Competition in the snack food market keeps getting more interesting as mergers and acquisitions continue to increase. Flowers Foods (FLO) just announced their intention to purchase Tasty Baking Company (TSTY) for $ 4 per share a +148% premium over its prior closing price. Flowers is a leading bread and sweet baked goods company with core operations focused in the Southeastern U.S. Tasty Baking is a regional snack cake producer with strength in the Northeastern U.S. Tasty competes with other leading snack cake producers including Hostess brands and McKee Foods (Little Debbie).
This purchase follows on the heals of Diamond Foods (DMND) purchasing the Pringles brand from Procter and Gamble (PG) and a merger of equals between Lance Foods (LNCE) and Snyder’s of Hanover. Diamond has been aggressively adding to its snack nut portfolio through a string of deals including buying Pop Secret from General Mills (GIS) and adding Kettle brand potato chips. The Lance/Snyder merger brings together the leading pretzel manufacturer with Lance’s portfolio of snack brands including Cape Cod, Tom’s, Jay’s and Stella Doro.
So why all the acquisitions and what does this mean for the snack food market ? The first thing that is evident is these are opportunistic buys and mergers. Companies are looking for scale in order to drive lower costs and increase their leverage and positions in the snack food aisle. Frito Lay (division of Pepsico) (PEP) is still the undisputed leader in the snack food market with their Lays, Tostito’s and Cheetos brands. Diamond’s strategy is clearly to add snack products that round out their portfolio that do not require direct store distribution. They are looking for orphan brands that they can drive growth through increased marketing and distribution expansion. Lance was looking for a partner that could strengthen their portfolio of snack brands and compliment their direct store distribution model. Lance further strengthened their business model by announcing the conversion of employee routes to the more cost efficient independent operator model. This is a classic case of making 2+2=5.
In Flowers case they are strengthening their position in the snack cake market and also potentially opening up the distribution of their bread products through TastyKake’s distribution network in the Northeast. National distribution has long been one of Flower’s goals and Tasty Baking’s route system will eventually allow them to expand their Nature’s Own bread brand in the Northeast. This too is a good move but one with some definite execution challenges. Flowers had to make a move after the leading US bread and sweet baked goods company Grupo Bimbo (GRMBF.PK) first purchased the bakery brands of George Weston Bakeries (Entenmanns ,Thomas, Arnold, Brownberry brands) and then purchased Sara Lee’s bakery division(SLE). These acquisitions by Grupo Bimbo made them the undisputed leader in the US bread market with a 30$ share. Flowers is currently 2nd in bread with a $10 share followed by Hostess brands (Wonder, Home Pride, Beefsteak, Nature’s Pride) with a 9.5 $share. Flowers Foods purchase of Tasty Baking is actually more about the bread market with added penetration of the snack cake market being a secondary benefit.
Going forward we expect the snack food market to continue to consolidate but albeit at a smaller scale. Of the remaining players only J and J Snack Foods (JJSF) is a publicly trade company. However, there are many private companies including Hostess Brands, McKee Foods( Little Debbie),regional potato chip companies (Utz, Herr’s, Old Dutch) and others that may make sense for private equity. The snack food market is like the rest of the grocery industry where sales growth is tough to come by so companies are looking for strategic acquisitions to improve their portfolio’s of brands and drive cost savings through integration.