When chocolate and snack giant Hershey was preparing to acquire Dot's Homestyle Pretzels for $1.2 billion last year, the deal was about more than just gaining a brand; it was about acquiring the production capabilities behind it.

Founded over a decade ago, Dot's has grown into the third-largest pretzel brand in the U.S. market by market share, thanks to bold flavors like Southwest and honey mustard. Its expansion has relied mainly on word of mouth, with sales concentrated in the central and western United States. Hershey hoped to broaden the brand's market reach by leveraging the company's overall push into savory snacks.

However, during due diligence, Hershey discovered that Dot's uses a proprietary process to adhere its special seasoning to the pretzels. Given the supply chain challenges facing the U.S. economy, Hershey believed it had to control this process to drive brand growth.

"Given the current macroeconomic environment in manufacturing, labor shortages, and supply chain issues, integrating the brand with manufacturing capabilities was critical to this deal," said Jeff Lilla, Hershey's vice president of snacks and grocery. "If we want to achieve sustainable long-term growth, we must control end-to-end what we produce and what we bring to market."

So far, acquiring Dot's and its contract manufacturer has paid off for Hershey. CEO Michele Buck told Wall Street in July that retail sales grew about 50% over the past three months, with market share up 3.7 percentage points during the same period.

"Sitting on a gold mine"

Against a backdrop of strong demand and unpredictable supply chains, companies like Nestlé and J.M. Smucker have announced investments of hundreds of millions of dollars in new plants. However, building new plants can take years, during which time consumer goods companies may miss opportunities to meet demand growth and corresponding sales.

As a result, many food companies are instead turning to acquiring existing plants to quickly boost capacity or expand brand reach. Acquiring manufacturing capabilities—whether standalone or, as in Hershey's case, as part of a product acquisition—offers numerous other benefits: it can protect proprietary information, avoid the complexities of working with contract manufacturers through training or equipment partnerships, accelerate product innovation, improve profit margins, provide a safe outlet for capital, and reduce reliance on currently unreliable or overstretched supply chains.

"The challenge is that everyone (with a plant to sell) realizes they are sitting on a gold mine. If such an asset really existed, someone would have already snapped it up."

— Annemarie Vaupel, vice president of foodservice marketing at Hormel Foods

Minnesota-based Hormel Foods, which owns brands like Skippy peanut butter, Planters nuts, and Jennie-O turkey, is looking for additional manufacturing capacity, but the problem is that many other food producers are also looking, said Vaupel, the company's vice president of foodservice marketing.

"The challenge is that everyone (with a plant to sell) realizes they are sitting on a gold mine," Vaupel said in May on the sidelines of the National Restaurant Association Show in Chicago. "If such an asset really existed, someone would have already bought it."

When Hormel acquired Planters from Kraft Heinz last summer for $3.35 billion, it gained not only a food portfolio including the iconic nut products but also three valuable production facilities in California, Arkansas, and Virginia.

Vaupel noted that these plants are invaluable because Planters uses unique manufacturing processes and equipment to package nuts into plastic jars, tubes, and bags—processes not used elsewhere in Hormel's portfolio. Without these assets, Hormel would have had to buy machinery or find contract manufacturers to produce and package the products.

"That would have diverted energy from getting operations up and running immediately after the acquisition. It would have taken us a long time to realize the return on this investment," Vaupel said. "These plant assets are a key part of the overall purpose of acquiring the brand (to grow it)."

Brian Choi, CEO of The Food Institute, a food industry media outlet and market research firm, agrees that many "low-hanging fruit" in terms of plants have already been picked. But he said companies with ample cash and eager to meet surging demand may have to pay premium prices and accept sellers' asking prices.

"They have no choice but to acquire because building takes too long," Choi said. "This will make such assets more attractive, even if people expect a possible short-term recession in the next six to twelve months."

Meeting future demand

Not long ago, consumer goods companies were moving away from manufacturing. They divested plants, adopted asset-light models, and focused on innovation and maintaining product appeal to consumers, unwilling to be distracted by operational issues like equipment maintenance, overhead costs, or worker recruitment and training—said Henk Hartong III, chairman and CEO of Brynwood Partners, the private equity owner of SunnyD beverages, Buitoni pasta, and Juicy Juice.

