GLG News by Matthew Levine

Implications: As reported in market research firm IGD's Retail Analysis, Whole Foods is set to sign leases for another London Store in the Canary Wharf area as well as a location in Birmingham.  Manchester is reportedly also on the radar.  Yet here at home as the chain integrates its new Wild Oats stores into the mix, more and more questions are being raised about its ability to translate enthusiasm and demand, and in some cases even signed leases, into actual stores. Whether this story is merely indicative of ongoing enthusiasm for a quality grocer in a retail landscape where most chains are dull and limited by the mechanisms of bureaucracies and slotting fees is not yet clear. But anecdotal indications suggest that ongoing efforts to build new stores in prime locations, quickly transform Wild Oats stores and grow overseas might be a bigger challenge than the store's PR statements indicate.

Analysis: Most notably the chain's failure to open a location it leased over a year ago in a former Albertson's in  uber-wealthy Marin, County, California, as well delays in the opening of its new location in Orange, Connecticut indicate problems.

Whether the Marin County effort was merely a tactical move to forestall Trader Joe's from moving closer to the chain's Mill Valley blockbuster is unclear.  Similarly we aren't sure what is delaying the Orange, Connecticut store, which from outward appearances looks ready to roll. Whether it is zoning delays or something from Whole Foods corporate, one would expect that the business development team would be moving faster than it is.

Further our ongoing analysis of its efforts in Westport, Connecticut which showed initial strong improvements in perishable and prepared foods departments are now shower less polished merchandising and service. 

While the overheard plan for a $5 million remodeling, is slated for August, the better than ever store to come, isn't even mentioned anywhere in the store.  Meanwhile, conversations with shoppers at the store reveal some of them are wondering what the big fuss about Whole Foods is about.  Once complete these shoppers will see something magical, but in the meantime are opportunities being lost in hedge-fund rich Westport, much like Marin County and elsewhere.

While current competitive challenges are still weak, with regional based Wegman's and Trader Joe's among the only clear strong challengers, increasing efforts from smaller regional super natural markets are growing as are the ongoing efforts from conventional markets to get their natural and organic ducks in a row.

Furthermore, we expect Target to start attracting many hard core natural shoppers with their continued expansion into the premium side of grocery both with low-priced branded offerings, as well as through continued efforts in the Archer Farms store brand and in the personal care department as well.

Things are heating up and the question to be seen is does Whole Foods have the resources to take advantage of its huge advantages before the competition catches up?

Implications: 1)  The Sunday after a strong earnings call for 3q 2007, the PR mastery of Hain Celestial continued in a NY NEWSDAY profile of Irwin Simon.  Simon looked so great in the piece that one doubts it could have been any rosier had the Hain Communications Department written it

2) Simon's confidence comes across as arrogant, suggesting either that he really believes his hype or perhaps believes the market growth for natural and organic is so strong, actual single-digit growth in brand performance is less relevant to Hain's stock's continued strong performance.

Analysis: Just a few days after a strong earnings report, fueled in most part through newly acquired companies, a Long Island NEWSDAY profile of Irwin Simon must have added to his glee.

After reading the profile one would believe Simon is the only thing keeping CPG giants from burning down organic processing plants and polluting the natural and organic products industry with substandard mass market brands. That's funny because Simon's criticism of mass market organic brands echoes what many of Hain’s critics within the natural and organic industry say about him.

While Hain's growth through acquisition strategy has been oft described as the work of a master strategist developing strong brands in reality Hain's growth isn’t so rosy. Yes Hain’s Simon is a master financier, yet when it comes to managing brands instead of money, his leadership leaves little room for admiration.

The fact is Hain has done a historically poor job with its new brands.   And what’s more we wonder if in the long term Simon’s that concerned.  Could it be he is betting that growth in the marketplace will benefit his brands no matter how poorly they're managed?

While last week’s earnings call showed strong growth in several of Hain’s new brands including Jason Cosmetics much of this is from new placement in conventional outlets and we have significant doubts that sales from many of these new distribution points will be strong. Instead look for these products to sit on the shelves gathering dust as consumers seek cheaper more familiar mass market brands instead.  

As quoted in the story, Simon states that many of the companies he bought would have likely gone out a business.

"I've been looked upon as a big bad guy in the industry, because I've gobbled all these companies up. But I believe that if I didn't buy them, they wouldn't have stayed in business today. They were poorly run, and I've taken them to a whole other level."

This claim that Simon’s acquisitions have saved companies from failure is ridiculous. In fact the opposite could be argued far more persuasively. Namely that without Hain’s clumsy lead glove management many of these brands would be more robust than they are today.

Implications:

While many in the natural and organic products industry were foaming at the mouth with the prospects of doing business with the retail giant, others were skeptical from the start.

While a few high volume items, notably organic milk, that appeal to a wide range of consumers were likely additions to Wal-Mart’s shelves the much touted March 2006 announcement of Wal-Mart’s commitment to carry thousands of natural and organic products always rang hollow to me.

 

Analysis:

The company announced their intention on the opening day of Natural Products Expo West, the natural and organic industry’s largest and most important trade show. This was a shrewd move as Wal-Mart’s declared intention to add thousands of natural and organic SKUs to it shelves was the number one topic of discussion the three days of the show.

Today that intention seems a lot like the guy who tells you the check is in the mail or the heavy co-worker who always vows to go the gym at lunchtime but never does.

There were several key reasons to doubt Wal-Mart would follow though with its pledge, or if they did, that it would suceed.  Natural and organic shoppers like fresh foods, like the beautiful produce, seafood, meat and poultry so prominently featured in stores like Whole Foods.  Wal-Mart can never provide them with this.

