Investors Nibbling at the Mexican Food Industry

Burned by dot-coms and telecom, some investors are thinking enchiladas rather than e-commerce, burritos instead of broadband.

Or in Rick Palmer’s case: salsa. The food industry veteran, with the help of a San Francisco investment firm, in recent weeks has quadrupled annual sales of his Senor Felix Foods to $100 million by buying up the nation’s top-selling refrigerated salsa brand and another dip rival.

More and more, companies such as Palmer’s are rapidly being cobbled together from Southern California’s fragmented network of small to medium-sized food processors as investors look for investments more recession-proof than technology.

“Growth is so hard to get in the food industry with everyone eating out,” said John McMillin, a food industry analyst with Prudential Securities in New York. “One of the few areas of the food business that is growing is Hispanic goods. Food companies are willing to pay for this kind of growth.”

Senor Felix, which started as a one-man kitchen operation, now has the scale to sell its tubs of fresh salsa and guacamole to supermarkets across the country and elbow out smaller, regional competitors.

“Retailers don’t want 20 different salsas on the shelf. They want the No. 1 brand, No. 2 and their own private label,” said Palmer, who became president last fall at Baldwin Park-based Senor Felix. San Francisco-based Swander Pace Capital Management owns the controlling stake in the firm.

The rush of investment should catapult some of Southern California’s familiar brands into national distribution and ultimately expand the offerings of Mexican food in mainstream supermarkets.

In a deal announced Thursday, Don Miguel Foods in Anaheim, maker of frozen Lean Ole and XLNT burritos as well as frozen entrees and appetizers for supermarkets and convenience stores, was acquired by Shansby Group, a San Francisco-based investment firm. Terms were not disclosed.

Shansby also hired former Nestle USA President Robert W. Schult to advise its portfolio of food companies. It has one manager whose sole duty is to help these firms get into Wal-Mart stores.

The consolidation of food processors also is turning up the heat on smaller competitors that lack the deep pockets to launch a broad array of products, conduct expensive advertising campaigns and pay upfront fees to supermarkets for display space.

“It’s a real concern,” said Gina Harpur, president of Juanita’s Foods in Wilmington. Already, she said, “it’s hard to secure our fair share of space in supermarkets.”

Privately held Juanita’s sells tens of millions of dollars’ worth of menudo, pozole, hot sauce and mole each year and has been the target of investors, who have been scouring supermarket sales data and talking to independent grocers to find the hottest-selling brands.

But Harpur, like many other industry entrepreneurs, isn’t interested in selling, preferring to keep the business -- which her grandfather started 56 years ago -- in the family.

“We feel like we can do things on our own,” she said. “We’re not just in this for the money. Our freedom is too important to us.”

Others have welcomed the opportunity to sell while interest and prices are high.

“We do one thing and we do it really good. But we are a one-trick pony,” said Michael Murdock, who this month sold his family’s Chilay Foods, a City of Industry firm that makes Rojo’s fresh salsa, the nation’s top- selling brand, to Senor Felix. “We had a choice of whether to plow a bunch of capital into the company to expand to other items” or, he said, sell now.

Accepting Senor Felix’s offer allowed Murdock to remain vice president of marketing and gave his father a lucrative way to leave the business. At the same time, Senor Felix also bought Murdock rival Itella Foods from the Galletti family of Los Angeles. Terms of the deals were not disclosed.

Chatsworth-based Excelline Foods, which supplies hand-rolled burritos, taquitos and quesadillas to supermarkets, club stores and food service operations, this year sold a stake for an undisclosed amount to a fund led by Cambridge Capital Management of Boston.

Excelline now will have the financing to ramp up distribution, roll out products and advertise for the first time, said Vice President Frank Ojeda. The company’s sales have grown from $1.5 million to $30 million in the last several years.

And other deals are in the works, analysts say, as investors eye Mexican convenience food, especially quick-to-fix frozen items.

This should lead to a wider variety of Mexican food in supermarkets besides taco shells and belly-stuffer burritos.

Juanita’s, for instance, has taken its first steps into the freezer case by developing tortilla soup for Costco Wholesale Corp. stores.

Some of the nation’s food giants also are pushing new items. Kraft Foods Inc. will begin selling manchego -- a Spanish cheese used in quesadillas and empanadas -- in supermarkets.

And meat packer Cargill Inc.’s Excel meat unit unveiled its Carnicero Moderno line of marinated beef for dishes such as milanesa and carne asada at the Expo Comida Latina, a food industry trade show held recently at the Los Angeles Convention Center.

“Every day there’s something new coming out,” said Morrie Notrica, a 50-year supermarket veteran who operates two Notrica’s Family Markets in central Los Angeles. “The whole industry has changed so much in the last five years, we have to change our thinking” about what Latin food is.

Changes in the Mexican food industry have many wondering how this influx of capital will affect these smaller companies. Will the be toned down for a broader audience? And will a stiff corporate culture develop as mom-and-pop entrepreneurs are replaced by business school graduates and investor board members?

Senor Felix owner Swander Pace Capital brought in Palmer, who had worked at such mainstream firms as Nestle and Seagram.

The 37-year-old MBA has pushed to cut overhead, develop new markets and get better deals from suppliers of ingredients, including tomatoes.

“We can now go direct to the grower, let them know what we need and negotiate a discount,” Palmer said. He also has rechristened Senor Felix as Fresh Foods Concepts Inc. and is moving the company to a single large facility in Buena Park next year.

Even with the help of grocery veterans, there’s no guarantee that these investments in Mexican food will prove any better than Internet stocks.

Most new grocery products fail, food analysts say, and miscalculations can result in costly stumbles, such as Mars Inc.’s dulce de leche flavor M&Ms;, which were pulled from the market this year.

Still, that won’t stop investors from following this trail of money, said Pat Turpin of USBX Advisory Services, an investment banking firm in Los Angeles that has helped broker some of the deals between Latino food processors and private equity firms.

“You are going to see a lot more of these deals.” And, he said, “you’re going to see a lot more Mexican food products in supermarkets.”