Food and Beverage Investment Banking: The Best Way to Have Your Cake and Eat It, Too?

There’s one product that fuels investment banking analysts and associates above all else: Red Bull.

And, to a lesser extent, takeout ordered from GrubHub Seamless / America To Go.

So what could be better than advising the companies that help you survive your job on a daily basis?

Nothing, really, which is what makes the food and beverage investment banking coverage group so attractive.

Here’s what’s on the menu:

• How to get into the food & beverage group.
• How to analyze companies in the food, beverage, supermarket, and restaurant industries.
• What types of deals and advisory assignments are most common.
• Where to go after you’ve had your fill and you’re looking for dessert.

You Are What You Eat: Getting a Seat at the Table

Q: Many people are drawn to TMT (technology or technology, media, and telecom) investment banking coverage or mergers and acquisitions.

What motivated you to cover the food sector?

A: I was hungry… for deal flow.

In the US, Texas may be home to oil and gas coverage, but cities like Charlotte take ownership of non-durables, non-cyclicals, and soft goods such as food and beverages.

I was from the right area, I liked the industry, and I wanted to gain a broad skill set working on lots of different types of deals – so it just made sense.

Q: Where do bankers who specialize in food come from?

A: At my firm, it’s really happenstance.

There are some junior staff members who made a lateral move from smaller investment banks (that focus on M&A, sorry PIPEs) because our hiring policy aims to attract “low-risk” candidates (i.e. you must have done this job before).

I took some classes on economics, accounting, and finance to show I was interested in the work, which helped with getting internships and entry-level offers.

If you don’t have a background in these areas, I strongly recommend programs such as Breaking Into Wall Street as way to get a firsthand education.

You can then apply this thinking directly to the role of an investment banking analyst, sell-side equity research analyst, or even a buy-side analyst (check out the bonus case studies on the site for that one).

The Top of the Food Pyramid: What Goes Into Food and Beverage Coverage

Q: Can you break down your coverage area by sector?

Bonus points for ranking the sectors so we can create our own “food pyramid”…

A: The way I see it: you’ve got restaurants, grocery stores, and food as the 3 major verticals.

Restaurants: Here’s how I think about the major groups, with example companies:

• Fast Casual: Cosi, Panera, Tim Horton’s
• Quick-Service Restaurant (QSR): KFC, Popeye’s, Pollo Tropical
• Coffee/Snack: Dunkin Donuts, Krispy Kreme, Caribou Coffee
• Mexican: Chipotle, Taco Bell
• Pizza: Domino’s, Papa John’s
• Sandwiches: McDonald’s, Burger King, Carl’s Junior

You can also divide it by hot (savory) and cold (includes dessert) food.

There tends to be less competition in the cold area (in case you’re an aspiring chef planning your career).

Grocery Stores: Conventional, supercenter, limited assortment (under 1,500 items), and natural / specialty are the major categories.

There are also various ways to dress up grocery stores with decorations and inventory composition.

Example companies include Whole Foods, Kroger, and Safeway.

Food (Major Diversified): These companies produce a variety of products that you would find in a supermarket itself.

Examples companies include Kraft, WhiteWave, and Pinnacle Foods.

Getting Qualitative: What’s Your First Ingredient in the Recipe?

Q: What are the key drivers that influence this sector?

A: According to Amherst Partners, changing demographics, ethnic diversity, and household income are some of the key drivers for the food and beverage sector.

Changing Demographics: Longer lifespans and higher income levels lead to an interest in low-fat / diet grocery items.

You might even say that gender distribution affects the in-demand products: think about all the nutrition bars geared toward the female population.

Ethnic Diversity: A more heterogeneous population leads to broader segmentation categories, as well as more substitutes when popular items are sold out.

Household Income: A family of multiple income earners doesn’t have much time to cook – or to shop.

That trend has made prepared foods, such as the kind you might find in a food court-style marketplace section, more popular.

Choosing the right target audience also makes a big difference for your value proposition.

As seen from Very Small Array, there is a strong correlation between income brackets and particular grocery chains.

But, surprisingly, there is less of a relationship between the concentration of grocery stores and income level.

Macroeconomically speaking, you could watch the Consumer Sentiment from the University of Michigan to get a good sense of the sector.

For specific grocery categories such as dairy or meat, you would look at production, exports, and imports to figure out which countries are the leaders in each category and where your client fits into that.

Finally, you also have to consider both the domestic market’s prices and the export market’s prices for the product in question.

Q: Great. So how do you move from these broad trends to companies in the sector growing their revenue and increasing their margins?

A: Sure – I’ll start with restaurants and grocery stores, since those are bit easier to think through.

From an organic perspective (that is, everything but M&A), firms have a couple of levers for increasing sales:

Open stores in new and existing markets: All else being equal, more stores in more different locations will equal more revenue… at least until the region is saturated (see: Starbucks).

Capitalize on consumer trends: If restaurants are serving kale, customers at the grocery store will start asking for kale. So you need to watch those trends and respond to consumer demand. But you also have to be careful to distinguish between trends and fads.

Improve up-sells and cross-sells: Could you position items in the store to encourage more impulse purchases? Or get consumers to “upgrade” to something higher-priced?

The same goes for a restaurant and how items are priced and positioned on the menu.

Increase labor productivity: This involves syncing up training at the grassroots level and the persona of the target customer. You want your employees to interact directly with customers in order to boost loyalty to the store’s location (read: increase labor productivity).

Localize product mix: For some companies, the customer relationship begins before he/she ever walks in the door: the items on the shelf already match the customer’s identity.

