Buyouts Invigorate Natural Products Industry

ANAHEIM, Calif. — The natural products industry is taking its vitamins.

The merger of Sunflower Farmers Market [4] and Sprouts Farmers Market [5] may have captured the most attention, but it’s not the only muscle this segment is flexing. A number of deals on the manufacturing side are just as powerful, according to industry stakeholders interviewed during the recent Natural Products Expo West here.

“We’re seeing the transformation of the food business driven by health needs, and we’re seeing it across many categories,” said David Thibodeau, principal at Partnership Capital Growth, Boston, Mass.

In the span of two weeks, no less than four mergers and acquisitions were announced involving health and wellness manufacturers:

  •  General Mills and Food Should Taste Good.
  • Dole Food Co. and Mrs. May’s Naturals.
  • Pfizer and Alacer.
  • Ian’s Natural Foods and Blue Horizon Wild.

The tight spacing of the announcements was occasion for some to credit the overall health of the natural food industry, which emerged surprisingly unscathed from the recession. Though sales fell back to the 6% range, the recent buyouts indicate that corporations in acquisition mode have done their math and foresee sunny days ahead.

“There’s a lot more confidence in the economy,” said Charlie Sweat, chief executive officer of Earthbound Farm, a value-added produce processor based in San Juan Bautista, Calif. “Speaking for ourselves, the demand for our products for Q1 has been the highest it’s ever been.”

Consumers seem similarly positive. The most recent report on retail sales from the Commerce Department shows sales rose 1.1% last month, on top of a 0.6% percent increase in January. The gains were broad-based, according to officials.

Smaller to midsized companies stand to gain the most in this environment, according to industry observers.

“Momentum and growth are critical, both top-line and bottom-line,” said Thibodeau. “The companies need to have a niche, an unmatched claim within that niche. Are they No. 1 or No. 2, or are they No. 6 or No. 7?”

These are the issues facing today’s strategic buyer. “No one wants to buy the No. 6 brand in a category,” he continued.

The modern natural products industry is still young. For example, Food Should Taste Good was founded in 2006; Mrs. May’s started manufacturing its snacks in 2002. The fact that both were considered ripe for acquisition speaks volumes about the pace of development within the natural segment.

“A lot of brands are just now growing out of adolescence,” noted Liz Myslik, executive vice president of Cucina Fresca Gourmet Foods, Louisville, Colo. “The challenge for them at this point isn’t production, but logistics and distribution.”

That’s the challenge facing companies like Rooibee Red Tea. The award-winning beverage manufacturer recently secured $1.5 million in series A funding to help it expand.

“I feel sorry for those today who might have a great idea and commitment, but no support,” said Heather Howell, “CTeaO” of the Louisville, Ky.-based company.

Rooibee counts among its current customers H-E-B Central Market and Whole Foods Market. Without the additional financing, Howell said it would have been like the company “hitting a wall.”

The search for financing can often distract small companies and actually sidetrack their growth.

“They spend more time trying to raise money than on running their business,” Cucina Fresca’s Myslik said. “It takes away from their core purpose, which is to build their business.”

Some operators are surmounting such hurdles by joining forces with complementary partners of the same size. That’s the strategy being employed by Ian’s Natural Foods in its decision to merge with Blue Horizon Wild to form Elevation Brands. Chuck Marble, the combined companies’ new CEO, said the priority in looking for a partner was operational.

“What’s really exciting for us, though, is finding new resources to innovate, to control sustainability, traceability and product quality,” he said.

Ian’s, which makes allergen-friendly foods, and Blue Horizon, a processor of value-added seafood products, now share common goals as co-packers.

“Our sister company, Glutino, was sold and it allowed us to come out from under its shadow and take Ian’s to the next level. We’ve gone from being gluten-free to allergen-friendly, a brand that has a much broader appeal and a lot more potential for growth,” Marble added.

Start-ups understand that simply making a product, no matter how unique, does not entitle them to shelf space, or to recognition from potential buyers. CPG companies like General Mills are not in the business of building early-stage brands. It’s not a risk they want to take, say industry observers.

“Ninety percent of these companies fail,” said Thibodeau. “But some of them make it past the initial hurdles. They make their first million, their first 5, their first 20 — and then they’re on the map.”