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How CPGs are using M&A to boost manufacturing amid supply disruptions


As chocolate and snacking giant Hershey was preparing last year to embark on the purchase of Dot’s Homestyle Pretzels, the $1.2 billion transaction was as much about acquiring the brand as it was the production capability to make it.

The fast-growing Dot’s, founded more than a decade ago, has become the third-largest pretzel brand by market share in the U.S. through the introduction of bold flavors like Southwest and Honey Mustard.

Its expansion, which has come predominantly through word of mouth, was largely concentrated in the Central and Western U.S. Hershey saw an opportunity to broaden the brand’s reach as part of a company-wide effort to increase its presence in salty snacks.

But as Hershey conducted its due diligence on Dot’s ahead of the deal, it discovered the company used a proprietary process to apply its special blend of flavor to the pretzel that the CPG wanted to control in order to grow the brand — especially with the supply chain challenges impacting the U.S. economy.

It was “paramount to the deal that we brought [the brand and the manufacturing capacity] together just given the whole current macroeconomic environment on manufacturing today, labor shortages, supply chain issues that are there,” said Jeff Lilla, Hershey’s vice president of snacks and grocery. “If we want to see a sustainable long-term growth, we need to be able to control end to end and what we make and what we get out to the market.”

The purchase of Dot’s and its co-manufacturer has paid off so far for Hershey. Retail sales have grown about 50% during the past 3 months, with its market share increasing 3.7% over that period, Michele Buck, the company’s CEO, told Wall Street in July.

‘Sitting on gold’

As companies struggle to keep up with demand while navigating an at-times unpredictable supply chain, many companies such as Nestlé and J.M. Smucker have announced plans to build new facilities costing hundreds of millions of dollars. But the facilities can take up to a few years to get built, a time during which CPGs risk losing out on meeting the growing demand for their products and the sales that come with it.

Instead, many food companies are turning to acquisitions of existing plants as a faster way to ramp up production or widen a brand’s reach. Buying manufacturing capacity — either separate or as part of a product acquisition like Hershey did with Dot’s — can make sense for a variety of other reasons, too.  


“The challenge is everybody [who has a plant to sell] realizes they’re sitting on gold right now. If it was out there, someone would be buying it.”

Annemarie Vaupel

Vice president, foodservice marketing, Hormel Foods


Purchasing a plant can allow the company to keep proprietary information close, or that would be complicated to put in place with a co-manufacturer through education or equipment. It also can accelerate product innovation, improve margins, provide a safe place to put money to work and lessen the dependence on the supply chain, which in the current climate can be unreliable or overworked. 

Hormel Foods, the Minnesota-based producer of Skippy peanut butter, Planters nuts and Jennie-O turkeys, is on the lookout for additional manufacturing capacity, said Annemarie Vaupel, vice president of foodservice marketing. The problem: so are other many food producers. 

“The challenge is everybody [who has a plant to sell] realizes they’re sitting on gold right now,” Vaupel said on the sidelines of the National Restaurant Association Show in Chicago in May. “If it was out there, someone would be buying it.”

Hormel, planters

Optional Caption

Permission granted by Hormel Foods

 

When Hormel dolled out $3.35 billion to purchase Planters from Kraft Heinz last summer, not only did the Minnesota company acquire a food portfolio that included the iconic nut offering, but it also inherited three valuable production facilities in California, Arkansas and Virginia.

These plants were invaluable because Planters uses a unique manufacturing process and equipment to package the nuts into plastic bottles, tubes and pouches that were not used anywhere else in Hormel’s portfolio, Vaupel noted. Without these assets, Hormel would have had to go buy the machinery or find a copacker to make the product and package it.

“That’s a distraction from making a purchase and then hitting the ground running. It would have taken us a long time to deliver the [return on investment] on this,” Vaupel said. “These plant assets were a pretty critical part of the whole purpose for buying the brand, which was to grow it.” 

Brian Choi, CEO of The Food Institute, a food industry media and market research company, agreed that much of the “low-hanging fruit” has been acquired when it comes to plants. Still, he said for companies rich in cash and desperate to meet soaring demand, they may have to pay up and meet a buyer’s asking price. 

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