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Snack Foods Acquisition

Type: Market sizing, break-even analysis and payback period

Problem at hand:

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A US snack foods company specializing in snacking peanuts, Peanut Co., is planning to acquire another company specializing in snacking almonds, Almond Co. Peanut Co. is currently the market leader in snacking peanuts, but the overall segment is growing slowly compared to the market and they want to diversify. They have hired you to tell them whether this is a good idea.

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Approach and Framework:

Acquire or not?

Market size

  • How large is the market for snacking almonds?​

  • How much is this industry expected to grow? Is it trending up, down, or stagnant?

Profitability

  • How profitable will this product be (e.g., pricing, costs)?

  • Is snacking almonds a more premium market then snacking peanuts, in terms of price?

Synergies / dis-synergies

  • Can we leverage Peanut Co.’s existing capabilities (distribution, marketing, sales)?

  • Will entering cannibalize existing sales?

  • Is the overlap between almond and peanut customers high?

Competition

  • Is Almond Co. the preferred brand in the market?

  • Who are the current competitors?  

  • What are the barriers to entry?

  • How large is the threat of new entrants?

Deal Price

  • What is the deal price?

  • How will we finance the deal?

Moving forward we need to get certain details from the client, such as: ​​

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Further data that we get from the client:​​

  • Assume the population of the US is 300M

  • 1 snack almonds packet: 16 ounces

  • Price of 1 packet: $2

Sizing the US market for snacking almonds

 We could do market sizing based on frequency of purchase.​

Thus we come up with the following distribution:  

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  • Total number of packets: 0.75B + 1.8B + 1.8B = 4.5B (round to 5B)  

  • Cost of 1 packet: $2

  • Total market size: 5B * $2 = $10B

Total market size is $8-10B​

Breakeven for Peanut Co. on this investment

Further data that we get from the client:​​

  • Almond Co.’s current market share: 10%

  • Almond Co.’s profit margin: 50%

  • Purchase price for Peanut Co: $1.5B

  • ​Almond Co.’s revenues : 10% of 10B(total market size)

 

  • Almond Co.’s profits  = 50% of $1B 

= $500M

  • Purchase price is $1.5B

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Lets assume revenue and cost structure stays the same over the next few years​

= $1Billion​​

Thus,

       Payback period = $1.5B/$500M = 3 years

Given Peanut Co.’s existing snack nuts business, we should consider the following:

​Potential Benefits: ​

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  • Cross sell almond products to existing peanut customers

  • Leverage current distribution network to expand reach of Almond Co. and drive sales  

  • Can extend innovation from peanuts to almonds (e.g., flavor, packaging, etc.)

​Potential Risks: ​

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  • Potential for cannibalization of existing sales

  • Potential of brand dilution

Recommendations to the CEO of the Peanut Co.

Client should acquire Almond Co.

Recommendations and justification for acquiring : ​

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  • Large and growing market

  • Quick payback period of 3 years

  • High overlap with customers

  • Risks: could cannibalize current peanut sales, could dilute/confuse brand  

Next steps: can we get a more favorable deal price; determine what exact innovation can be carried over from peanut business

On the other hand if recommendation was to not acquire Almond Co. suitable justification would be:​

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  • Cannibalize current sales

  • Could impact our current margin structure

  • Could dilute brand

  • Risks: if competitor acquires Almond Co and succeeds, Peanut Co’s competitive position would be weaker

Next steps: determine if there are other players that we could acquire

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