With mergers and acquisitions an ubiquitous part of the food and beverage space, it may seem that the number of players in the industry is getting smaller.

During the last two decades, there have been 9,007 transactions involving food and beverage, processing, retail and supply companies, according to The Food Institute, an industry group that tracks trends, market news and deals. And the pace hasn’t slowed down, with 2017 being the third-busiest year on record with 591.

But the large number of deals doesn’t mean the industry as a whole is consolidating, according to Brian Todd, president of the Food Institute.

The reasons for M&A in the food and beverage space have changed, but the activity on the whole has not. Todd said M&A in the industry, as well as company and investor motivations tend to be cyclical, depending strongly on world events and larger market activity.

As M&A activity churns on, small upstart companies are getting into the food space with optimism and vigor. Big Food is scanning the field looking for the next big thing — or the best way to improve its bottom line. Private equity and investors are looking for ways to make money and buy into a brand that wants to make food better. And companies are always trying to find ways to make what they do smoother and more efficient.

Greg Wank, a partner at Anchin who leads the accounting firm’s food and beverage industry practice, works with food and beverage upstarts with products in trendy areas.

M&A makes their business landscape part validation and part exhilaration, he said. The industry trade shows he attends are crowded with new companies each year. While these entrepreneurs are partially driven by passion for their products, Wank said they also are motivated by the possibility of being involved in a major deal.

“Most people start a business in this industry because their dream is to get acquired by a big food and beverage company,” Wank told Food Dive. “What we’ve been saying a lot to our clients is, ‘Yes, there are more investors in the space than before, but investors are smarter than they’ve ever been before. Nothing catches anybody by surprise.’ ” 

Jeff Robards, a managing director at Alantra who leads the firm’s consumer foods sector, said he has seen a wave of consolidation in medium-sized players who have sales around $1 billion. But he’s also seen many new companies created and succeed in in the industry.

“There’s been a lot of activity in both directions,” he told Food Dive.

As the number of deals increased in the late ‘90s, many large food companies wanted to become bigger players in their space, Todd said. Back then, companies were looking to take over smaller companies and reduce competition.

Robards said this wave of consolidation was spurred on by an interest in size and efficiency. These types of mergers allowed for expansion with lower overhead costs.

These efficiencies — as well as reduction in competition — make food and beverage companies more attractive to investors.

Tim Larsen, a managing director in Houlihan Lokey’s food and retail group, told Food Dive this type of M&A creates value for investors.

At the turn of the century, several events changed everything for food and beverage. The dot-com bubble, in which the values of tech stocks were artificially inflated, burst. Warehouse club shopping and Walmart both became popular. And the terrorist attacks of Sept. 11, 2001 caused many investors to put the brakes on potentially risky investments.

“People were looking for relatively safe havens,” Todd said. “Up until then, the supermarket and food industry, it was there, but there wasn’t a heck of a lot of interest from the outside. Some people had seen benefits to it, but others, compared to the internet, DVDs and videos and so forth, it was not nearly as exciting. But people eat.”

Mergers, both large and small, came next, helping to eliminate competition and creating companies with less overhead. The 2015 Kraft Heinz megamerger — which resulted in one of the world’s largest food companies with an estimated $28 billion in annual sales at the time —  likely took place for this reason. The companies, backed by investors from 3G Capital and Berkshire Hathaway, was a financial blockbuster. 

Todd said the biggest impact throughout the food industry from the Kraft Heinz deal was that food and beverage companies started looking at how to make themselves more efficient.

“But that doesn’t drive innovation, that doesn’t drive growth,” Wank said.

M&A for efficiency isn’t always just on the manufacturing end.

Eric Burgess, a partner in Grant Thornton’s transaction services practice, told Food Dive he sees a lot of mergers between manufacturers and distributors. These mergers, he said, helps manufacturers effortlessly move into new markets.

“It’s … economies of scale, and bringing that all together just continues to make sense for these larger companies to buy smaller competitors,” he said.

Decades ago, large companies acquired smaller ones that were in their space. Chicken giant Tyson Foods, for example, would only look at other poultry companies.

Slowly, Tyson began acquiring other protein-based companies, adding beef, pork and sausage to the company’s brands. And then last year, Tyson bought convenience and ready-to-eat manufacturer AdvancePierre for $4.2 billion, and invested in other convenience-minded food companies such as Tovala steam ovens.

Many companies have used M&A as a means of expanding what they can do.

The 2016 merger between Danone and WhiteWave helped the yogurt giant confront stiff competition in the dairy products market, Robards said.

“WhiteWave was in a lot of higher growth categories, so it was driven by growth, because Danone was wanting to be playing in the organic and natural space,” he said. “Danone, in its core dairy products, was getting beaten by new upstarts.” 

