Food & Beverage Sector overview
After some years of headwinds and a transitional 2024, Food & Beverage (“F&B”) players (investors and industry stakeholders) are making out a comprehensive outlook on this sector for 2025.
What economic pressures, consumer trends, technological innovations, and opportunities are becoming in this sector? Where are the strategic investment opportunities and risks moving forward?
As of 2024, the F&B industry has shown moderate stabilization, following years of volatility due to inflation and supply chain disruptions. The F&B sector has seen modest top-line growth (approximately 2,2%) despite challenges from rising input costs in energy, labor, and raw materials.
Source: S&P Global
Inflation
Inflation continues to affect the F&B sector through higher costs of raw materials, labor, and energy. However, businesses can turn these challenges into strategic opportunities, as the followings:
Shift to Private Label and Store Brands
As consumers seek lower-cost alternatives, private label and store brands are gaining traction. Retailers are expanding these offerings to cater to price-sensitive customers. This trend is likely to continue as inflation persists, driving increased competition in the value segment.
Cost-Effective Product Reformulation
To accommodate cost conscious shoppers, companies are launching more affordable product lines. The shift towards budget-friendly options will likely continue as price sensitivity remains high across markets.
Persistent Input Cost Increases
Despite some cooling in general inflation, agricultural commodities and energy prices remain volatile. Essential inputs like packaging materials and transportation have seen fluctuating costs, which has forced companies to either raise prices or absorb these additional costs, both of which present risks to profitability.
Source: Bloomberg
Consumer Sensitivity to Price
As higher costs are passed through to consumers, spending patterns are shifting. Consumers are becoming more price-sensitive, seeking value options, including private-label products, leading to an increase in market share for value brands. This shift presents a key opportunity for companies positioned to provide lower-cost yet appealing products.
Source: BCG
How Interest Rates Have Impacted Market Valuation
Interest and Discount Rates
The impact of high interest rates in the past two years has led to lower valuation multiples, reflecting the increased cost of capital and cautious market sentiment.
Impact on Valuation Multiples
Rising interest rates and raw materials inflation have caused a decline in median EV/EBITDA multiples, leading to lower market valuations as companies face higher borrowing costs and more cautious investors. Beverages and snacks have kept higher multiples due to steady demand, while agribusiness and natural/organic foods have seen sharper valuation declines.
Source: Capital IQ
When analyzing Emerging Markets, particularly LatAm, these multiples described above should be discounted on average by aprox 30%, due to different liquidity and country-risk aspects
M&A Activity
Higher interest rates have impacted valuations and led to a drop in deal volume, with companies taking a more selective approach to M&A. This shift favors targeted investments over aggressive strategies, though the number of transactions has increased since last semester.
Source: Capital IQ
Divestitures and Reinvestment
Given the valuation shifts, businesses can consider divesting non-core or underperforming assets in sectors that still attract higher multiples, like beverages and snacks. This allows companies to unlock capital for reinvestment in higher-growth areas or use the proceeds to deliver and strengthen balance sheets.
Additionally, several multinationals are considering to divest some of their local, minor brands, to streamline their portfolio and concentrate their investments and marketing spending on a selected number of international, high-performing brands.
Value-driven Acquisitions
While M&A activity has slowed down, the current market conditions offer opportunities for value-driven acquisitions. Companies that are well-capitalized or possess strong cash reserves can take advantage of favorable acquisition costs, especially in sectors that have experienced valuation adjustments.
Technology and Supply Chain Resilience: Moving Beyond Disruption
Supply Chain
Technological advancements are reshaping the F&B industry, driving efficiencies, and enhancing resilience against disruptions. Innovations in IoT, AI, and blockchain are leading the way to more transparent and adaptable supply chains.
Automation for Labor Efficiency
Automation is set to revolutionize supply chain management, with robotics and automated systems expected to control nearly 75% of large supply chain operations by 2026.
Source: Fourkites
Localized Supply Chains
Many F&B companies are opting for more regionalized supply chains to avoid dependency on international suppliers that are susceptible to geopolitical tensions or global logistics bottlenecks
Source: McKinsey
How is AI helping F&B Industry?
Artificial Intelligence is already playing a major role in F&B production. It’s telling manufacturers what their clients want, speeding up new products development, and is even working out the most efficient and attractive packaging design.
Quality design: Consumers buy products based on an expectation of a certain quality, texture and taste, and it is important that these expectations are met. AI systems can monitor and adjust recipes in real time, ensuring every dish meets the same high standards, to say just a few benefits.
Improved efficiency: AI speeding up innovation in F&B, and this is happening at all stages of production from farm to fork. From speeding up new product development to helping shape marketing campaigns for those new products, the potential for AI in innovation is just getting started
The adoption of AI tech across the food landscape continues to roil the industry, as manufacturers look for more ways to streamline their supply chains and innovate new products quicker.
Perspective in the M&A Activity for 2025
M&A activity is forecast to accelerate in 2025 as F&B companies deal with fewer outside distractions and place greater importance on dealmaking to grow their businesses.
According to Forbes Lower inflation and expected interest rate cuts are fueling optimism, although many sellers are looking at selling part of, not the entire, company. About half of larger companies believe a better economy will boost their M&A activities, compared to only 14 percent of smaller companies, according to Citizens Bank.
On the other hand, interest rates are starting to decline, which makes it less expensive for businesses looking to take on debt to finance a transaction.
The improved environment comes as businesses that previously depended on price increases to foster growth are dealing with inflation-weary consumers reluctant to pay more, leaving them to search for other ways to boost revenue and margins. This makes M&A a more attractive option.
