Serving Up Growth: Diverse Opportunities Across the Food Service Value Chain

The food service industry is large, diverse and experiencing steady growth. The industry supports a rich variety of related businesses, including equipment manufacturers, food service product distributors, service providers and others. With strong tailwinds that tend to defy economic cycles, the entire supply chain serving the food service segment is increasingly attractive to strategic buyers and investors.

In this article, senior bankers from Harris Williams’ Business Services and Consumer Groups discuss what’s putting the food service value chain on the radar for so many, and how six recent Harris Williams transactions have played to that trend.

Recession Resistance

When it comes to segments with recession-resistant demand, food service has few rivals. In fact, since 2000, the food service industry has grown at a steady CAGR of 4.8% (Figure 1). Consumer demand for food service offerings has stayed relatively stable throughout economic cycles, with significantly less volatility than general consumer spending. During the most recent recession, food service sales declined just 1.8% peak-to-trough, compared to all other retail sales, which saw a peak-to-trough decline of 12.1%.1

“That kind of steadiness is attracting significant attention from a very wide range of investors,” says Bob Baltimore, a managing director in the Harris Williams Business Services Group, “and it’s being driven by well-established demographic trends.”

Figure 1: Food Service Sales Resist Recessions

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Source: U.S. Department of Commerce

Eating Out is “In”

Between 2000 and 2017, annual spending on food and beverages in U.S. restaurants climbed from $573 billion to $798.7 billion (Figure 2). That growth in spending has occurred largely unabated throughout economic cycles, and, in 2015, surpassed spending on groceries.2

The ongoing surge in eating out has its roots in a host of long-term demographic trends, from the rise of dual-income families to increasing spending power among millennials, says Tim Alexander, a managing director in the Harris Williams Consumer Group: “As people get busier and more comfortable financially, there’s a natural shift toward cooking less and eating out more.” 

Figure 2: Restaurant Industry Shows Steady Long-Term Growth

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Source: Restaurant Informer

And, while any one food service player may have good and bad years, the food service industry is comprised of so many different concepts that overall growth remains steady among both independent and chain restaurants (Figure 3).

Figure 3: U.S. Restaurant Unit Counts Continue Steady Climb

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Source: NPD Group

Cycle Resistant, Rich in Variety, Increasingly Important

These attractive dynamics, paired with a wide variety of businesses to choose from across the value chain, provide buyers and investors with numerous opportunities to add stable growth to their portfolios.

“Rather than picking the next winning restaurant concept, they can choose from a range of companies that supply essential goods and services to the entire industry,” says Alexander. “In fact, we’re starting to see interest from groups that have not historically been active in the space. Some of them are using their experience in related fields—such as manufacturing or distribution—to get involved in food service.”

As Brant Cash, a director in the Consumer Group, explains, two key food service industry trends are adding fuel to the fire. “Up-and-coming restaurant concepts are gaining share, and they are building new locations and hiring. That’s driving up rents and labor costs, which is pushing all operators to take a closer look at outsourcing all non-core activities to save money.”

The booming food service space provides fertile ground for investors and buyers looking for steady growth. Indeed, a wealth of thriving businesses are part of the food service supply chain, from restaurants themselves to product and equipment suppliers, specialty distributors and outsourced service providers.

As shown in Figure 4, Harris Williams has extensive experience in each of these key segments, including the following sample of recent clients.

Figure 4: Harris Williams is a Leading Advisor across the Food Service Supply Chain

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Restaurant Technologies (RT)

By outsourcing activities that fall outside of core food preparation and hospitality activities, food service providers can focus on quality, while taking advantage of the cost savings and expertise inherent in the outsourcing model. That’s particularly true of sanitation and safety-related services, which are subject to an expanding body of regulations and standards.

Restaurant Technologies (RT) exemplifies this dynamic. The largest national provider of closed-loop automated cooking oil solutions to the U.S. restaurant and hospitality markets, the company also provides back-of-house hood and exhaust cleaning solutions to national quick-service and full-service restaurant chains, independent restaurants, grocery delis, hotels, casinos, convenience stores, universities and hospitals. Through its automated oil storage, handling, filtration monitoring and disposal management systems and AutoMistTM automated exhaust cleaning solutions, RT helps food service operators make their kitchens safer, smarter, more efficient and more sustainable. 

