Under Supply Chain Pressure, FMCG Giants Expand Manufacturing Capacity Through M&A

Last year, when chocolate and snack giant Hershey set out to acquire Dot's Homestyle Pretzels, the $1.2 billion deal was about more than just the brand—it was about the production capacity behind it.

Founded over a decade ago, Dot's has become the third-largest pretzel brand in the U.S. market thanks to bold flavors like Southwest and honey mustard, with growth driven mainly by word of mouth and sales concentrated in the Midwest and West. Hershey hoped to broaden the brand's market reach as part of its broader push into savory snacks.

However, during due diligence, Hershey discovered that Dot's uses a proprietary process to apply its signature seasoning. Given the supply chain challenges facing the U.S. economy, Hershey believed it had to control both the brand and the manufacturing capability to drive brand growth.

"Given the current macro environment in manufacturing, labor shortages, and supply chain issues, combining the brand with manufacturing capability was critical to the deal," said Jeff Lilla, Vice President of Snacks and Grocery at Hershey. "If we want to achieve sustainable long-term growth, we need end-to-end control over what we produce and what we bring to market."

So far, acquiring Dot's along with its co-manufacturer has paid off for Hershey. CEO Michele Buck told Wall Street in July that retail sales had grown about 50% over the past three months, with market share up 3.7% during the same period.

"Sitting on a gold mine"

In dealing with demand fluctuations and supply chain uncertainty, companies like Nestlé and J.M. Smucker have announced investments of hundreds of millions of dollars in new plants. But building new facilities can take years, during which time consumer goods companies may miss opportunities to meet growing demand and corresponding sales.

As a result, many food companies are instead acquiring existing plants to boost capacity or expand brand reach more quickly. Buying manufacturing capacity—whether standalone or bundled with products as Hershey did—offers several other benefits: it can protect proprietary information, avoid complications with co-manufacturers over training or equipment, accelerate product innovation, improve margins, provide a safe home for capital, and reduce reliance on currently unreliable or overloaded supply chains.

"The challenge is that everyone (with a plant to sell) realizes they're sitting on a gold mine. If such an opportunity really existed, someone would have already jumped on it."

— Annemarie Vaupel, Vice President of Foodservice Marketing at Hormel Foods

Minnesota-based Hormel Foods, which owns brands like Skippy peanut butter, Planters nuts, and Jennie-O turkey, is looking for additional manufacturing capacity, according to Annemarie Vaupel, its Vice President of Foodservice Marketing. The problem is that many other food producers are looking too.

"The challenge is that everyone (with a plant to sell) realizes they're sitting on a gold mine," Vaupel said on the sidelines of the National Restaurant Association Show in Chicago in May. "If such an opportunity really existed, someone would have already jumped on it."

When Hormel acquired Planters from Kraft Heinz last summer for $3.35 billion, it gained not only a food portfolio including the iconic nut products but also three valuable production facilities in California, Arkansas, and Virginia.

Vaupel noted that these plants are invaluable because Planters uses unique manufacturing processes and equipment to package nuts into plastic jars, tubes, and bags—equipment not used elsewhere in Hormel's portfolio. Without these assets, Hormel would have had to buy machinery or find co-packers to produce and package the products.

"That would have diverted energy from getting operations up and running immediately after the acquisition. It would have taken us a long time to realize a return on this investment," Vaupel said. "These plant assets are a key part of the overall purpose of buying the brand to grow it."

Brian Choi, CEO of The Food Institute, a food industry media and market research firm, agrees that many "low-hanging fruit" in terms of plants have already been picked. But he says companies with ample cash and eager to meet surging demand may have to pay premium prices and accept sellers' asking prices.

"They have no choice but to acquire because building takes too long," Choi said. "That will make these assets more attractive, even if people think there could be a short-term recession in the next 6 to 12 months."

Meeting future demand

Not long ago, consumer goods companies were moving away from manufacturing. Companies divested plants, adopted asset-light models, and focused on innovation and keeping existing products relevant. They didn't want to be distracted by equipment maintenance, overhead costs, or worker recruitment and training, said Henk Hartong III, Chairman and CEO of Brynwood Partners, the private equity owner of SunnyD drinks, Buitoni pasta, and Juicy Juice.