Now the situation has dramatically changed, with several companies adding capacity for previously acquired brands through M&A.

Last year, Utz Brands acquired Festida Foods for $41 million—the latter being the largest manufacturer of corn chips for its On The Border brand. Utz said the acquisition would improve On The Border's supply chain (the brand was acquired six months earlier) and enhance the company's ability to expand the geographic reach of that product and other portfolio items in the Midwest.

In May, B&G Foods acquired the frozen vegetable manufacturing business of Growers Express. Growers Express is a manufacturer, producer, packager, and seller of frozen vegetable products, primarily under the Green Giant brand.

"By increasing the variety and volume of Green Giant frozen vegetables produced at our internal manufacturing plant, we expect to reduce inefficiencies, lower costs, and decrease supply chain risk for some of our Green Giant frozen products," B&G CEO Casey Keller said in a statement. "This acquisition will strengthen our innovation efforts for the Green Giant brand and improve the speed to market for new products."

Erin Lash, director of consumer equity research at Morningstar, said acquiring existing assets rather than building from scratch is often advantageous for buyers, but it is not without risks. Acquirers need to carefully assess whether a plant is efficient, uses the latest technology, and whether significant investment will be needed for improvements after acquisition. Buyers also need to ensure that demand for the products produced will continue to support their prices in the future.

"Adding capacity for certain brands or businesses presupposes they have staying power," Lash said. "But if volumes are going to fall back, will companies burden themselves with excess capacity?"

Only themselves to blame

At Brynwood Partners, owning manufacturing capabilities is central to its business strategy—acquiring underperforming assets from large consumer goods companies and then revitalizing sales by changing product packaging, pricing, or marketing. CEO Hartong said achieving this is easier with in-house operations than relying on contract manufacturers, because their responsiveness, willingness to invest in new technology, quality of work, and capacity to take on additional work are beyond one's control. If any of these falter, it can damage the brand image, slow the turnaround, and ultimately upset retailers.

"You're making excuses for things you can't control," Hartong said. "But retailers don't care about excuses at that point... If shelves are empty, they'll find other suppliers to replace you."

He recalled that when Brynwood acquired the Pillsbury brand from J.M. Smucker in 2018, third-party contract manufacturing of gluten-free cake mixes and brownies was "completely unreliable," and the company was constantly explaining shipping delays to customers. Brynwood decided to build its own gluten-free product plant, and since then "service levels have been impeccable."

"Now, if there's a supply problem, we have only ourselves to blame, not others," Hartong admitted. He estimates that 95% of the approximately $2 billion in sales of the food and beverage products owned by his private equity firm is produced in-house.

For Eat Just, unreliable contract manufacturing prompted the plant-based food company to bring production in-house. The protein extraction process used to make its plant-based eggs is complex; if done improperly, the product can become mushy and unappealing to consumers. Initially, Eat Just used contract manufacturers but found results inconsistent, with subtle variations changing the final product.

CEO Josh Tetrick and his team quickly realized that to grow the brand and attract more consumers, they had to control this step. The answer was close at hand: in 2019, Eat Just acquired its contract manufacturer in Minnesota, a company it already knew well, along with its 45 employees and its small town. This fortunate acquisition is now paying off, as the company relies less on supply chain disruptions or uncertainty from partners being overstretched or understaffed.

"Running a plant obviously has downsides: more to-dos, more things to worry about," Tetrick said. "But we can't afford any disruptions. We have to run at full speed, at full capacity."

Three years later, Tetrick says there's no doubt Eat Just is better off than if it hadn't made the acquisition. He said Eat Just's eggs likely taste better and have better texture. This not only enables the company to produce a more enjoyable product but also enough to meet growing demand—while lowering costs to be on par with premium eggs. High prices across the plant-based food industry often deter consumers from switching from animal-based foods.

Today, Eat Just's products are in more than 2 million households, and the company claims it holds a 99% share of the U.S. plant-based egg market.

"If we hadn't controlled the process (through the plant acquisition), quality would be worse... and the business would be much worse off because of it," Tetrick said.