“RT has a business model that delivers recurring services with a strong value proposition to their customers and market segments. And as regulatory oversight continues to increase, demand for these services will only grow,” says Brian Lucas, a managing director in the Business Service Group.

Imperial Dade

As described above, companies that reliably provide essential consumables to the food service industry have the opportunity to generate steady, cycle-agnostic revenue. Dade Paper (Dade) is just such a company.

Dade is a leading distributor of food service disposables and janitorial supplies, serving customers across more than 20 states, with an emphasis on supermarkets, food service providers, cruise lines and schools. Dade primarily serves the Southeast and Mid-Atlantic markets, reaching from Florida to Maryland, with additional locations in the Tri-State and Northeast regions.

“Dade has done a tremendous job establishing itself as a leader in the food service disposables and janitorial supplies industry, offering best-in-class distribution capabilities and unrivaled customer service,” says Graham Gillam, a vice president in the Business Services Group. “That positions the company well to take advantage of the many growth opportunities available in the food service industry.”

[Note: Dade Paper was acquired by Imperial Bag and Paper Company in 2016, and now operates as Imperial Dade.]

Rise Baking

​Rise Baking (Rise) has risen above the competition by helping food service providers differentiate themselves with innovative, high-quality baked goods. The leading provider of premium cookies, dessert bars, artisan breads, and flatbreads in North America, the company partners with customers in the in-store bakery, food service, and convenience store channels to bring fresh, seasonal treats to the bakery section, which attract customers and boost margins. As such, it benefits from the steady demand and growth of all three channels.

“Through consistent organic growth and multiple acquisitions, Rise has emerged as a leader in North American bakery. It has integrated multiple businesses and innovated new products to build a highly sought-after platform,” says Alexander.

“Investor interest in the bakery sector is extremely high,” adds Cash. “Consumers are demanding higher- quality baked goods, and retailers and food service operators need suppliers like Rise to offer upscale bakery items that differentiate from the competition and reduce labor costs.”

DPI

DPI is one of the largest specialty food distributors in the United States, with a leading position in perishable foods. The company offers a level of service and a breadth of products that simplify operations for national retailers, regional retailers, independent operators and food service providers.

“DPI fulfills a unique niche within the food distribution industry,” says Alexander. “Today’s grocery retailers are utilizing specialty food products to drive traffic and retain an increasingly discerning consumer. DPI’s product breadth and value-added services provide its customers with access to the on-trend, gourmet, natural, organic, local and other specialty foods that allow grocery retailers to compete effectively in a competitive marketplace.”

DPI also provides dedicated logistics services to Starbucks Coffee locations, supplying stores with an exhaustive list of supplies required for several days of operation. “DPI supplies everything from mops and cleaning supplies to milk and coffee,” Alexander adds. “They have keys to each location and drop everything off before the stores open. Successfully executing that role requires incredible reliability and service levels.”

California Splendor        

​California Splendor helps food service companies tap into ever-changing consumer tastes. A leading provider of natural frozen fruit ingredients, including strawberry and blackberry products, the company provides organic and conventional products in a variety of formats including sliced, puree, individually quick frozen (IQF), whole, and juice.

But those are just the raw ingredients. What truly sets California Splendor apart is its research and development (R&D) capability. As Cash explains, “They will work with restaurants to develop new products, in effect providing outsourced R&D. That’s incredibly important to food service providers, who are always looking to win and retain customers by introducing new products and flavors.”

Such innovation is essential in an increasingly competitive and fragmented restaurant environment, says Cash: “A supplier can’t just go in and take orders anymore. California Splendor has been successful by bringing its customers a steady stream of winning ideas.”

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Conclusion

The food service industry is large, diverse, and powered by long-term growth trends that have proven resistant to economic cycles. It is served by an equally broad and diverse array of suppliers, which provide essential goods and services that span categories. This creates plentiful opportunities for buyers and investors with an appetite for growth.

“Whether investors bring expertise in services, manufacturing, distribution or consumer-facing businesses, they will be able to find ways to participate in the food service space. We believe it will have positive momentum for a long time,” concludes Baltimore.

1. U.S. Department of Commerce

2. https://www.census.gov/retail/index.html?eml=gd&utm_medium=email&utm_sou...

Published January 2019