Now, the situation has dramatically reversed, with several companies adding capacity for previously acquired brands through M&A.

Last year, Utz Brands acquired Festida Foods for $41 million—the company was the largest manufacturer of its On The Border brand tortilla chips. Utz said the acquisition would improve the supply chain for On The Border (a brand acquired six months earlier) and enhance the company's ability to expand geographic reach for that product and others in the Midwest.

In May, B&G Foods acquired the frozen vegetable manufacturing business of Growers Express. Growers Express is a manufacturer, producer, packager, and seller of frozen vegetable products, primarily under the Green Giant brand.

"By increasing the variety and volume of Green Giant frozen vegetables produced in-house, we expect to reduce inefficiencies, costs, and supply chain risks for certain Green Giant frozen products," B&G CEO Casey Keller said in a statement. "This acquisition will enhance our innovation efforts for the Green Giant brand and improve speed to market for new products."

Erin Lash, Director of Consumer Equity Research at Morningstar, says acquiring existing assets rather than building from scratch often pays off for buyers, but it's not without risks. Acquirers need to carefully assess whether plants are efficient, use the latest technology, and whether significant investment is needed for improvements after purchase. Buyers also need to ensure demand for the products produced will persist in the future to justify the price.

"Adding capacity for certain brands or businesses presupposes they have staying power," Lash said. "But if volumes are going to fall, are companies going to burden themselves with excess capacity?"

Only themselves to blame

At Brynwood Partners, owning manufacturing capability is central to its business strategy—acquiring underperforming assets from large consumer goods companies and then boosting sales by changing product packaging, pricing, or marketing.

CEO Hartong says doing it in-house is much easier than working with co-manufacturers, because the latter depends on their speed of action, willingness to invest in new technology, quality of work, and ability to take on additional work. If any of these falter, it can damage the brand, slow the turnaround, and ultimately lead to retailer dissatisfaction.

"You're making excuses for things you can't control," Hartong said. "But retailers don't care about excuses at that point... If shelves are empty, they'll find other suppliers to replace you."

He recalled that when Brynwood acquired the Pillsbury brand from J.M. Smucker in 2018, third-party manufacturing of its gluten-free cake mixes and brownies was "completely unreliable," and the company was constantly explaining shipping delays to customers. Brynwood decided to build its own gluten-free product plant, and since then "service levels have been impeccable."

"Now, if there's a supply problem, we have only ourselves to blame, not others," Hartong admitted. He estimates that 95% of the approximately $2 billion in sales of its private equity-owned food and beverage products is produced in-house.

For Eat Just, unreliable co-packers prompted this plant-based food company to bring production in-house. The protein extraction process used to make its plant-based eggs is complex, and if done improperly, the product can become mushy, potentially turning off consumers. Initially, Eat Just used co-manufacturers but found results inconsistent, with subtle variations changing the final product.

CEO Josh Tetrick and his team quickly realized that to grow the brand and attract more consumers, they had to control this step. The answer was close at hand: in 2019, Eat Just acquired its co-manufacturer in Minnesota, a company it was already very familiar with, including its 45 workers and the small town where it was located. Tetrick says this fortunate acquisition is now paying off, with the company less dependent on supply chain disruptions or unpredictability from overworked or understaffed partners.

"Running a plant obviously has downsides—more to-dos and more worries," Tetrick said. "But we can't afford any disruption; we have to run at full capacity and full speed."

Three years later, Tetrick says Eat Just is undoubtedly better off than if it hadn't made the acquisition. He says Eat Just's eggs likely taste better and have better texture, allowing the company not only to produce a tastier product but also enough to meet growth demand while lowering costs to be price-competitive with premium eggs. High prices across the plant-based food industry often deter consumers from switching from animal products.

Today, Eat Just products are in more than 2 million households, and the company claims a 99% share of the U.S. plant-based egg market.

"If we hadn't taken control of the process (by acquiring the plant), quality would be worse... and the business would be much worse off as a result," Tetrick said.