McCain snaps up Australian subsidiary of Sara Lee for a tasty $82 million

Movement in the food and grocery space has continued, with Canadian giant McCain picking up the Australian subsidiary of Sara Lee Foods for a cool $82 million.

The acquisition of Australia’s second biggest player in the frozen cake and pastry space is the latest in a string of moves within the Australian food industry among food companies to consolidate and combat struggling consumer sentiment.

Brian Walker, managing director of the Retail Doctor Group, says the acquisition comes at a time when the grocery market is experiencing a “rationalisation of markets”.

“Businesses using this classic supply channel of manufacturer to on-seller, and so on; it’s getting very blurry.”

“B2B models are becoming B2C models, production companies are looking at other areas where they can integrate other business units and save money. Like in the case of McCain’s. That’s all increasing.”

The $82 million acquisition was announced by US-listed group Hillshire Brands overnight.

“The Sara Lee Australian bakery operation is an excellent business that will complement McCain’s strengths,” Hillshire Brands chief executive Sean Connolly said in a statement.

“The sale of this business enables Hillshire Brands to focus on driving growth and innovation in our retail and food-service segments in North America.”

Although Sara Lee operates in Australia, it was founded in the United States by Chicago baker Charlie Lubin in 1949. It was sold to Consolidated Foods in the 1950s, which then changed its name to Sara Lee and then to Hillshire Brands.

The food and grocery industry has been full of movement this year. The major supermarkets are creating more private label foods, which now make up a growing proportion of their revenue. The move is putting more pressure on food companies, which are taking up less space on store shelves.

At the same time, suppliers of staples like bread and milk are becoming strapped for cash as well, as Coles and Woolworths continue to clamp down on prices.

As a result, more companies are collapsing: SmartCompany has covered a number of collapses in the food industry this year, including ready-made foods group Australian Convenience Foods, and one of the largest tomato growers in the country.

More recently, iconic brand Rosella fell into administration.

A recent report compiled by IBISWorld on the frozen cake and pastry manufacturing industry in Australia found the market is turning over $582.5 million a year, with forecast annual growth from 2013-18 of 3.3%.

The industry also has $60 million worth of profit to be taken, with Sara Lee holding an 18.9% market share next to Patties Foods, which owns 35.6%. Mrs Mac’s is the third largest player at 15.8%.

The report notes that although the industry has performed “remarkably well” during the past four years in the downturn, due to strong brand loyalty, several obstacles remain – they include the shift towards private labels and increases in purchase costs.

“The expansion of private label products has been a major concern for many operators in the food industry,” IBISWorld notes.

“This has fuelled price competition for frozen cake and pastry manufacturers, eroded brand loyalty and depressed profitability over the five years.”

These problems are made worse by rising prices for key ingredients like wheat and sugar, the report said.

Walker says the move could very well be “a defensive play for market share”.

“Companies are under pressure, so they’re asking, ‘How do we grow our businesses?’ Acquisitions which share some elements with their current business make sense.”