Source: LOHAS Weekly Newsletter
Published: Monday, November 01, 1999

DENVER—It’s not a prediction of return to the glory days of 20%-plus growth rates, but new-product introductions, increased customer acceptance, expanded distribution channels, and larger players entering the industry through M&A activity should drive attractive growth through 2000, says a recent report issued by the Denver office of investment banker Tucker Anthony Cleary Gull.

The 84-page report, “Healthy Lifestyles: Compelling Secular Fundamentals Plus Consolidation Prospects to Shape Industry,” notes that from 1991 through 1997 top-line growth for what Tucker Cleary computes as the $25 billion healthy lifestyle industry was reported to be around 20% to 25% a year.

But, “Growth hardly ever persists undisturbed,” writes Carole Buyers, Tucker Cleary’s Denver-based senior VP and author of the report. In 1998, as the vast majority of industry watchers now know, growth slowed to the 10% to 15% range.

Buyers asserts that the various industry segments—dietary supplements, natural/organic food & beverage, and retail & distribution—will be influenced in different orders of magnitude by what she has identified as the industry’s market drivers in 2000.

Dietary Supplements

For the dietary supplements segment, Buyers believes that even as consumer sales data confirm the segment’s growth is slowing, overall positive demographic trends, coupled with new products, should help sustain an overall 5% to 10% growth rate. She notes that the growth rate in the mass, food and drug channels was 12% for the four-week period ending May 23, 1999.

As the segment continues to consolidate—and it will do so on a larger scale in 2000, Buyers writes—potential acquirers of supplements companies will focus on companies with strong brands, a competitive pricing strategy and strong distribution.

“Over the past 12 months the [segment] has witnessed an increase in small mergers and acquisitions, mostly comprised of private and/or publicly traded microcaps,” Buyers writes. “Going forward, with valuations near historical lows, we expect larger companies to attract tender offers.”

Natural/Organic Food & Beverage

For the industry’s food & beverage segment, Buyers predicts 10% to 15% growth. 1998’s blockbuster performance, which saw food & beverage company stock prices/share increasing on average 60%, has not been repeated in 1999—largely because at least five publicly traded companies in this segment, for various reasons, missed earnings estimates, she writes.

Buyers believes the segment’s growth will be driven by organic foods and beverages, which continue to garner wider distribution in mainstream channels as a result of burgeoning

consumer demand. She asserts that most companies in the food & beverage segment are still in the process of expanding their penetration into mainstream mass, food and drug channels.

“Overall, we estimate that natural foods and beverage companies, on average, have ACV (all-commodity-volume) ratios less than 20%,” Buyers writes.

Branding and marketing also will continue to differentiate companies in the food & beverage sector, with those that are successful in brand management continuing to leverage their name recognition into new products.

Buyers expects larger conventional companies to be M&A players in the natural/organic food & beverage segment for the balance of 1999 and through 2000.

Retail & Distribution

For the retail & distribution segment, Buyers believes that “significant” growth markets exist in the Northwest, mid-Atlantic and Northeast U.S. She predicts growth rates of between 15% and 20% for retailers but does not predict a growth rate for distributors.

Indeed, Buyers believes that the evolution of natural products retailing, from small-store formats, with stores between 3,000 sq. ft. and 5,000 sq. ft., to supernaturals, with stores in excess of 20,000 sq. ft., “has been the single most important element in the expansion of natural products.”

The report discounts some observers’ concerns that the major supernaturals, Wild Oats Markets (OATS) and Whole Foods Market (WFMI), overlap each other in too many markets and thus are guilty of “irrational competition.”

Buyers writes that in the 24 months following the report’s September publication, Wild Oats’ new stores are not expected to compete directly with Whole Foods, and Whole Foods is expected to open only six stores that compete directly with Wild Oats’ existing stores.

The report also notes that natural products retailers have an opportunity to increase gross and contribution margins by adopting efficiency strategies that conventional retailers use, such as investing in information software.

With respect to the distribution portion of the retail & distribution segment, Buyers writes that investments in natural products distributors typically have been an excellent investment strategy because distribution captures the growth of the industry. However, she also notes that there is only one distribution company, United Natural Foods (UNFI), that is publicly traded on U.S. markets.

Despite risks that include volatile share prices, the potential for fluctuating growth trends and lack of consumer acceptance of new products, plus the possible further entry into the natural products industry by mainstream consumer companies, Buyers is optimistic about the industry’s investment potential.

“In our opinion, the healthy lifestyle industry offers one of the most attractive growth stories within the consumer sector,” Buyers writes.