</strong> exposure to<br />
hormone-disrupting chemical Bisphenol A (BPA). The<br />
highest BPA levels, in descending order, were found in<br />
canned soups, canned pasta, <strong>and</strong> canned vegetables<br />
<strong>and</strong> fruit, otherwise seemingly healthy choices.<br />
Marketplace Identity<br />
The benefits of healthy products can become diluted,<br />
or in some cases even lost, due to a large selection of<br />
similarly labeled products, such as “natural,” “green”<br />
<strong>and</strong> “organic,” among others. What follows is confusion<br />
for consumers <strong>and</strong> a lack of product differentiation for<br />
food companies.<br />
Among the ways companies can bring clarity, identity<br />
<strong>and</strong> transparency to their product offerings are through<br />
unique ingredients, specific target marketing <strong>and</strong><br />
br<strong>and</strong>ing. Companies that are focused on sustainability<br />
<strong>and</strong> community-improvement differentiate themselves<br />
by increasing their authenticity <strong>and</strong> aligning values with<br />
today’s consumers, who seek companies that offer<br />
more than low-priced better-for-you foods.<br />
THE RISE OF A NEW FOOD INDUSTRY MANDATE: TRUST, TRUTH AND TRANSPARENCY | 9
Big Food Dilemma<br />
Each year, food br<strong>and</strong>s launch better-for-you products that gain both significant consumer<br />
traction <strong>and</strong> loyalty as well as br<strong>and</strong> awareness.<br />
Consumer mistrust of the food system is giving rise to<br />
a number of new marketplace perceptions, trends <strong>and</strong><br />
behavior. Among the most prominent is consumers’<br />
growing belief that their food health <strong>and</strong> safety<br />
priorities would best be met not by the Big Food br<strong>and</strong>s<br />
that have been relied on, in many cases for generations,<br />
but rather by smaller br<strong>and</strong>s.<br />
Big Food companies are often laboring under<br />
monolithic, outdated legacy supply systems that were<br />
developed decades ago, while smaller companies’<br />
systems are generally newer <strong>and</strong> more aligned with<br />
consumers’ dem<strong>and</strong> for transparency. The result is<br />
nimble systems that can better accommodate the rising<br />
market for better-for-you foods.<br />
A large <strong>and</strong> growing number of consumers are br<strong>and</strong>ing<br />
Big Food companies as less in tune with their voices <strong>and</strong><br />
overly profit-driven. According to the Natural Marketing<br />
Institute, a comm<strong>and</strong>ing 72 percent of Americans<br />
believe that most food <strong>and</strong> beverage manufacturers are<br />
focused on profit rather than on health.<br />
“In the last five years, the top 10 br<strong>and</strong>ed<br />
food manufacturers lost 4.3 percent of<br />
market share mainly to smaller <strong>and</strong> midsized<br />
companies.”<br />
– COMPANIES STEP UP EFFORTS TO REVEAL MORE<br />
DETAILS ON FOOD YOU EAT, THE WALL STREET<br />
JOURNAL, MARCH 13, 2016<br />
Conversely, smaller food companies are being lauded<br />
for their strong devotion to consumer advocacy <strong>and</strong><br />
health, <strong>and</strong> for their commitment to shared values<br />
<strong>and</strong> the public interest. A recent New Hope Network<br />
survey indicates that 67 percent of consumers had a<br />
“great deal” or “quite a lot” of trust in small companies,<br />
while only 21 percent had the same degree of trust<br />
in big businesses. One of the leading reasons for this<br />
perception can be traced back to supply systems.<br />
Acceleration in Acquisitions<br />
While Big Food br<strong>and</strong>s continue to dominate sales, a<br />
recent Fortune Special Report: The War on Big Food<br />
shows that some may be struggling, with the top 25 US<br />
food <strong>and</strong> beverage companies having lost an equivalent<br />
of $18 billion in market share since 2009. What has<br />
followed is a strengthening migration to, <strong>and</strong> a host of<br />
new opportunities for, small companies, <strong>and</strong> a flurry<br />
of mergers <strong>and</strong> acquisitions by Big Food companies of<br />
smaller br<strong>and</strong>s that allows for market entry with more<br />
convenience <strong>and</strong> less risk.<br />
Dealogic reports that in 2015, food merger <strong>and</strong><br />
