Strong tailwinds are driving growth in the produce distribution sector across foodservice and grocery channels, says a report recently released by investment bank Harris Williams. Given its fresh, perishable nature and the complexity of sourcing quality products year-round, produce demands unique specialization across the supply chain. The market requires distribution partners that consistently deliver quality and reliability, and several platforms have unearthed winning formulas to maintain high customer service levels while building scale.
Harris Williams recently worked with several companies that exemplify the growth opportunities in produce distribution, including BIX Produce Company, FreshEdge, Mr. Greens, and Worldwide Produce.
In the report, senior professionals from Harris Williams’ Consumer Group share the trends buoying investor enthusiasm for the sector and how leading businesses can differentiate.
Growing Desire for Premium
Several trends are driving value-creation opportunities in the ingredient sector, including foodservice channel growth, a challenging labor environment, and an increasing consumer preference for natural and premium products.
The foodservice industry continues to recover and has more room for growth before reaching pre-pandemic traffic and volume levels. “The foodservice industry’s continued recovery remains a powerful tailwind for food and beverage companies serving this channel,” says, Tim Alexander, a managing director in Harris Williams’ Consumer Group.
In addition, consumers are continuing to demand clean-label, natural ingredients, healthier food, and premium products. “Consumers want to see ingredients on the label that are familiar and easy to identify,” says Ryan Freeman, a Consumer Group managing director. “This increasing desire for all-natural food and drink products highlights the significant tailwinds for natural ingredient companies.”
There’s also strong demand for products that simplify front- and back-of-house restaurant operations, especially in a difficult and high-cost labor environment. According to Brant Cash, a Consumer Group managing director, many restaurants are reporting being understaffed.
“Using pre-cooked, pre-cut, or ready-to-use ingredients can save operators significant labor hours and improve consistency,” said Mr. Cash. “This is helping drive interest in food and beverage companies that can offer high-quality, time-saving ingredients.”
A Focus On Clean Label, Freshness, And Consistency
Three recent Harris Williams clients—The Perfect Purée of Napa Valley, J&K Ingredients, and Denali Ingredients—share multiple traits that are highly sought-after among food and beverage investors.
J&K is a prime example of the clean-label trend driving growth. J&K focuses on natural food preservation solutions and supplying ingredient systems that remove chemical ingredients from food labels for baked goods and other food and beverage categories. Its clean-label solutions enhance food quality and safety, extend shelf lives, and reduce waste, which deliver tangible benefits to customers, retailers, and consumers. “J&K’s focus on clean-label ingredients was a key factor in its recent sale to SK Capital,” notes Andy Warczak, a director in the Consumer Group.
Similar to J&K, The Perfect Purée is also a leader in clean-label, natural ingredients, providing frozen fruit purées, concentrates, zests, and blends. The company’s products, which are frozen to maintain the freshness, flavor, and color of their real fruit ingredients, are highly appealing to both foodservice customers and consumer packaged goods companies wanting to offer clean-label, natural, and premium products to their customers.
Each company also provides a consistently high-quality product. For instance, The Perfect Purée’s products stand out for their consistent flavor and vibrant color, regardless of the fruit varietal, country of origin, or time of the year. Providing such consistency is highly complex as the company sources fruits from various growing regions and in different seasons that produce variation in sweetness and color.
“The Perfect Purée has rigorous sourcing requirements and extensively tests incoming fruit to adjust formulations and ensure each finished product has a consistent finished flavor profile and appearance,” says Mr. Cash. “Chefs and mixologists highly value that level of consistency and quality control.”
According to Mr. Warczak, time- and labor-saving premium products like purées are a win-win for a restaurant: “They simplify in-house operations while improving quality and taste year-round. Plus, using a fresh fruit purée is a way to offer a more premium cocktail or food item at a higher price.”
Having a well-known and respected brand is another key trait shared by winners in the space. The Perfect Purée, for example, partners with culinary schools to introduce the value proposition behind their products early in a chef’s career. The company also engages chefs and mixologists as brand ambassadors to showcase its products and drive demand among end users. Complementing these efforts is The Perfect Purée’s extensive sampling program, which allows chefs to experience the products’ premium quality and has become an integral part of growing the brand. Over time, these brand-building efforts have led to The Perfect Purée becoming the go-to premium purée brand amongst chefs, pastry chefs, and mixologists.
Like The Perfect Purée, a comprehensive flavor innovation sampling program has also helped drive the growth of Denali Ingredients, an ingredients manufacturer serving ice cream, frozen novelty, and foodservice customers.
“Denali Ingredients’ long-standing partnerships with marquee customers and responsive, innovative R&D team are differentiating in the sector,” says Mr. Cash. He adds that the company is committed to offering samples of its latest flavors multiple times each year, providing unique flavor innovation kits that open the imaginations of new and existing customers to ideate new products and help the company win in the marketplace.
Runway for Growth in Foodservice Ingredients
Investors interested in ingredient businesses should look closely at their multi-channel growth potential. With strong differentiators in place, The Perfect Purée of Napa Valley, J&K Ingredients, and Denali Ingredients are great examples of companies poised to expand in the foodservice channel and more broadly to create diverse, multi-channel ingredient platforms.
Companies with strong differentiators in place and an ability to leverage core competencies in new channels are poised to expand into diverse, multi-channel ingredient platforms.
Mr. Cash notes that foodservice suppliers are often oriented toward serving either chain or independent restaurants. These different audiences require varied approaches to sales and distribution. “The Perfect Purée differentiated itself by working with both national accounts or single-restaurant operators and serving them through a unique, national distribution network. The company’s products also added value to its customers because they can be used across a variety of menu items, including alcoholic and non-alcoholic beverage, culinary, pastry, and confectionery,” he says.
“Leveraging a core competency in a new channel is a significant opportunity in the ingredient sector,” adds Mr. Warczak. “Opening up new markets and channels either organically or though M&A can create more revenue growth opportunity for leaders in the space.”
Premiumization Endures
Trends favoring healthier eating, a need for higher restaurant efficiency, and rising foodservice volumes position the premium ingredient segment for continued growth. Leading companies continuously innovate to create new, high-quality, and natural ingredients that align to consumers changing eating preferences.
Expansion opportunities abound for these companies, across the foodservice channel and more broadly, and many will look to M&A as a key lever to enable new avenues for growth.
Harris Williams is headquartered in Richmond, Virginia, with additional offices in Boston, Chicago, Cleveland, Minneapolis, New York, San Francisco, Washington, D.C., Frankfurt, and London.
This article was reprinted with the permission of Harris Williams.
© 2024 Private Equity Professional | February 9, 2024
