All industries go through periods of consolidation.
Industry consolidation can happen over a very short period, like the technology sector, or over longer periods, like the steel and auto industries.
There is a typical pattern we see where the first wave of consolidation occurs in a 1-3 year period, the industry remains static for many years, and then another wave of consolidation occurs as new factors drive change in the industry.
The most prominent factors that drive consolidation include market conditions, international competition, increased customer concentration, introduction of new technology, and increased capital costs.
Consolidation can also take many forms. The two most common forms are mergers that achieve scale and mergers of vertical integration.
The first form spreads capital costs over a greater revenue stream and enables a company to better drive margin expansion through scale to cut costs and hold off pricing pressure or, at the very least, generate sufficient returns in a price pressured environment.
The second form, vertical integration, enables companies to control the value chain and ensure high quality standards throughout the chain and wring out costs and capture margin throughout the value chain.
The fruit sector is not immune from economic reality, and consolidation is on the horizon. The industry has been on the forefront of identifying market trends, developing product to meet the demand, and marketing and branding their product as a premium to capture premium pricing.
The strong market over the past few years has clouded changing industry dynamics including larger capital investment requirements in the form of packing technology, continued consolidation among customers, customer desires to deal with fewer suppliers who can provide year-round product with guaranteed minimum quality, and a need to offer workers as close to full-year employment as possible in order to ensure a sufficient supply of workers.
The dynamics driving industry change are natural, and while they can be viewed as a risk, they can also be viewed as an opportunity. Because consolidation occurs in waves, it’s important to understand where the industry is going and what it will look like in the next 5-10 years.
Our view is that the fruit industry will take on the look of a barbell. At one end of the spectrum, there will be smaller independent growers who serve a niche, perhaps organic product or varieties that do not make sense for larger growers to farm. At the other end of the spectrum will be large vertically integrated suppliers of year-round products.
In a barbell industry, the mid-sized producer is most at risk as they are not large enough to have the scale to capture margin and compete against the larger suppliers, yet they are not small enough to capture a niche. The second category most at risk is the smaller producer who doesn’t serve a niche with a superior product.
So how does the mid-sized and small players strategically adapt over the next 5-10 years to changing industry dynamics?
There are four primary ways to compete:
1. Become a high-quality producer in a niche or premium sector. Organics are at present the most attractive opportunity given premium pricing and market growth ratios. Growing a variety with a smaller customer base willing to pay a premium price is another option.
2. Consider a joint venture with other mid-sized players in the value chain. As the market continues to consolidate, the type, farm, economics and partners will need to be carefully thought through, and deal structure and economics may need to change.
3. Consolidation—buy-side. Some mid-size players believe, and rightfully so, that they have the know-how to become larger players, but they lack capital. Capital, both equity and debt, is available for growth and acquisition. Certain structures exist to access the capital without giving up full control or putting the core business at risk.
4. Consolidation—sell-side. The last option is to sell the business either to a competitor or a financial buyer. Selling to an industry competitor most often means selling 100 percent and giving up control. Selling to a financial buyer can be structured as the sale of a majority, with the owner retaining a minority stake and day-to-day operating control.
In a period of industry consolidation, good and viable options exist for those business owners who proactively think through their opportunities and can honestly assess their own competitive advantages vis-à-vis other market participants.
The most at risk business owner is the one who ignores market dynamics. It may be that a business is well positioned for now and in the future, but a careful analysis and a proactive approach should at least be given consideration. •
Michael Butler is chairman and CEO of Seattle-based Cascadia Capital, a diversified, boutique investment bank serving both private and public growth companies around the globe. Butler leads the firm’s Energy and Applied Technology and Food and Agribusiness practices.