M&A volume in the Canadian food and beverage (“F&B”) industry continued to decline slightly during the fourth quarter of 2019, dipping to a total of 21 deals involving a Canadian party (announced or closed during the period), from a recent high of 37 deals in Q1. While this represents a third consecutive quarter of declined deal activity, it remains relatively consistent with deal volumes throughout the prior year, with 22 deals announced or closed in the fourth quarter of 2018. Given the potential for F&B businesses to generate economies of scale or cost savings by moving up or down the supply chain via acquisition, the F&B sector remains predominantly driven by strategic buyers, with strategic transactions representing 81% of total deal volume in Q4.
Despite an overall reduction in closed or announced deals this past quarter, certain key industry forces have continued to drive activity. Growth in the industry is expected to be driven by salary hikes, which will lead to an increase in consumer spending especially towards premium, organic products as Canadian consumers become increasingly health conscious. The organic food industry in Canada has nearly tripled since 2006, as consumers are willing to pay a premium for products that are considered environmentally friendly5.
Additionally, niche processors and producers of cannabis-related products have continued to attract the attention of a variety of acquirers. Continued momentum in the cannabis-infused consumer products sector is driving strategic acquisitions of both producers and product developers1. Significant demand in a new beverage sector, cannabis-infused drinks, is anticipated to quickly propel smaller companies like BevCanna Enterprises Inc., following the trend that major players in the energy drinks market previously demonstrated6. The global cannabis-infused beverage market is predicted to jump from $89 million USD in 2018, to $1.4 billion7 and $4.4 billion8 by 2023 and 2025, respectively.
If history repeats itself, it is likely that the smaller, early-mover companies such as BevCanna will see the greatest benefit and growth in this market. BevCanna has already established strong brand relationships with healthy, consumer focused enterprises, and has pre-existing expertise in branding and bottling6.
From a macro standpoint, retail sales saw a larger than anticipated 1.2% decrease in October 2019, which increases the concerns surrounding domestic Canadian economic growth3.
Despite uncertainty in the broader landscape, underlying forces that are fundamental to transactions still exist such as availability of capital and continued ownership succession needs. It is predicted that these forces, combined with core product and consumer trends, will support an active M&A market for Canadian F&B businesses into the year ahead.