A year after the merger was finalized, Danone is back to rapid growth, recently posting its fastest first-quarter sales growth in five years.

While this approach has been a popular way for food companies to expand, what really got it started, analysts said, was The Hershey Company’s 2015 acquisition of Krave jerky. Analysts said this deal, worth about $200 million, got everyone’s attention throughout the industry. With this purchase, Hershey went from a leader in U.S. confectionery to a company that could become a snacking powerhouse, too.

“When that deal happened, it got a lot of founders and a lot of early stage companies super excited,” Wank told Food Dive. “That not only can the multiples be fantastic, but also my buyer could be somebody I never thought would be interested in my category.”

Other deals have reinforced this philosophy, like Hormel Food’s 2016 acquisition of Justin’s nut butter, Kellogg’s purchase last year of RXBAR, and Campbell Soup’s recently completed deal to buy Snyder’s-Lance.

While deals like these are exciting for food companies, analysts said they also tend to stop other deals in the same category. The Hershey-Krave transaction validated the rising popularity of meat snacks, but it also was one of the last major deals for jerky companies involving manufacturers. About a year after that deal, General Mills bought premium meat snacks company EPIC Provisions — and then no more large deals.

The meat snacks and jerky segment is still hot, but smaller companies aren’t being acquired by large manufacturers right now. Instead, private equity is investing in the space.

“Some of these smaller entrepreneurial deals get a lot of attention and then money starts piling in to try and develop something similar that will generate similar interest from the big players,” Robards said. “…A lot of these startups that result from that, from the ‘me too’ concepts, aren’t all that successful because they try to buy shelf space rather than earn it.”

Consumer trends have pointed toward more healthy, clean label, authentic and sustainable foods — completely different than Big Food’s traditional major brands. As a result, some companies have noticed their market share and sales slipping, meaning they have to cut as much as possible to continue to deliver good results to investors.

In that frenzy of cutting, analysts said, one area that is often sheared to its bare minimum is research and development. Robards said M&A helps Big Food avert crisis by taking on some of these startup companies that hit on the latest trends and are quickly growing.

“I kind of view that as almost a way of outsourcing innovation,” he said. “Because the cost of acquiring a company is a capital expense, whereas the cost of investing in R&D is something that flows through your margins and your net income, and if you’re not staying competitive because Kraft Heinz is putting pressure on everyone to raise their EBITDA margins … [and] you can acquire a small business that had developed a new product, it might be more expensive than developing it in house, but you realize that as a capital cost.”

Larsen said the fundamental shift in what consumers want out of food — items keeping with health and wellness trends that are clean and from the earth instead of from a lab — have caused a shift in the brands companies want in their portfolios. And while entrepreneurs with small brands are doing this, Big Food certainly wants to do it, too. Instead of losing grocery shelf space to a trendy or cleaner product, large companies are snapping up smaller ones.

This strategy has paid dividends already. As plant-based substitutes for meat and dairy are becoming more popular, large companies are buying items in the space that already work. Last year, Nestle bought Sweet Earth Natural Foods, which makes frozen plant-based items. With Sweet Earth’s nearly 50 products, Nestle immediately was a major player in the space without having to work on developing anything new.

Dairy producer Dean Foods also purchased a minority stake in Good Karma, a flaxseed-based alternative to milk and yogurt. Though it isn’t an outright acquisition just yet, the dairy giant — which is dealing with fierce consumer headwinds as many of them abandon traditional dairy — has a unique alternative in its arsenal.

Burgess said this has happened more in the craft beer market. Instead of putting a lot of time and money into developing trendy new brews, the mega-companies are buying up smaller breweries. Last year, Heineken completed the purchase of Lagunitas, while Anheuser-Busch acquired Wicked Weed. These craft breweries usually keep their operations, employees and facilities the same, though the larger company often helps increase scale and distribution.

“All of the larger players have realized the value in the good ones,” Burgess told Food Dive.

As active as the food space has been for M&A, analysts don’t predict it will slow down anytime soon. Even as the potential for a recession hovers in the distance and as trade disputes hang over the market, consumers will keep buying into food and beverage — and the potential to make money from the companies will continue.

“As long as there’s investment capital out there, we’ll continue to see more activity here,” Todd said.

But analysts said more action is likely with small food and beverage companies. There aren’t many megamergers on the immediate horizon, and the ones that could take place involve oft-mentioned targets like TreeHouse Foods or Hain Celestial.

Todd said one thing is clear: The consumer is the one who ultimately leads the direction of the business.

“I think consumers talk with their feet,” he said. “They have more opportunities in more ways to buy products than they ever did. …As these mergers take place, … [companies say] we can raise prices and increase profits that way, but they are careful about knowing that consumers have many more options.”