Nixon Peabody has one of the leading Food, Beverage and Agribusiness (FBA) practices in the nation. As we do each year, our FBA lawyers have prepared short summaries of the top trends we are seeing in the industry. These 2018 trends reflect the exciting and dynamic nature of the FBA industry—driven in no small part by millennials’ increasing purchasing power and interest in healthy and socially and environmentally responsible products. Millennials’ concerns are influencing how large established companies innovate, how large brands present themselves to the market, how investors leverage FBA opportunities into other industries, and the policy decisions of U.S. lawmakers.
Increasingly, established FBA companies are creating venture capital arms to invest in interesting early stage FBA companies. Indeed, in the last few years, many of the world’s largest FBA companies— including Campbell Soup, Coca-Cola, Danone, Diageo, General Mills, Kellogg and Tyson Foods—have created VC arms. The fund allocations typically range in size from $100 to $150 million. They are designed to help larger companies access new discoveries, innovations and trends that they might not be able to reach as effectively through internal development resources. These new investments may further fuel the increasingly dynamic FBA industry, helping to create an ecosystem of exciting new early stage companies, similar to what we have seen drive the U.S. technology industry for so many years. David Martland
Soda taxes have become increasingly popular among U.S. lawmakers. The tax is generally structured as an excise tax levied per ounce of soda. For example, Berkeley, California, implemented a soda tax in 2015 that taxes the purchase of soda at a rate of one cent per ounce of soda. Soda taxes are intended to discourage excessive sugar consumption while raising revenue. While critics state the tax is regressive, fails to raise sufficient revenue and does not alter behavior meaningfully, proponents argue the tax leads to reduced soda consumption and increased revenues that can be used to fund popular social service programs. A number of other cities, including Seattle, San Francisco, Oakland and Philadelphia, among others, have recently joined this movement. Internationally, Mexico, Hungary, France and the UK have already passed similar legislation. The likelihood of this trend continuing appears high, especially as additional medical studies come out on the negative effects of excessive sugar consumption. Shahzad Malik
In recent years, “shopping local” has become the new norm. As a result, national and international food and beverage companies have experimented with different methods to tap these burgeoning markets in an effort to grow a regional brand’s customer base and revenue without compromising its local feel and appeal. Yet how larger companies present these brands to market is very important to maintaining their local feel. Consequently, companies have started experimenting with various legal structures to foster local appeal. These approaches include VC-type investments (see above), other forms of minority investments possibly coupled with a negotiated option to purchase the entire company, structuring investments as convertible promissory notes with attached warrants or acquiring control of companies with the sole intention of maintaining the local focus and growing its brand regionally. There are risks: some acquisitions and investments may not achieve the buyer’s long-term strategic goals due to a public perception that the regional company is selling out. To incentivize management to combat these risks, and maintain some of the creativity of smaller, independent companies, buyers are increasingly developing performance or earn-out based structures linked to metrics reflecting regional success and acceptance. Investors are more frequently using these techniques to enter regional markets and sophisticated sellers are increasingly expecting to see them as part of transactions. Tyler Savage; Isaac Figueras
In 2018, food and beverage concepts will increasingly anchor brick and mortar developments. This pivot from traditional forms of soft goods retail has been driven, in part, by millennials and their preference to spend on “Instagram worthy” experiences like food prepared by popular chefs. Food halls are the prime example of this trend and will continue their national proliferation spreading from large- to middle-market cities. Inevitably, the right location, operator, concept and legal structure will be imperative to any venture’s success. Operators, investors and landlords are increasingly looking to various and evolving legal frameworks to create what they believe is the right balance of control between the landlord and operator. Options range from traditional leases between the landlord and food hall tenant where the tenant is responsible for the overall operation to a management agreement where the landlord builds out and owns the food hall but brings in a food hall manager. Increasingly, these structures are modified with the addition of licensing agreements for vendors to operate in the space or consulting agreements with restauranteurs. Kristopher Stark
Companies like FreshDirect, Peapod and AmazonFresh appear to have learned valuable lessons from Webvan, the now defunct online grocery business. This next generation of online grocers is implementing business models that may prove to be a challenge to more traditional regional and national grocery chains. In 1999, Webvan raised $375 million to finance plans for its breakthrough online grocery order/delivery business. Two years later Webvan filed for Chapter 11. Now, more than 15 years later, e-commerce in the grocery sector appears destined to last. Though brick and mortar stores will remain, they are no longer the only option. Some e-savvy consumers may still want to shop in-person for perishable products like meats and produce, but expectations are that they will be further inclined to shop online for nonperishables, specialty items and staples they regularly purchase. In 2018, brick and mortar grocery chains will experience increased pressure to offer reliable online services. They will want to consider how these expanded services may affect their physical plant, financing, labor force and marketing dollars, among other resources. Louis Cisz
The foregoing has been prepared for the general information of clients and friends of the firm. It is not meant to provide legal advice with respect to any specific matter and should not be acted upon without professional counsel. If you have any questions or require any further information regarding these or other related matters, please contact your regular Nixon Peabody LLP representative. This material may be considered advertising under certain rules of professional conduct.
Food, Beverage & Agribusiness Alert | 08.06.19
Food, Beverage & Agribusiness Alert | 09.30.18