acquisition activity was responsible for more than<br />
$116 billion worth of deals between US companies,<br />
which st<strong>and</strong>s as the largest dollar amount in at least<br />
two decades. Also, by the middle of 2016, disclosed<br />
food <strong>and</strong> beverage deals were valued at more than $43<br />
billion, which although less than the $74 billion worth of<br />
deals during the same period in 2015, nonetheless ranks<br />
as the second-highest level overall since 2008.<br />
There are a number of food-industry acquisitions that<br />
have captured the attention <strong>and</strong> interest of large <strong>and</strong><br />
small companies alike, both within <strong>and</strong> outside the food<br />
sector, as well as among investors <strong>and</strong> members of<br />
the media.<br />
10 | THE RISE OF A NEW FOOD INDUSTRY MANDATE: TRUST, TRUTH AND TRANSPARENCY
GROWTH BY ACQUISITION<br />
Danone’s Acquisition of WhiteWave Foods<br />
In July 2016, Danone announced the acquisition of<br />
WhiteWave Foods for $12.6 billion, or 26.6x EBITDA.<br />
The acquisition represents a 24 percent premium over<br />
WhiteWave’s 30-day average closing price of $45.43,<br />
<strong>and</strong> the largest deal to date in the natural <strong>and</strong> organic<br />
foods industry.<br />
Danone believes the acquisition will create a unique<br />
global leader strongly aligned with consumer dem<strong>and</strong><br />
for healthier <strong>and</strong> more sustainable food <strong>and</strong> beverage<br />
options. The acquisition also provides Danone with a<br />
foothold in the fast-growing plant-based sector through<br />
the WhiteWave Silk, Alpro <strong>and</strong> Vega br<strong>and</strong>s.<br />
The company estimates that the acquisition would likely<br />
make Danone, with its Stonyfield, Horizon <strong>and</strong> Wallaby<br />
br<strong>and</strong>s, the largest buyer (by tons) of organic milk in<br />
the US. Plant-based alternatives to milk <strong>and</strong> yogurt are<br />
growing at an 11 percent Compound Annual Growth<br />
Rate (CAGR) in the US, while organic dairy is growing at<br />
eight percent.<br />
Pinnacle Foods’ Acquisition of Boulder Br<strong>and</strong>s<br />
Pinnacle Foods announced in November 2015 that it<br />
would acquire Boulder Br<strong>and</strong>s, a US food company<br />
based in Boulder, Colorado. Boulder Br<strong>and</strong>s is known<br />
for its better-for-you br<strong>and</strong>s such as Smart Balance,<br />
Udi’s, Glutino, Earth Balance, EVOL <strong>and</strong> Best Life.<br />
Pinnacle paid $967 million for Boulder Br<strong>and</strong>s, or 22.1x<br />
EBITDA. Pinnacle’s health <strong>and</strong> wellness portfolio was<br />
further exp<strong>and</strong>ed by the acquisition, <strong>and</strong> the company<br />
plans to increase EBITDA by approximately 50 percent.<br />
General Mills’ Acquisition of Annie’s<br />
In September 2014, General Mills announced its<br />
acquisition of Annie’s, a Berkeley, California-based<br />
maker of natural <strong>and</strong> organic pastas, meals <strong>and</strong> snacks.<br />
General Mills paid $821 million for Annie’s, or 38.6x<br />
EBITDA. The acquisition is expected to exp<strong>and</strong> General<br />
Mills’ presence in the US br<strong>and</strong>ed organic <strong>and</strong> naturalfoods<br />
industry, with General Mills planning to use its<br />
scale to further strengthen the Annie’s br<strong>and</strong>.<br />
THE RISE OF A NEW FOOD INDUSTRY MANDATE: TRUST, TRUTH AND TRANSPARENCY | 11
Hormel’s Acquisition of Justin’s<br />
In May 2016, Hormel announced its $286 million<br />
acquisition of Justin’s, a maker of natural <strong>and</strong> organic<br />
nut butter <strong>and</strong> nut butter snacks. Hormel was drawn to<br />
the company’s authentic position in the better-for-you<br />
snack category, strong management team <strong>and</strong> healthconscious<br />
customer base.<br />
Hormel expects Justin’s to grow at low doubledigit<br />
rates from a starting point of approximately<br />
$100 million in 2017 net sales. Justin’s complements<br />
Hormel’s SKIPPY br<strong>and</strong> <strong>and</strong> Hormel plans to apply<br />
its key resources, supply chain, finance <strong>and</strong> R&D<br />
capabilities to further grow the Justin’s br<strong>and</strong>.<br />
<strong>Transparency</strong> M<strong>and</strong>ate<br />
