Food and drink is a funny old business. Every now and then a quirky company comes along, no doubt started by young, enthusiastic entrepreneurs bored with the humdrum of the corporate world.
A thriving business ensues, built on originality, with a personality that sets it apart from the corporate giants. It sticks two fingers up at the bigger, more powerful opposition. And it holds its own very well.
Then one day it is sold, normally to the very company it had set itself apart from. It’s the food giants that get the last laugh.
Take maverick smoothie company PJ Smoothies, which in February became the latest addition to PepsiCo’s burgeoning drinks portfolio. PJs, the self-claimed founder of the UK smoothie market, celebrated its 10th birthday last October as a growing independent player. It will celebrate its 11th as a small cog in a much larger wheel.
PJs is not alone. Last month Cadbury Schweppes gobbled up Green and Black’s, the luxury organic chocolate manufacturer that is still in its teens. And who can forget Ben & Jerry’s, the quirky ice-cream brand started in a petrol station in Vermont, which was scooped up by Anglo-Dutch giant Unilever back in 2000.
From the large companies’ point of view, the benefits of buying a small successful company are obvious. David Brooks, head of M&A at Grant Thornton Corporate Finance, says that small companies are attractive to larger ones because of the speed with which they can react to the market. “Small companies are very lucrative as they are fleet-footed. They can respond faster to the market than bigger companies.”
He also says that small companies are very good at driving innovation, the lifeblood of every successful business, which makes them very attractive to larger companies short on ideas. “Big companies need to have new ideas, and these don’t always come from themselves.”
But while larger companies such as Unilever and PepsiCo are swallowing up successful smaller companies to boost their business, there are also many advantages for the smaller player, such as potentially guaranteeing the long-term success of the business by having greater resources to advertise and greater leverage to get listings in the multiples.
Neil Sutton, head of consumer products at PricewaterhouseCoopers Corporate Finance, says at a time when the retailers wield so much power, small companies reach a point where they need the backing of larger players in order to expand. “There is a huge imbalance between the retailers and manufacturers, so it is hardly a surprise there is consolidation. There are plenty of cases where smaller family businesses need to move to the next level, particularly in drinks, which needs good distribution.”
Brooks shares this sentiment. “The power of the multiples is so great, companies start to have to become bigger.” He adds: “Another challenge that faces mid-size companies is what to do about moving into Europe.”
Paul Wilkinson, chairman of the Big Bear Group, which led a management buy-in of Fox’s Confectionery from Northern Foods in 2003, says the size of a business is important. “One of the issues is clearly a lack of scale. Scale is a good thing to have. It’s difficult for a small business to operate unless it has a particularly robust model. If a big company buys a small company, it can create lots of synergies,” he says.
Craig Sams, Green and Black’s president, believes the chocolate company will benefit from having a bigger, older brother, in terms of spreading its original message. “Our businesses share a commitment to ethical values and I am confident that, with the involvement of Cadbury Schweppes, we will be able to bring these positive messages to a much wider audience,” says Sams.
While there are many advantages to becoming part of a company that has the necessary spending power, some argue that it is damaging for a brand that has built itself up as a niche player to suddenly become part of a bigger, and maybe faceless, group.
However, Nicky Owen, director of consumer service brands at brand agency Dragon, says that, treated correctly, even the most avant-garde brands can thrive under the stewardship of a large, mainstream company. “It is not necessarily detrimental to be bought out by a bigger company. Large does not mean worse. In many instances larger companies are the size they are because people love them.”
Owen admits that core adherents to a niche brand may be put off, but says that the majority of consumers either don’t care or are blissfully unaware of any changes. “Individual consumers that have bought into the fact that it was an alternative brand, a challenger, may see it as selling out. But bigger companies are shrewd and do not overplay the relationship. In many cases people don’t know who the parent company is and don’t even think about it.”
PricewaterhouseCoopers’ Sutton says that, as long as the brand retains its original identity and appears to stay true to its beliefs, it will work. “People thought Ben & Jerry’s would be a harder brand to maintain in a large corporate group because of its unique positioning. But Unilever has done it and deserves praise for that. It clearly bought an asset and realised that the value was in the brand itself. It’s not about to trample all over it. The general public don’t know that Ben & Jerry’s is Unilever.”
Where there is a danger, says Sutton, is if the company decides to rebrand a product, although in most cases this does not happen. “Where it can be problematic is when the relationship between the corporate brand and the individual brand is different. However, Unilever is not a product brand, but a corporate name, which makes it easier for it. The same goes for PepsiCo. It is not a brand that is in your face.”
But Sutton says small companies should also be aware that not all large players will give them the attention they deserve. “Some brands have been bought and then haven’t received the attention that they should have, as they are now part of a large group that has other investment priorities.”
Andrew King, CEO of PJs, believes it will get full support from its parent company to enable it to stay true to its roots. He is determined that the brand will keep the fun personality the company has spent the past 10 years establishing. “PJs is still a standalone business,” he says. “In many respects it remains the same. PepsiCo has a youthful culture and so the cultural side of the business is protected rather than in danger.”
King points to the success of family-run company Copella under PepsiCo’s wing. He says this influenced his decision to come on board. And he is adamant that PJs will have the same company ethos, including dress-down days, and use the same suppliers as it has always used. The changes that PepsiCo will bring, he says, will give the company a louder voice and deeper pockets.
“There is a massive consumption of smoothies and, to really continue at that pace, we needed further investment. But we are conscious of our culture and aware of who are consumers are. We really believe the PJs business and brand will continue where it started out,” says King.