Dive Brief:
- Public food companies do not have exposure to Silicon Valley Bank and Signature Bank, a Wall Street analyst said in a research note, adding that his firm does “not anticipate related material impacts on industry structure (liquidity challenges, catalysts for M&A).”
- Still, Mizuho analyst John Baumgartner wrote “a fair number of industry start-ups did have exposure” to SVB. He wrote that along with short-term disruption, tighter subsequent lending standards and a stronger emphasis on free cash/profitability “can be expected to further limit the ease with which small companies gain financing and enter the industry.”
- The collapse of SVB, in particular, has had a widespread impact across the U.S., affecting not only the banking sector but industries such as food and biotech that turned to the bank for funding and as a place to hold their cash.
Dive Insight:
The collapse of SVB was swift and unexpected. The bank, which catered to startups such as The Better Meat Co. and Equii, left many businesses scrambling to figure out what to do when it came to things like paying their employees. While regulators shut SVB and later Signature Bank, the government announced it was undertaking emergency measures to make all of the depositors whole.
But the long-term impact the turmoil has had on the U.S. banking system and the businesses that depend on it is unlikely to abate anytime soon. Already dealing with inflation, supply chain challenges and changing consumer buying habits, food and beverage upstarts could feel the impact of the recent bank failures for some time.
Baumgartner noted in his report that from 2017 to 2021, new entrants in the food industry grew sales at a compound annual growth rate of 6.5%, versus 4.5% for established companies. They also had access to sufficient capital at historically low financing rates to aid their growth.
But things have since changed dramatically. He added that “in addition to direct SVB exposure for some companies,” a move toward stricter lending requirements and a greater emphasis on free cash and profitability could weigh on some smaller companies.
While the current environment doesn’t mean all younger companies are in trouble, it does signify that in many cases there will be more pressure on them to show they are financially stable and deserving of funding. Banks and investors will be less willing to chase promised growth and instead direct their attention toward profitable, established brands.
Some upstarts that could have one day matured into better-established firms could lose out of funding. Large CPG companies could ultimately benefit through less competition, or find themselves in a position to purchase a cash-strapped upstart desperate to survive.
Baumgartner said for large-cap names, such as Kraft Heinz, Hershey and General Mills, with debt maturities this year, “refinancing/retirement is highly unlikely to be compromised by financial markets volatility.”
He added that “investors remain best-positioned in names with innovation/new distribution that support volume and efficiency savings that reinforce” earnings before interest, taxes, depreciation and amortization. These companies include Kraft Heinz, BellRing Brands, Mondelēz International and Simply Good Foods.
