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friendly packaging due to consumer demand, especially in California. Styrofoam – which does a great job of preserving freshness but can be devastating to the environment
– is significantly down. There has been a move away from plastic, and the two alternative options have significant drawbacks: Glass is more expensive and heavier (not to mention breakable), and aluminum cans take a lot of energy to make, and some people – including me – don’t think food in them tastes as good. Plastic bag use has also come under fire. However, unlike paper bags, they provide a moisture barrier and are more sanitary than multi-use bags.
Q: ARE THERE ACCOUNTING AND TAX-RELATED ISSUES THAT BUSINESSES MAY BE OVERLOOKING?
A: Fagan
Twenty years of low-interest rates have caused companies to become lax with their cash cycle and levels of working capital. Rising interest rates, inflation, and supply chain issues have increased working capital for most companies. In addition, increases in the cash cycle (the number of days between paying for the procurement of inventory and collection of cash from customer sales) have forced companies to increase their borrowings at a time when borrowing money is at its highest level in 20 years. Recent tax legislation has limited the amount of interest expense a company can deduct. These factors make it necessary for CFOs to take a hard look at cost management accounting and the finance portion of their operations for cash leakage. Between inflation, interest rates, increased effective tax rates, and supply chain disruptions, companies may see profit erosion in 2023.
Q: HOW IS THE INVESTMENT CLIMATE TODAY FOR FOOD & BEVERAGE COMPANIES WANTING TO RAISE CAPITAL OR ATTRACT INVESTORS?
A: Haney
In relative terms, given the state of the economy, it’s very strong – since food is largely recessionresistant. People always have to eat. There is plenty of capital, and money is pretty abundant for food products that have mass appeal, are affordable, and fall into the “flavor of the day” category, being attractive in terms of health benefits, convenience, and/or taste. The restaurant sector is a different animal because restaurants can be trendy, and a restaurant’s value proposition is usually more than just the food it serves. In addition to food, the value proposition of a restaurant may be the experience, the convenience, the service, etc., in addition to serving good food.
A: Apfelberg
There is no question that the market for financing and acquisitions has tightened or slowed. This makes obtaining growth capital or achieving a liquidity event for a business more difficult than in the past. To be able to achieve that, companies need to have products with an almost cult-like following, an experienced management team, a clearly articulated growth strategy and identifiable, concrete steps to achieve their business plan. There is a noticeable “flight to quality” when deals get evaluated. Companies need to do whatever it
takes to put themselves into that category. We are seeing an increase in transactions for less than 50% of a company so that the founders/ early investors can have a “second bite at the apple” in a few years when multiples and other deal terms are more seller-favorable. Transactions are also much more highly structured or complex than in the past. It is critical to understand the “real life” impact of all of this and “stress test” it under varying potential economic and operational future circumstances.
A: Pearman
The investment climate is active, but it is not as hot as it was in 2021 or the first half of 2022. Macroeconomic conditions are felt in the industry: Higher interest rates lead to a contraction of cash or a tightening of the belt, and indications of a recession lead to cold feet from investors. However, there is still a good deal of flow in the sector. Emerging companies continue to drive disruption in food and beverage, and investors take notice. Many of my food and beverage clients are successfully closing capital raises. These years are important building years for emerging companies. Series A or B rounds will be closed, and companies will continue to build momentum and demonstrate solid performance in the market, which will tee them up for a transaction as we enter a more expansive phase of our economic cycle.
Q: WHAT ARE THE PROS AND CONS OF BEING BASED IN LOS ANGELES IN 2023?
A: Apfelberg
Let me start out by saying that the pros outweigh the cons. Some of the negatives include higher costs for employees and real estate as well as increased health and safety regulations as compared
Macroeconomic conditions are felt in the industry: Higher interest rates lead to a contraction of cash or a tightening of the belt, and indications of a recession lead to cold feet from investors.”
A: Haney
– Maria Pearman
to companies located elsewhere. Being in a big city, there is also more competition, especially when first starting out and trying to find distribution and retail opportunities. Some of the positives, though, are the more open and accepting attitudes, willingness to try new things and diverse tastes to accompany diverse backgrounds and lifestyles. Los Angeles attracts creative people who are willing to take risks. There is also the “Hollywood” factor that can be a huge opportunity to building brand awareness and loyalty.
I see mostly pros. In my opinion, L.A. is the most vibrant business community on the planet. It would rank as the 10th largest economy in the world by itself. If you need it, you can get it here. Restaurant trends are set here, and given our diverse population, L.A. is a microcosm of the world where you can find any
type of food. Many suppliers are here because importing is supported by our location next to the West Coast’s largest port and close proximity to farmers, dairies, and ranches. We also have a more creative base of workers than most other places. The cons I can see are the travel distances since the city is so spread out, the cost of living is high, and the regulatory environment can be challenging in Los Angeles.
Q: WHAT KEEPS FOOD AND BEVERAGE MANUFACTURERS AND DISTRIBUTORS UP AT NIGHT?
A: Pearman
Access to labor continues to be a major concern. Hiring is still very challenging today. Compressed margins continue to linger and present further challenges. During the pandemic, costs of direct inputs soared, and prices could not increase enough to preserve margins. Costs are coming down, but margins are not where they were pre-pandemic. Many food and beverage companies have great top-line performance, but they still struggle to make ends meet. Leaders are looking for innovative ways to drive efficiency in their operating expenses.
A: Fagan
Respondents from the forthcoming 2023 Citrin Cooperman Pulse Survey report that supply chain disruption, rising inflation, and interest rates are the top issues of concern. Following closely behind is the worry that their employees do not have the appropriate technology skills to maximize the current software being run by their enterprise resource planning (ERP) system. Besides the factors that were at least partially caused by COVID-19, the Fourth Industrial Revolution continues in the food and beverage industry. Artificial intelligence (AI) and machine learning (ML) continue to revolutionize the industry. Algorithms are advancing beyond predictive maintenance and quality control. Manufacturers with heavy assets and complex production apply AI to reduce their reliance on experience, intuition, and judgment. Since variations in operators’ qualifications can affect efficiency, AI’s ability to preserve, improve, and standardize knowledge has become a game changer.
Q: LOOKING TO THE FUTURE, HOW DO YOU SEE THE INDUSTRY EVOLVING OVER THE NEXT FIVE YEARS?
A: Pearman
Categories that have been stagnant for years are being revitalized by innovative new brands. Companies are bringing life and zest to canned food and other pantry staples with new flavor profiles and formulations. Who would have imagined that canned beans could be exciting? Some companies have introduced contemporary flavors, high quality, and attractive branding to an aisle of the grocery store that has been stagnant for decades. Emerging food and beverage companies will continue to find pockets of the market that sorely need innovation, which will drive continued acquisition and disruption of sleeper categories.