Growth challenges faced by food and beverage companies

As family-owned food and beverage companies move along their respective growth trajectories, challenges inevitably present themselves – some that are industry wide and some unique to each individual company. Such challenges include:

• Changing consumers tastes and preferences
• Increasing use of technology in business processes and the consumer experience
• Understanding when to pivot or invest in new business models

No matter the particular challenges faced by middle-market food and beverage companies, the ability to overcome these challenges boils down to answering one key question – where do we need to focus our efforts to maintain consistent growth?

During a recent panel discussion, select executives of family-owned food and beverage companies that recently faced ownership transitions shared their succession paths and views on the current opportunities for middle-market companies, the panelists included:

• Tom Walzer – CEO – Saco Foods, LLC
• Dimitri Pappas – Founder/Owner – Orchard Solutions
• Jonathan Del Re – CEO – Lacas Coffee Company

In an excerpt from "Challenges of growing and transitioning a private food and beverage company," the panelists discuss the particular growth challenges they faced at their respective companies.

Baker Tilly Capital: What were some of the challenges you faced with respect to growth?

Tom Walzer: As Saco Foods’ sales started to grow quickly, we knew we were in need of capital and in need of strategy to help answer the questions “where do we grow and where do we focus?” These were challenging questions we wanted to answer because we believe Saco Foods can be a platform for bolt-on acquisitions to make us more important and relevant in Saco’s core areas of the store – produce and center-store baking – as well as new areas of the store with our current customer base. We were looking for a boutique private equity firm without a traditional fund structure and a much longer term and flexible investment time horizon. In short, we were willing to take some chips off the table, but still retain material ownership and, mostly important, another “large bite” at the apple down the road by gaining a strategic partner. We brought in Benford Capital in late 2016 and they have helped enable our growth strategy, both organically and through strategic acquisitions.

Jonathan Del Re: We are a multi-channel coffee company, and the channels that were the drivers of growth and profitability in the past are now growing more slowly. On the other hand, some of our higher-growth channels are either very small or not very high margin. People likely look at us primarily as a direct-store delivery (DSD) coffee company catering to diner and restaurant customers, and while these markets remain very important to us and we are well positioned within them, they account for only 30 percent of our current production volume. It takes tremendous effort just to maintain low to mid-single digit growth in the DSD business. Most of the remaining 70 percent is sold on pallets, in bulk or online. Some of these channels, while growing more quickly than DSD, are less profitable for us.

Another challenge is keeping up with changing consumer tastes and preferences. We still love the diner business, but more diners have been closing than opening lately and the volumes of each diner typically are not growing much, in part because people are consuming good coffee at a million other places. My predecessors planted the seeds of diversification into a wider selection of premium coffees and new end markets, and we’re continuing the process.

A third challenge that comes to mind is volatility in the price of the coffee commodity. It was trading near $3 per pound when we acquired the company and it’s now closer to $1 per pound. In our industry, we like stable prices.

Baker Tilly Capital: Is technology entering into your business now, or is it still driven by your sales people?

Jonathan Del Re: We are specifically focused on technological evolution, which is a big challenge on many levels. This applies to the way consumers are ordering, logistics, all types of business processes, factory automation and more. We’re not fully evolved in all these areas, but we are getting better. For example, we are currently investing in a robust online ordering system, which will be tied into our enterprise resource planning system and facilitate ordering at any hour of the day without human intervention on our end. Another area of focus is online sales, which continue to grow faster than our overall company sales. We’re looking at a small acquisition to bolster our online sales capability. Other technology we’ve invested in include a CRM, inventory management software and two new production lines, which allow us the ability to insource the manufacturing of certain products. With technology, I feel like we are better positioned than many companies our size, but we have a long way to go to prepare ourselves for the future.

Dimitri Pappas: Over time, the business grew from $250,000 in sales in 1962 to $400 million in 2011. The biggest factor that contributed to our growth was making good decisions with respect to the categories of products that we made. My father and uncle looked ahead and saw that a commodity tomato canning business based in southern New Jersey would struggle, given the economics of growing tomatoes in New Jersey. When the time was right, they pivoted from the legacy business primarily focused on tomato canning to one that was focused on juice, which at the time was a growing category.

This was a good lesson, because the best way to grow is to find and invest in categories, channels, packaging formats or customers that are growing rather than fighting battles with competitors on a crowded playing field. Even after the initial decision to get into juice, our company made good long-term decisions like getting into organic juices very early, diversifying our packaging options and expanding into new geographies that allowed us to grow. We had our misses as well – one of the worst decisions we made was when cranberries were scarce in the late 1990s, we supplied Pathmark and shorted Costco because we didn’t anticipate the growth of club stores. That is one we would have liked to have back!

One of the most difficult things for privately held businesses is that you need to be realistic and clear sighted about what the future holds for the business. You cannot simply continue doing things just because it is the way you have always done them. This is sometimes difficult for closely held private businesses because they have been successful and they do not want to let go of what they know and what has enabled them to build the business.

Baker Tilly Capital: Did emotions play into the decision to transform from a tomato canning business to a business focused on juice?

Dimitri Pappas: It could have been emotional, and there are many leaders that probably would have struggled with the decision. But the best family businesses are able to take emotion out of the equation and make a decision that is right for the business, and that was certainly the case in our situation. As a private business, you can make the right long-term decisions for the business even if it has a short-term negative impact on growth and profitability. We lost something like 25 percent of our sales the year after we sold the tomato business, but it allowed us to invest in growth and it was the right long-term decision. This is harder to do for a public company or if you have outside investors.

Download the full panel discussion

For more information on this topic, or to learn how Baker Tilly Capital specialists can help, contact our team.

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