Healthy foods have become a staple part of the modern consumer's diet. But what investment opportunities does the growth in sales of 'superfoods' and nutrition supplements provide? Words by Gill Wadsworth.
There is nothing like espousing the health properties of a food to boost its sales. As soon as the humble blueberry was labelled a 'superfood', many consumers clamoured to include them in their diet, causing sales to soar by 132 per cent in the past three years.
But aside from supposed health-enhancing qualities (there is no medical evidence that such foods offer superior benefits than everyday sources of nutrition, such as apples or oranges), does astronomical growth in superfood sales provide opportunities for private equity investors?
With figures from Datamonitor predicting the industry in Europe and the US will be worth £5.6 billion by 2011, Richard Green, managing partner at August Equity, sees health food companies as a good proposition. "Over the past 15 to 20 years there has been an increasing propensity for people to want to become and stay healthy," he says. "Health foods are where much of the attraction lies."
Organic produce is another recent big food sector success story. According to the Soil Association 2007 market report, sales of organic produce in the UK nudged £2 billion in 2006, representing a climb of 22 per cent.
One entrepreneur who succeeded in cashing in on the organic boom is Keith Abel of organic food delivery firm Abel & Cole. Last autumn, Abel sold around one-third of his stake to Phoenix Equity Partners in a deal that saw the business valued at between £30 million and £40 million - not bad considering Abel launched the company 19 years ago using just £2,000 worth of travellers' cheques.
Innocent Smoothies is another entrepreneurial enterprise that has caught the eye of venture capitalists. At the start of 2008, the company (which uses a range of superfood ingredients in its drinks products) secured £32 million of funding from Bank of Scotland to expand its business across Europe and the US.
"As a brand, Innocent Smoothies has come a huge way in the past few years," says Green. "From a private equity perspective, there are opportunities when businesses created by individuals have grown and the founder wants to retire or the business has outgrown their skill set. That is where the opportunities are to take an emerging brand, bring in new management and take the business on to the next level."
And it's not just entrepreneurs identifying the huge growth potential in organic and vegetarian products. In 2005, leading mainstream food producer Premier Foods acquired leading meat-free food company Cauldron Foods for £27 million from August Equity portfolio company Rayner Foods.
Patrick Groarke, partner at Livingstone Partners, has identified two growth trends in the food sector that appear to contradict each other: indulgent food products and healthier options.
"Confectionery and cakes have enjoyed real growth in sales, but that coincides with a clear growth in health food sales," he says. Some confectionery manufacturers have even moved into the health food space. As examples, Groarke cites Zetra's twin-sector focus and Glisten's acquisition of healthy snack bar manufacturer Halo in 2005. Meanwhile, the Wellness Group, backed by Lydian Capital, continued to add to its portfolio of healthy food products with the buy-out of Rowse Honey in 2006.
While the phenomenal growth in health foods is clear, there are some concerns that the fickle nature of consumers might cause interest in superfoods to wane.
"People jump on the superfood bandwagon and sales shoot up, but they plateau and sales eventually drift back down to more usual levels," says Shaun Browne, managing director of independent corporate finance advisers McQueen. However, Browne accepts that these 'more usual levels' are still high in relation to the food sector as a whole.
August Equity's Green claims the strong evidence for the benefits of eating a healthy, balanced diet is too powerful to ignore. "There is too much evidence around the five portions of fruit and vegetables a day and the benefits of foods that are high in antioxidants to be seen as a passing trend," he says. "They're here to stay."
There is more to the consumer health sector than food, however. The growth in nutritional supplements has, according to Green, been just as exciting. "The vitamin, minerals and nutritional supplements market is worth more than £400 million and is growing at a rate of more than ten per cent a year," he says.
Green's comments are borne out by the secondary buy-out of leading sports nutrition provider Maximuscle in December 2007. Piper Private Equity sold its stake in the firm, which it acquired in 2004 for £10 million, to Darwin Private Equity for £75 million. This huge deal was preceded by the 2004 acquisition of a majority share in Phillips Health by private equity investment firms ACI Capital Co and American Securities Capital Partners.
"Sports stars and amateurs alike are more focused on nutrition and health now than they ever were," says Jonathan Pye, publisher of sports training magazine and website Peak Performance. "For example, rugby players a few years go would be in the pub before a game, now they look after themselves much more. I expect the growth in use of sports nutrition supplements to continue."
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