Fragmented food distribution market attracts PE: report

Brown Gibbons Lang & Company director Daniel Gomez says firms that have historically avoided food investments are 'dipping their toes in the market.'

Private equity firms are among the most active investors in a food distribution market beset by changes in consumer demand and distribution channels, according to an investment bank report.

Published this month by Chicago-headquartered mid-market investment bank Brown Gibbons Lang & Company (BGL), the report described the large and fragmented industry that services US food retailers like supermarkets and foodservice providers.

E-commerce platforms designed to harness growing demand for healthy and fresh foods are experiencing rapid growth within the $1.2 trillion food retail market, according to the report, which described regional and local distributors as playing key roles in the $289 billion foodservice segment.

“While the industry has undergone consolidation over the past 15 years, the five largest players still account for approximately one-third (~35 percent) of industry sales, with the remaining share distributed across 11-15,000+ regional and local operators,” the report’s authors wrote.

BGL director Daniel Gomez, one of the report’s authors who leads the firm’s food & beverage practice, told Agri Investor private equity firms that have historically avoided investments in food companies are beginning to “dip their toes’ into the market.”

“From their perspective, the easiest way to do that is through distribution,” said Gomez. “That exposes them to the end market without having to take a risk in buying a brand or buying a restaurant which they may not have prior experience in.”

To illustrate, Gomez highlighted HIG Capital’s January acquisition of Lipari Foods – a Midwest distributor focused on “perimeter-of-the-store” segments like deli, dairy and specialty retailers – and Palladium Equity Partners’ December purchase of protein and Hispanic food product focused Quirch Foods. Gomez said he expects firms active in the market to continue expanding geographically through acquisitions or perhaps into new subsectors requiring more specialized facilities.

One of the characteristics of food distribution companies that investors find attractive, Gomez said, is that they offer stable cashflows. As opposed to grocery store chains that periodically encourage consumer product suppliers to compete on price, food distribution companies generally maintain long-term relationships with their customers.

“Once a restaurant or a retailer has its distributors, there is really no impetus for change, unless there is a pattern of mistakes, or a single mistake big enough to cause a disruption in the customer’s business,” he said. “If the distributor is delivering on time and providing quality customer service – getting the good feedback from the customer and transmitting that to the supplier base – there is little risk of disintermediation for quality distributors.”