1998: Industry Survives Year of Peaks and Valleys
Published: Tuesday, December 01, 1998
To gain perspective on where the industry is and where it is going, Natural Business has compiled its list of the top stories for 1998.
Stocks Fall From Grace
Number one on the list—in the stocks and financials arena—is the natural products stocks’ fall from grace with investors and Wall Street that occurred in conjunction with the overall market’s three sharp downturns in August. While the rest of the market has mostly recovered, the healthy living stocks have not.
The first ripples that natural products stocks might experience difficulty in 1998 occurred in late March when some analysts voiced concerns over what they felt were inflated price/earnings (P/E) ratios for some industry stocks. In August, healthy living stocks plunged in sync with the Dow Jones Industrial Average’s (DJIA) drop of 299.43 points on Aug. 3 and 4, followed by the 357.36-point fall on Aug. 27 and the 512.61-point nosedive on Aug. 31. Major companies hit hardest in the free fall included GNCI, WFMI, RXSD, TWLB and NBTY (see Natural Business, August 1998, pg. 1).
And although the DJIA and the Nasdaq have gradually recovered, many natural products stocks continue to struggle, as evidenced by the Natural Business Composite Index’sTM (NBCI) performance in the latter half of the year. The NBCI plummeted 77.12 points from its July high of 193.12 to 116.0 on Nov. 25.
Chance Bahadur, president of the Chicago-based The Bahadur Group, says that the natural products stocks’ fall from grace has changed the dynamics of how the industry works. “It’s going to accelerate consolidation,” Bahadur says. “With consolidation and with the entry of more mass retailers such as Wal-Mart, there will be more competitive pressure. Margins will soften, and marginal players—companies that don’t have critical mass—will be taken out.”
In 1999, Bahadur expects companies with $75 million to $100 million in sales to be in acquisition mode and companies with less than $25 million in sales to be under pressure to sell.
Public Offerings: Is the Drought Over?
A second and related story is the deluge of public offerings both completed and scheduled prior to August 3-4, and the subsequent drought of said offerings until Delicious Brands Inc. (DBSI), formerly Delicious Frookie Co., raised more than $12.2 million in an IPO on Nov. 12. The offering was $5 million less than the $17.2 million the company had hoped to raise when it was announced that it expected to file in April (see story, pg. 1).
In 1998, Natural Business tracked a total of 17 completed, scheduled and rumored public offerings. Of that number, five IPOs and three secondary offerings were completed, generating $872.85 million, and five offerings were put on hold. Kaire International, which filed for a 1.15 million-share IPO expected to gross $6.9 million, was instead acquired in September by Natural Health Trends (NHTC). Advanced Nutraceuticals filed in September and then withdrew a 5 million-share, $69 million, roll-up IPO. Two rumored IPOs, Jamba Juice and Power Bar, have not filed to date. In 1997 there were seven IPOs and eight in 1996 that, combined, generated net proceeds of $422 million.
As a result of the market’s volatility, the natural products industry’s access to public and private capital is impaired. “Anyone in the market to raise capital is going to find it more expensive and challenging to get,” says Bill Voss, president of Natural Nutrition Group, which was scheduled to complete an estimated $50 million IPO on Aug. 5 but canceled on Aug. 4 after the stock market plunge.
Bahadur calls this a flight-to-quality market in which people become risk averse and market conditions become temporarily adverse. “If the Dow heads toward the 10,000 mark, the IPO market will loosen up,” Bahadur says.
Mass Marketers Enter Supplements Business
The purchase in June of Solgar Vitamin and Herb Co. by American Home Products (AHP), makers of Centrum vitamins, for a reported $425 million to $450 million, was the biggest acquisition of the year and signals a greater trend—the entry of large and sophisticated mass-market manufacturers into the supplements business (see Natural Business, July 1998, pg. 1). The current strategies of outside competitors to gain entry into the natural products industry include acquisition, as in the case of AHP’s purchase of Solgar, or the creation of herbal lines to sell in mass-retail channels. The Bayer Corp., a member of the German pharmaceutical and chemical conglomerate The Bayer Group AG, and Warner Lambert (WLA), in September launched herbal supplements lines under the One-A-Day and Quanterra brands, respectively (see Natural Business, October 1998, pgs. 4-5).
