Activist investors are taking aim at a growing number of competitively-advantaged but underperforming food companies. Bill Ackman and Mondolez. Sardar Biglari and Steak & Shake and Cracker Barrel. Jana Partners and ConAgra. Berkshire and Heinz and Kraft, Berkshire’s funding the Burger King and Tim Horton’s merger. Starboard Capital’s ouster of Darden’s board of directors.
And as of last Friday: Trian, Nelson Peltz and Sysco.
Peltz has a food industry background. As a young man he managed his grandfather’s food distribution business. Trian’s past and present investment portfolio includes Wendy’s, Heinz, Mondolez, Domino’s, Dr Pepper/Snapple, PepsiCo, Cadbury.
High-roller investors devour money-making ideas like fried chicken on Sunday…but with business sophistication unfamiliar to an industry plagued with outdated thinking, incrementalism and broken customer relationships. Despite the mania of activities, few companies are actually growing. Accumulating costs are outpacing revenue gains, cost cutting is not falling to the bottom line, and all are experiencing shrinking incremental returns on a variety of investments.
Enter the activist investor
They use their clout to bring about divestitures, splits, management ousters, mergers…whatever it takes to generate more value.
Sweeping changes usually start by demanding better governance:
- Overturning boards with new criteria for directors possessing exceptional knowledge and engagement in long term strategy; and,
- New management with uniquely unclouded insights, not the re-treaded solutions seen today in company after company.
Not all activists prevail but many have been more successful in recent years than in others–though it is unclear why. Our opinion is that food industry leaders have generally been slow to transform. Boards have not been sufficiently involved in redirecting strategy or raising the bar on performance. Shareholders have lost confidence and are now willing to get behind changes in how things are run and done.
Which is a tip for every CEO and board, regardless of size or structure, to incorporate a similar mindset into their organizations:
- New leadership and capability criteria
- Refreshed strategy in the new paradigm, backed by new business and operating models
- New budgeting practices; in particular, zero based budgeting
Now, looking ahead after Friday’s announcement of Trian’s 7% stake in Sysco, what may the industry expect? In Blueberry’s opinion, possibilities include:
- One or several top Sysco executives “spending more time with family”
- Another look at Sysco’s transformation initiatives to revise, accelerate or abandon
- Divesting any business that puts a drag on Sysco earnings
- Push for faster market share growth via high margin local and regional accounts secured by multi-year supply contracts
- Global sourcing
- Rationalized accounts and national contract business
- Another run at acquisitions which could include vertically integrating suppliers, a national broker, cash & carry, or an alliance with a major e-commerce company to better conform to customer preferences and reduce headcount
- Heightened pressure on manufacturers to better leverage their awarded positions by growing Sysco share with increased spend and low prices to improve gross margins.
Manufacturers and the industry at large will be impacted by Friday’s announcement, if not directly then by competitors and new supply systems bolstered by an inflow of investments, channel customers consolidating and demanding more from suppliers, and customers continuing to experiment with new sources of value.
All of this is complicated by the certain awareness that the value from traditional activities and business streams continue eroding faster than ever.
Friday’s headline gave manufacturers–indeed all industry members–a new lens with which to view their 2016 strategies and plans. These investors move fast to make changes and extract immediate value.
Cascading impacts on your business are unavoidable. We highly recommend urgent action to avoid getting caught in the crosshairs.