The growing appetite of Swiss dealmakers
Clarity on Mergers &
In Food & Drink, customers are demanding ever more ethical,
healthy and customizable products. Dealmakers are satisfying the hunger for change through impressive dealmaking.
Clarity in 100 seconds
Cross-border deal flows
It has long been expected that China would feed its global growth ambitions by acquiring western companies. In 2017, some of the largest Swiss deals were purchases by Chinese groups. Yet overall, the US held on to first place for both inbound and outbound Swiss deals. Within Europe, the UK dominated inbound transactions, while outbound Swiss activity centered on France.
Another strong Swiss performance
2017 saw a record number of transactions involving Swiss businesses in the past ten years, with the exception of 2014. And for Private Equity, by far the highest number of deals over this period. While total deal values did not hit the same record, a respectable performance exceeded USD 100 billion.
An industry perspective: Migros and Farmy on Food & Drink trends
Driving consumer choice: healthy products, customization and innovation
Sustainability and transparency are at the heart of Migros’ ethos. These values play directly into product development. Which is why backwards integration is in the group’s DNA, delivering goods that customers both value and trust.
„ We rarely do 100 percent takeovers. Our partner will usually retain some ownership.
Beat Arbenz, Head M&A Migros
Patrik Kerler: Looking at the bigger picture, what trends are shaping your industry and who is driving them?
Walter Huber: Digitalization is having a huge influence. It is altering processes from procurement to production to consumers. We also see a much greater use of big data to create new solutions for our customers. And, of course, sustainability remains key. Both consumers and the industry are driving this. That’s the way it’s always been. Consumers know what they want. And when their expectations grow, you get new requirements. In addition, there are technical advances, which generate new options of which the consumer is not yet aware.
Beat Arbenz: Healthcare is also a major trend. We see demand for healthy products growing, and, more generally, consumers want existing products to be healthy as well as socially responsible and environmentally friendly. However, they are not prepared to pay much more for this. Producers must be smart in how to achieve this, because if making a product healthier changes the taste, consumers won’t accept it.
Huber: A good example is lowering salt content. When we put less salt in a product, the product’s taste can change and consumer acceptance can decline. Similarly with color – consumers want to avoid additives and food coloring, but if a product has an undesirable color, it doesn’t sell.
Kerler: How do you factor in these issues along your entire value chain?
Arbenz: Backwards integration. It’s in our DNA. We can say with total conviction that we have full control over these factors as many of our products come out of our own production. A clear differentiation factor in comparison to our competitors.
Huber: Absolutely. And in terms of transparency to consumers, let me give you an example. In China we launched Orange Garten, an e-commerce shop-in-shop concept that enables us to show and offer our integrated capabilities. The entire value chain can be explained there. Nowadays, consumers want to know how a product is made and who’s behind it. So the CEO of the e-commerce platform visited our factories in Switzerland and live-streamed her visit to show customers the production process. This builds up trust in the products we sell in Orange Garten. And to remain competitive we invest vast amounts in the education of the employees, in new technologies and in new and highly automated plants and factories.
„ If a business is less aligned with our processes, we leave it to operate on a more individual basis so it keep its entrepreneurial power.
Walter Huber, CEO Migros Industry
Kerler: How about product customization - what role does that play?
Huber: Customers increasingly want ‘their’ cosmetics, ‘their’ cereal or ‘their’ candy bar. Many consumers are even willing to provide their personal data in order to receive tailored products, such as customized diets.
Arbenz: Intolerances and allergies reinforce this demand for personalized products. The result is stronger differentiation among the various products and thorough monitoring of the value chain so that we can guarantee certain ingredients are not included. Again, this is an area where trust is paramount.
Kerler: Innovation is clearly at the heart of things. Where does it come from?
Huber: Innovation comes from internal and external resources. Start-ups play an important role. But from a certain stage they need marketing knowhow, distribution power and production facilities – that is often the starting point for cooperation with us.
Arbenz: Within the Migros Group, we implemented innovation and R&D processes working in an agile and systematic manner.
Kerler: Talking about your companies, what kind of business do you want to acquire and how do you seek out targets?
Arbenz: In the past, we more or less received opportunities straight from businesses or their advisers. Now, we have become much more active in searching for targets. One key thing that has changed is our attitude to the size of a target. We no longer reject targets just because they are small. Instead, we analyze every target carefully.
Huber: That’s right. There’s also a second reason why targets have become smaller and younger, and that is pricing. There is a huge amount of capital in the market – both in terms of cash and finance. This means we have to get to a target very early on.
Kerler: Have your desired ownership structures changed?
Arbenz: We rarely do 100 percent takeovers. Our partner will usually retain some ownership. We give the business a great deal of support and contacts, but the partner needs to help drive the business itself. We integrate as far as it’s required to exploit the synergies or for the financial reporting.