A new reality has dawned on store shelves across the US <strong>and</strong> it reflects a level of truth <strong>and</strong><br />
openness that has yet to be seen in the food sector.<br />
Coveted consumer audiences across demographics are<br />
looking to food br<strong>and</strong>s for products that meet their<br />
ever-rising st<strong>and</strong>ards for transparency, better-for-you<br />
ingredients <strong>and</strong> global citizenry. The result is a m<strong>and</strong>ate<br />
for food companies to factor those st<strong>and</strong>ards into their<br />
formulations, production, marketing <strong>and</strong> management<br />
decisions. Only then will they achieve the br<strong>and</strong><br />
recognition, repeat customers <strong>and</strong> pricing power to<br />
achieve genuine competitive advantage <strong>and</strong> long-term<br />
growth.<br />
Contact Us<br />
To learn more about how the Headwaters MB team can help you grow from the food industry’s strengthening<br />
transparency m<strong>and</strong>ate, please contact:<br />
Bill Harrison<br />
Managing Director<br />
Head of Consumer Investment Banking<br />
(917) 596.5533<br />
wharrison@headwatersmb.com<br />
Leigh Hudson<br />
Managing Director<br />
Consumer Investment Banking<br />
(415) 850.3729<br />
lhudson@headwatersmb.com<br />
Tyler Comann<br />
Managing Director<br />
Consumer Investment Banking<br />
(415) 272.2463<br />
tcomann@headwatersmb.com<br />
Shaun Kalnasy<br />
Director<br />
Consumer Investment Banking<br />
(404) 502.2946<br />
skalnasy@headwatersmb.com<br />
12 | THE RISE OF A NEW FOOD INDUSTRY MANDATE: TRUST, TRUTH AND TRANSPARENCY
Endnotes<br />
1<br />
2016 Label Insight Food Revolution Study<br />
2<br />
2016 Label Insight Food Revolution Study<br />
3<br />
Is GOOD Still Growing, 2015 Conscious Consumer Spending Index (Good Must Grow)<br />
About Headwaters MB<br />
Headwaters MB is an independent, middle-market investment banking firm providing strategic merger <strong>and</strong><br />
acquisition, capital-raising, <strong>and</strong> special-situations advisory services. Named Investment Bank of the Year by major<br />
industry organizations in 2014 <strong>and</strong> 2015, Headwaters MB is headquartered in Denver, CO, with six regional offices<br />
across the United States <strong>and</strong> partnerships with 18 firms covering 30 countries. For more information, visit<br />
HeadwatersMB.com.<br />
Disclosure: This newsletter is a periodic compilation of certain economic <strong>and</strong> corporate information as well as completed <strong>and</strong> announced<br />
merger <strong>and</strong> acquisition activity. Information contained in this newsletter should not be construed as a recommendation to sell or buy any<br />
security. Any reference to or omission of any reference to any company in this newsletter should not be construed as a recommendation to<br />
buy, sell or take any other action with respect to any security of any such company.<br />
We are not soliciting any action with respect to any security or company based on this newsletter. The newsletter is published solely for the<br />
general information of clients <strong>and</strong> friends of Headwaters MB, LLC. It does not take into account the particular investment objectives, financial<br />
situation or needs of individual recipients.<br />
Certain transactions, including those involving early-stage companies, give rise to substantial risk <strong>and</strong> are not suitable for all investors. This<br />
newsletter is based upon information that we consider reliable, but we do not represent that it is accurate or complete, <strong>and</strong> it should not be<br />
relied upon as such.<br />
Prediction of future events is inherently subject to both known <strong>and</strong> unknown risks <strong>and</strong> other factors that may cause actual results to vary<br />
materially. We are under no obligation to update the information contained in this newsletter. Opinions expressed are our present opinions<br />
only <strong>and</strong> are subject to change without notice. Additional information is available upon request.<br />
The companies mentioned in this newsletter may be clients of Headwaters MB, LLC. The decisions to include any company in this newsletter<br />
is unrelated in all respects to any service that Headwaters MB, LLC may provide to such company.<br />
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14 | LOHAS GOES MAINSTREAM<br />
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