I have been connected to the produce industry for nearly 40 years. It is clear to me that we are in unprecedented times as many shippers are selling their companies or looking to consolidate their sales efforts with competitors. We must look to the recession of 2008 to understand how we got here. In 2008, when the economy turned south, financial investors began to study which sectors performed well during such difficult times. Overall, agriculture, specifically produce, performed better than the market in general. This information, coupled with the expected global rise in food production linked to population growth, and an overall interest in eating healthier, meant investing in fresh produce would be important. Therefore, we began to see many private equity companies pursue our industry. From an insider’s view, we are seeing further need to consolidate for several reasons. Retailers and food service operators are gaining more buying clout with the massive volumes. If you are not strategically aligned with a few of the big five or six retailer customers and three or four food service buyers, it is difficult to grow your company.
The demands these large customers are putting on suppliers raised the cost of entry to maintain these strategic relationships. Demands included food safety, social audits, traceability, purchasing category data, trade shows and more. These costs are required while pressure on downward pricing has been harsh. Additionally, many family owned businesses did not have clear succession plans, which also opened the door for more consolidation.In the past two years, we have seen four private equity investments in Washington apples, with more expected over the next two years. Private equity companies have also invested in potatoes, western vegetables, eastern vegetables, indoor tomatoes, grapes and citrus, and are placing large bets on controlled environment agriculture. It is safe to say that private equity is here to stay. We are also seeing an uptick in conversations between several shippers interested in merging their sales entities. They are compelled to do this to reduce the competition in the market as well as to provide a wider and deeper assortment of products to gain favor with large customers.
In our work with Verdant Partners on mergers and acquisitions, we are often asked by shippers if private equity is a good option. The answer lies in the vision of each private equity firm. We feel it is important to understand a firm’s interest in and knowledge of fresh produce. As produce insiders, we know that the business is dependent on Mother Nature to achieve financial success. Industry veterans have always taken the long view when it comes to the ups and downs of crop risk.
It is important to understand the private equity firms’ views on this.It is also important to understand the horizon of their investment. If they demonstrate a deep understanding of fresh produce and their investment horizon aligns with your needs, we feel that private equity can be a good option. It is critically important to interview them extensively before you enter serious financial negotiations.
I expect the pace of consolidation and private equity investment to intensify over the next few years. It is important to consider all your options, including private equity, when you decide to exit your company.
Don Goodwin is President of Golden Sun Marketing and an Advisor to Verdant.