Huber: The structure also depends on the degree of integration. If a business is less aligned with our processes, we leave it to operate on a more individual basis so it keeps its entrepreneurial power.
Kerler: A final question to you. How do you think M&A will look in your industry over the next one to three years?
Arbenz: A lot of unused capital will still be out there. You see this in the degree of interest private equity is showing in the consumer industry. Multiples are already bordering on the absurd for companies that are seen as highly future-oriented, especially those with a turnover of approximately CHF 70 million and more.
Huber: New M&A opportunities will arise that are strongly linked to consumers, healthcare and sustainability as a result of the issues we discussed earlier. This will drive the emergence of new start-ups and attract fresh capital – ensuring that the industry will continue to develop and innovate long into the future.
Hungry for change: How food production is being disrupted
As a young disruptor, Farmy is all about innovation and improvement. Progress through digitalization, and an extremely agile structure, are key to its efforts to satisfy the shift in customers’ preferences towards online and mobile channels.
„ As a young company and start-up with a disruptive approach, we are innovative by nature and are constantly improving our products.
Roman Hartmann, Co-CEO & Founder of Farmy
Kerler: How is your industry responding to customers’ evolving needs, and what else is impacting how you do business?
Farmy: Customers are driving a big shift away from ‘offline’ shopping and towards online and mobile business. There is also a keener emphasis on locally, sustainably sourced products – which will continue to grow as a share of the total market for food. An interesting part of this is vertical agriculture taking hold in larger cities and individual households. This is where food production is integrated into buildings. It goes hand in hand with customers increasingly demanding transparency regarding the origin, ingredients and footprint of the products they buy. As a business, it means a better use of big data to communicate around production, transportation and storage. And more information about the nutritional properties of what we consume. For instance, the number of certified organic and local products is rising steadily. This is where we see ourselves. Farmy stands for transparency and healthy, ethical food. We recognize that the food industry must accept its responsibility. It cannot simply ruin the earth as we fail to change our diets. We must find alternative ways of feeding ourselves in order to offset the growing middle class in Asia and meet the challenge of lowering CO2 emissions and water usage.
Kerler: How do you and your competitors innovate to adapt to trends, or even shape trends yourselves?
Farmy: It varies by country. We see the US and UK markets, among others, being already further along as far as digitalization is concerned. And we can expect Switzerland to move in the same direction. On the one hand, we have new market participants who are digitally oriented from the start and burst onto the market. These are primarily foreign companies. On the other hand, even traditional market participants will have to master digitalization at a pace previously unheard of. This isn’t restricted to food, of course. The online share of books, electronics and clothing sales is so high that established offline players are in serious difficulty. We see the food industry being in a very exciting phase in which we face enormous changes.
„ Only retailers who have and use client data and direct access to customers will survive.
Ruedi Noser, Member of the Board of Directors & Investor of Farmy
Kerler: As digitalization changes the consumer industry, who is driving the agenda forward?
Farmy: Firstly, we think everyone has come to understand that digitalization will have a marked impact on every company and every market. As well as consumer trends, the driving force behind innovation is the hunger of Silicon Valley’s ecosystem. It is the most important source of digitalization advancement and is the prototype for other innovation hubs such as those we see in China, Israel or even Berlin. Companies such as Amazon, Uber and Alibaba operate on a completely different set of principles than historically. Profitability plays only a secondary role. Using large quantities of risk capital, the primary goal is to capture a vast market share and collect customer data. This sets entire markets in motion and drives digitalization forward. Only retailers who have and use client data and direct access to customers will survive. All others will become irrelevant. And digitalization is becoming ever more deeply integrated into the value chain and the lives of consumers. This is through mobile shopping and voice searching, which are becoming easier, or the Internet of Things. European companies are missing from the line-up of leaders, unfortunately. We are overshadowed by Google, Amazon, Facebook and Apple, as well as the Asian giants such as Alibaba or Flipkart.
Kerler: What role does your own R&D play in this progress?
Farmy: We do not have a formal R&D department. Rather, as a young company and start-up with a disruptive approach, we are innovative by nature and are constantly improving our products. Every manager in the company works to continually improve the product and processes and maintain ongoing tests. Our structure is very agile, which means we are able to adapt very quickly to new situations.
Kerler: The consumer industry is being increasingly altered by M&A. Do you see this continuing, and what will be Farmy’s involvement?
Farmy: We think this trend will persist as long as Silicon Valley and its imitators retain their hunger for innovation. The emergence of new companies with fresh technologies and products will not let up, which means there is a great deal of M&A potential. But as a start-up, we don’t have the necessary funds to undertake acquisitions. We rather invest our resources heavily in internal innovation.