The appetite for ethnic foods in the United States is rising, seemingly exponentially, driven by two fundamental factors: the growing diversity of the population and the sophistication level of America's palate.
Such a shift in consumer taste can be a sweet spot for private equity investors, who are ideally positioned to help nurture small ethnic brands in the U.S. market. In the process, investors can turn them into compelling portfolio candidates for consumer products companies, which know from experience that authentic ethnic flavor propositions can't be developed in-house; they need to be acquired.
Private equity investors looking for ethnic food brands with maximum upside potential, which they can nurture until they're large enough to attract the interest of a CPG firm, want them to have the following characteristics:
- It has a flavor profile that is recognized as authentic
- It has a strong loyal following in an identifiable region, be it overseas or in the United States
- Its ethnic influence is still early in the menu adoption cycle, ideally somewhere between inception and adoption
Even better is a brand that has the above characteristics but also leverages a broader food trend already underway, such as health (such as the move to gluten free), portability or convenience.
PE firms are, on the whole, better positioned than strategies to establish an ethnic food brand, as they are structured to both provide hands-on guidance and shoulder the risk associated with developing a smaller company.
Friedman Fleischer & Lowe (FFL), for example, spent four years working with Hayward, Calif.-based Asian frozen foods maker Discovery Foods, best known for its Ling Ling line of appetizers, to establish a presence with key national grocery retailers. Together they improved Discovery’s manufacturing operations, expanded its sales force and introduced new products, prompting Windsor Foods to buy Discovery from FFL in 2011.
And in June, Montreal-based Claridge Inc. sold Circle Foods, maker of frozen and refrigerated handheld Mexican foods, uncooked tortillas, and Indian flatbreads, to Tyson Foods.
“Claridge and the Circle Foods team have developed an outstanding portfolio of products and customers, with a fantastic plant and workforce, and will be an excellent fit within our branded consumer products group,” said Tyson President and CEO Donnie Smith.
“We believe Tyson’s robust sales structure, as well as our frozen and refrigerated foods distribution system, will enable this business to accelerate its growth,” he said.
Among the ethnic food brands that could be acquired and turned into household names are:
Gaucho Ranch. This popular brand of Argentinean chimichurri and dulce de leche (caramel) sauces does about $1 million in sales in major grocery stores in the East Coast area and in Texas including Publix, H-E-B and Kroger. It has a 10.8% CAGR and occupies the top share spot in a small but growing segment with an 8.5% CAGR of its own. However, the brand could benefit from being taken fully national and targeting the mainstream U.S. population with an easy-to-use and uniquely flavored marinade.
Tajín. The Zapopan, Mexico–based seasonings and salsa maker, which is best known for its so-called “fruit seasoning” powder made of chili peppers, dehydrated lime juice and salt, has a three-year CAGR of 11%. Sales in the United States (it’s sold in Europe as well as in Central America) are estimated at nearly $5 million a year. It also claims to be the leading maker of “powdered salsa” in both the United States and Mexico.
Sun Luck. This maker of many popular Asian sauces, including hoisin sauce, sweet and sour sauce, and plum sauce, comprises about 73% of the sales of its parent company, Allied Old English, at roughly $15 million. It owns the most complete portfolio of Asian sauces, a feature that has helped propel it to a three-year CAGR of 8.4%. Its hoisin sauce in particular offers significant potential given wider distribution—it currently makes up just 8% of the brand’s total sales.
Immigration-based American diversity by the numbers
The number of people in the United States is surging due— overwhelmingly—to immigration. According to the Pew Research Center, by 2050:
- the national population will rise from 296 million in 2005 to 438 million
- of that growth, 82% will be attributable to the arrival of immigrants and their subsequent offspring
- non-Hispanic whites, who in 2005 made up 67% of the population, will fall to 47%
- the percentage of Hispanics will rise from 14% to 29%
- the percentage of Asians will climb from 5% to 9%
As the number of people of immigrant origin rises, so will their purchasing power. According to the Selig Center’s 2012 Multicultural Economy report, by 2017:
- Hispanics’ buying power will climb from $1.2 trillion to $1.7 trillion
- Asian-Americans’ buying power will rise from $718 billion to $1.0 trillion
And both groups spend more on groceries than the average American household. The weekly grocery bill of Hispanic households, for example, who place an especially high value on cooking and eating with family at home, is $133 vs. a national average of $92.50, according to the most recent figures available from the Food Marketing Institute.
The Millennial equation
Millennials, who have grown up in the most ethnically diverse and globally networked environment in U.S. history, are as a result more likely than older generations to eat ethnic foods.
Millennials are also more likely to cook ethnic meals. A spring 2013 survey conducted by Mintel Research found that 90% of 25- to 34-year-olds had prepared ethnic food at home in the past month compared with 68% of adults ages 65 and older. Moreover, of adults with children under 18 living with them, 91% said they’d cooked ethnic food vs. 78% of those without kids at home.
Bolstered by more focused product development, the market research firm predicts that such a virtuous cycle will drive growth of the ethnic foods market by 20.3% from 2012–17.
5 November 2013