“Solgar tips us off that large, branded consumer products companies—Goliath mass marketers that have mastered the art of selling branded consumer products to the mass market—have taken notice of this industry,” Bahadur says.
The Battle of Big and Bigger
One top retail story of 1998 is the face-off between Wild Oats Markets (OATS) and WFMI that escalated in February when WFMI opened a 39,000-sq.-ft. store in OATS’ home town of Boulder, CO (see Natural Business, April 1998, pg. 1). On Oct. 7, the announcement of Whole Foods President Peter Roy’s retirement, effective Dec. 31, took the industry by surprise (see Natural Business, November 1998, pg. 1). More recently, speculation that WFMI might acquire Wild Oats rolled through the industry. However, during a recent conference call with analysts, Whole Foods stated it was not in any acquisition negotiations with Wild Oats (see story, pg. 1).
Another top story that could have a bigger long-range impact was the fall opening of General Nutrition Cos.’s (GNCI) Nature’s Northwest self-proclaimed lifestyles store in Portland, OR (see Natural Business, September 1998, pg. 7). One industry source sees GNCI as trying to revive itself the way Wal-Mart (WMT) has, as well as addressing concerns about continued growth in the small-footprint stores that have been its mainstay by becoming a contender in natural foods retailing.
Another retail story with probable long-range impact is the ongoing entry of conventional grocery retailers into natural foods. Gene Kahn, CEO of Sedro Woolley, WA-based Small Planet Foods, sees this as the major story. “It’s a bigger priority and a $425 billion-dollar universe,” Kahn says. “Grocery retailers such as Albertson’s, Fred Meyer and Ralph’s continuing consolidations and more importantly, having a significant increase in the natural and organic foods that they carry.”
Industry, Government Wrangle Over Regulations
On the legal/regulatory front, the biggest story of 1998 is USDA’s proposed national organic standards, released in December 1997. The industry and consumers united to generate more than 220,000 negative comments on these standards during a public comment period that ended in April. USDA is now rewriting these proposed standards (see Natural Business, May 1998, pg. 6, and June 1998, pg. 12). This number of comments represents the highest response a natural products regulatory issue has received to date. USDA on Oct. 28 released for public comment three related “issue” papers regarding animal confinement, animal medications and procedures for producer certification (see Natural Business November 1998, pg. 13). The comment period for the issue papers ends Dec. 14.
“There is tremendous consumer support for strict and meaningful standards for organic regulations,” says Loren Israelsen, president of Salt Lake City-based LDI Group. “I think that USDA got the message. The issue papers are an encouraging response. They seem to show a degree of sensitivity to the process.”
Bob Scowcroft, executive director of Santa Cruz, CA-based Organic Farming Research Foundation, has a different view: “Groups within USDA are acknowledging that the young organic industry is not being served, and people are beginning to conduct research,” Scowcroft says. “But the rules look no closer to completion than they did a year ago. We’ve got at least three to five years of work ahead of us.”
Kahn is tired of waiting. “The veracity of our claims needs to be proven through certification, and there are other methods than waiting for USDA, such as having industry accreditation done through a consolidated certifiers organization.”
A second important regulatory story for 1998 involves FDA’s proposed supplements-labeling regulations, released in April, that are an attempt to clarify how dietary supplements companies can word structure/function claims on product labels. These proposed rules generated more than 100,000 negative comments by the close of the comment period on Sept. 28, and the unfinished count now stands at between 120,000 and 130,000 comments, according to Boulder, CO-based consumer-advocacy group Citizens for Health.
“If this rule became final, the second most important part of DSHEA—the definition of a disease—would have been gutted,” Israelsen says.