Time for a snack? M&A in snack food category heats up.

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Each week we share insights from experienced operators and investors in consumer and retail. This article comes to us from consumer products investor extraordinaire, Dan Gross. Dan Gross is a VP at Encore Consumer Capital.

The snack market is alive and kicking. Last week, General Mills announced it was acquiring Food Should Taste Good, a natural tortilla chip company with unique flavors like olive, jalapeno and chocolate, that was founded only six years ago (Food Should Taste Good acquisition announcement). This week, emerging natural foods company, Mrs. May’s, was picked up by Dole at a very early stage, (Mrs. May’s acquisition announcement), with reported revenue of only $16M in 2011.

While these two successful exits are notable, they are not alone. Over the last few years, household brands like Kettle Chips, Stacy’s Pita Chips, Pretzel Crisps, Pirate’s Booty and PopChips have all received investments or changed owners. Because salty snacks tend to have a very quick repurchase cycles (according to Mintel, the average healthy snacker consumes a snack six times per week), many of these brands grew from inception to scale in just a few years.

Yet, the snack food marketplace is crowded. In 2010, there were almost 1,000 new salty/savory snack product introductions, representing nearly 20% of all food product introductions in the year. So, when you evaluate whether crowdfunding an early stage salty snack company makes sense, what should you look for to find the next salty snack success? Here are some thoughts:

  • Better-for-you: According to IRI (2011 State of the Snack Food Industry), between 2006 and 2010, healthier snacks’ share of snack food sales increased from 34% to 41%, at the expense of indulgent options. As an investor, you should look out for salty snack products that provide lower fat and sodium content (especially as compared with traditional potato chips), as well as those fortified with vitamins, minerals, whole grains and other functional ingredients.
  • Channel matters: Frito-Lay (owned by Pepsi) is the 800-pound gorilla of the salty snack space. Frito has ~60% share of the potato chip market in tracked channels (compared to #2 brand Pringles with only ~8% share), and potato chips account for 38% of the $9.4 billion salty snack market. Frito is particularly dominant in traditional grocery stores, where the company sends its own delivery people to each grocery store to deliver products and help arrange the shelves. As an investor, you want to look for small salty snack brands that can gain exposure, and scale, without facing Frito head-on. Club stores (i.e. Costco, Sam’s Club, BJ’s) are a great place for small brands to scale due to the large volumes these stores sell. Whole Foods and the deli aisles of grocery stores are other great examples of places where salty snack brands can be successful without fiercely competing with Frito.
  • Potato Chip Alternatives: For a long time, salty snacks were usually made with plain potatoes. However, many innovative salty snack brands are turning to different formats. For example, Stacy’s uses pita to make its chips, Food Should Taste Good has a successful line of sweet potato chips and a company called Flamous Brands even launched falafel chips. While brands like PopChips and Kettle Chips have had success with potatoes, keep an eye out for more innovative ingredients and flavors.

Guest Author Dan Gross is a Vice President at Encore Consumer Capital, a consumer products private equity firm. You can reach Dan at daniel.w.gross@gmail.com.

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