I’ve personally seen this with hair care products catered to the African community, aguas frescas for the Latino community, and household decorations for the Asian community.

Q: And what about improving margins?

A: Right, this one’s important since so many financial sponsors and lenders rely on EBITDA…

…But most food and restaurant businesses tend to be low-margin, so even a small margin increase can make a big difference.

A few ideas:

Centralized warehouses: I have seen companies invest in a central warehouse in order to facilitate distribution across its target geography – you’ll also see IT systems becoming streamlined or more seamless to reduce costs.

Renegotiate and consolidate vendor relationships: Essentially, you stack up all your expenses by vendor and see who the top vendors are – and then you use that information as leverage to seek out purchase discounts based on volume.

Improve price perception: All else being equal, it’s easier to earn a higher margin on higher-priced products – just compare Whole Food’s margins to Safeway’s.

So increased prices not only increase revenue, but may also potentially increase margins. And it’s amazing just how much grocery prices can vary.

Getting Technical: Organic, or Genetically Enhanced?

Q: So moving beyond revenue growth and margins, what are the key metrics you would look at when analyzing a company in the food and beverage sector?

A: I’ll start with the key operating metrics:

• Net Sales per Store. To calculate it, net sales = gross sales – discounts to customers – returns from customers – allowance for missing or damaged goods, and then you divide by the total # of stores.
• Net Sales per Square Foot (or Square Meter). This metric excludes real estate used for operations or warehousing inventory. Maintaining a brick & mortar store is a big expense for any retail company – so this calculation provides a sense of how much money is coming in as a result of that spending. [nota bene: Yes, there can be outside factors that influence a store’s profitability as well]
• Store Contribution Margin = Sales – Cost of Goods Sold – SG&A. This metric tells you how much an individual store adds to a company’s operating income – if you compare this metric at different stores, you can tell if the general price level is too high or too low, as well as the demand for individual products (if you calculate this at the product-level).
• Sales Growth and EBITDA Margins. Just like with any other company.
• Number of Owned Stores [or Restaurants]. More stores = higher potential revenue and profits… to a point.

Q: …and valuation methodologies?

A: Nothing unusual – you still use the same valuation multiples (TEV / EBITDA, TEV / Sales, P / E, and P / BV), and you still use comparable company analysis, precedent transactions, and the Unlevered DCF.

You’ll also use EBITDAR and (TEV + All Leases) / EBITDAR if you’re working with a set of U.S.-based companies where some own their own stores/restaurants and others rent, and you need to normalize EBITDA for comparative purposes.

If you’re dealing with companies that use a mix of U.S. GAAP and IFRS, you may have to use EBITDAR as well (see: more on EBIT vs. EBITDA vs. EBITDAR vs. Net Income).

Lease accounting is quite important in this sector because of these differences between U.S. GAAP and IFRS and the renting vs. owning distinction.

Q: Happen to have any example pitch books or valuation materials to share?

A: Of course, that’s the best part of these articles:

Restaurants:

• Amherst Partners: Food & Beverage Credentials
• Smith & Wollensky: Valuation
• Landry’s Pizza: Valuation

Major Diversified:

• Financial Times: Kraft / Cadbury Case Study
• Wall Street Journal: Kraft / Cadbury Case Study
• Ralcorp / Post Cereals: Valuation (from Fairness Opinion)

Other:

• Perdigão S.A. (poultry, pork, milk) and Sadia S.A. (agribusiness, meats, margarine, desserts, pasta): Valuation

Here’s a confidential information memorandum as well:

• Pizza Hut by Barclays Capital and Goldman Sachs

Reading the Nutritional Labels: Deal Types and Key Financial Advisors

Q: What types of deals are common for those who cover the food and beverage sector?

A: Mostly debt and M&A.

There are very few opportunities in the equity space – partially because it’s a relatively mature industry.

Part of it is also that in a low interest rate environment, companies gravitate toward debt for their financing needs.

Q: Where do people go to learn more about your sector?

A: Because the group is quite specialized, you can look at equity research reports or investment banking newsletters.

You can also look at the National Restaurant News for stats and reports on key metrics like same-store traffic.

Also think about trade groups focused on this sector, such as the Financial Executives Networking Group.

Q: Which banks focus on the food and beverage sector?

A: Boutiques include: IndiaBrook, Peakstone, Spartan, CCC Investment Banking, and Trinity Capital.

The top M&A players in this area include: Centerview, Goldman Sachs, and Lazard.

Equity houses include: Credit Suisse, Goldman Sachs, and Morgan Stanley.

Debt houses include: JP Morgan, Bank of America Merrill Lynch, and Deutsche Bank.

The Check, Please: Identifying and Pursuing an Exit Strategy

Q: Where do food bankers go after getting their fill?

A: Many food professionals look at buy-side opportunities focused on the broader area of consumer retail.

Depending on your deal experience, you could also go to distressed or credit funds.

You also see many former bankers following the corporate finance career path and joining conglomerate-type companies’ internal finance departments.

They’re similar to roles that participants in rotational programs such as those offered by General Mills or Doctor Pepper Snapple Group would pursue.

I have also seen banking professionals move to the buy-side, and then move into corporate development careers at normal companies.

As you know, it’s a numbers game where there are very few corporate development teams, but many buy-side funds – both of which function with a low headcount.

Q: Any last requests?

A: Yes. Remember to say “thank you” to the people who helped you along the way.  More importantly, let them know once you’ve accomplished your goal.

Q: Thanks for your time!

A: My pleasure.