Analyst says that the collapse of banks is unlikely to affect large food companies, but smaller start-ups are at risk
- General Foods has no dealings with Silicon Valley Bank and Signature Bank, a Wall Street analyst said in a research note, adding that his firm “does not anticipate relevant material impacts on industry structure (liquidity challenges, catalysts for mergers and acquisitions)”.
- However, Mizuho analyst John Baumgartner writes that “a fair number of startups in the industry are already exposed” to SVB. He wrote that, along with short-term disruption, subsequent tougher lending standards and a stronger emphasis on free cash/profitability “can be expected to limit the ease with which small businesses obtain financing and enter the industry.”
- The collapse of the SVB, in particular, had a widespread impact across the United States, affecting not only the banking sector but industries such as food and biotech that turned to the bank for financing and as a place to keep their money.
SVB’s collapse was swift and unexpected. He left the bank, which catered to start-ups like The Better Meat Co. And Equii, many companies are scrambling to figure out what to do when it comes to things like paying their employees. While SVB and Signature Bank were subsequently shut down by regulators, the government announced that it was taking emergency measures to get all depositors full.
But the long-term impact of the turmoil on the US banking system and businesses that depend on it is unlikely to abate anytime soon. Already dealing with inflation, supply chain challenges, changing buying habits of consumers, and emerging food and beverages may be feeling the impact of recent bank failures for some time.
In his report, Baumgartner noted that FFrom 2017 to 2021, food industry new entrants grew their sales at a compound annual growth rate of 6.5%, versus 4.5% for established companies. They also had access to sufficient capital at historically low financing rates to help them grow.
But things have changed dramatically since then. He added that “in addition to direct SVB exposure to some companies,” the move toward stricter lending requirements and an increased focus on free cash and profitability could affect some of the smaller companies.
While the current environment does not mean that all younger companies are in trouble, it does mean that in many cases there will be more pressure on them to show they are financially stable and deserving of funding. Banks and investors will be less willing to chase the promised growth and instead turn their attention towards well-established and profitable brands.
Some startups that may one day mature into better-established companies may lose funding. Large CPGs could eventually benefit through less competition, or find themselves in a position to buy out a cash-strapped start-up desperate to survive.
Baumgartner For big names, such as Kraft Heinz, Hershey and General Mills, with debt maturities this year, “refinancing/retirement is unlikely to be compromised by financial market volatility.”
He added that “investors remain best positioned in names with new innovation/distribution that supports economies of scale and efficiencies that boost” EBITDA. These companies include Kraft Heinz, BellRing Brands, Mondelēz International, and Simply Good Foods.