Furthermore while many mainstream manufacturers have launched organic lines, prompted by Wal-Mart’s intention few have done very well.  Perhaps the most ill fated example to date is Kellogg’s organic Raisin Bran, Mini-Wheats, and Rice Krispies, products that are laughed at as examples of the failure of large CPG’s to understand natural and organic shoppers. Its doubtful many of the mainstream organic items created for Wal-Mart will last more than a year or two.  Expect brands like Ragu, Breyer’s, Kellogg’s, Keebler Tyson’s and many more to disappear soon. 

These shoppers want something special and they are constantly suspicious of frauds, wannabees and newcomers that are only interested in capturing their shopping dollars and not committed like they are, to creating a more sustainable world.  Natural and organic consumers prefer supporting smaller companies that they perceive share their values. This is where Wal-Mart falls short too, and even if, as they claim in the Business Week story to be continuing to expand organic products in key markets the end of this started really before it began.

In the meantime Wal-Mart still promises to go green, creating new stores that use little energy and rely on sustainable construction practices.  They are also requiring vendors to submit plans to change packaging consistent with sustainable business practices. Should Wal-Mart actually follow through with the plan, the company would revolutionize green building.  Lets see if they hold the course.

Meanwhile look for Target to expand organic offerings as it rolls out more superstore formats.  Their Archer Farms brand is currently confusing.  It offers both organic items and conventional ones that aren't only non-organic but loaded with artificial ingredients.  Should they get this brand 'figured out' they could impact sales in Whole Foods and other natural stores.

Implications:

The recent report on the danger of antioxidant supplementation may have a powerful impact on sales.  If Vitamin E sales provide any indication the road for supplement makers ahead might be challenging.   

Analysis:

According to data provided by SPINS for the year ending December 31, 2006 sales of Vitamin E continued a two year decline, losing 12% from year ago dollars in Combined Natural Supermarket and Mainstream Food Drug and Mass channels.   More importantly 2006 sales compared to 2004 showed a 48% decline, with 2006 sales of Vitamin E at $80.6 million compared to $154 million in 2004.

The good news, if you can call it that, is that the steady decline is getting less steep.  More importantly overall sales of vitamin and nutritional supplements were up last year but the power of bad press suggests the fragility of this growth.

Nonetheless time will tell if the recent study on antioxidants has a similar impact.  I thinks not, as the overall consumer confidence in antioxidants has been high and unlike Vitamin E, this study that question antioxidants was not only one of a kind, but likely perceived by the public as a bit unbelievable as its conclusion was not only that antioxidants provide no benefit, but that they might actually kill you.

Implications:

American grocers are nervously awaiting Tesco’s opening of their “Fresh & Easy Neighborhood Markets” in the U.S.   Tesco’s plans include opening locations in Southern California, Arizona, Nevada and possibly Colorado.  While initially billed by the retailer as a new type of convenience store, the format more closely resembles a hybrid that combines the best of two of America’s most profitable grocery chains, Trader Joes and Whole Foods.

 

Analysis:

While actually modeled after the highly successful “Express” format in the U.K., purportedly highest margin stores in the Tesco empire, folks in the U.S. have been stating that Tesco has taken the best of Trade Joe’s (a small manageable size, convenience, good prices and products busy professionals like) and the best of Whole Foods (beautiful fresh foods and great prepared meals for folks who just don’t cook but want more than mediocre prepared food from the supermarket or takeout from a fast casual restaurant).

Furthermore while no one is actually willing to be quoted, folks from both chains are to wary of the British invasion.  Given Tesco’s deep purse strings, and strong market savvy, both Trader Joes and Whole Foods stand to lose significant shopping dollars if Tesco hits a homer, with their prepared meals being the key.  If they can even come close to the great taste of Whole Foods meals, look for rapid expansion in the States. 

Whether or not the significant added cost in the opening of these stores has any impact is doubtful.  And lest this story leaves readers wondering whether conventional retailers are worried you bet that they’re worried too.  The only thing is that they have been struggling for so long now that the real news is that even Tesco stands to knock some fat off the two untouchables in a way that America’s leading grocers couldn’t.

 

Implications: Despite nearly three years of lousy publicity generated by questionable science the vitamin and nutritional supplement has been about as active as a roadkill and consistently failed in creating powerful campaigns to educate the public.

Short term concerns over sales growth and a fear over positively impacting competitior's sales means that unless a cohesive industry effort can be created, sales growth will remain limited by the random winds of the media.

Analysis:

The recent study on antioxidants published in the Journal of the American Medical Association is bad science and worse public relations for the supplement industry. 

The research examined a select group of studies that gave supplements to really sick men and women. This isn’t a great way to learn much about anything other than really sick people tend to die.  Additionally the researchers excluded any studies that showed benefits. Regardless of its faults the scientists concluded and the media widely reported that antioxidants were potentially harmful and in some cases could hasten death.

What’s most remarkable about the JAMA study is that it shifts the public conversation from one of “can vitamins and supplements help me” or  “can vitamins and supplements make you live longer” or “can vitamins and supplements reverse disease,” to do vitamins kill?  Given the wide range of media coverage, much of which failed to explore the research’s shortcomings, one might have expected a concerted effort from the supplement industry to reach out to an increasingly confused public. Yet nothing other than a standard variety of mundane press releases were issued, none of which received media coverage.  While various reports, notably Tara Parker Pope’s story in the Wall Street Journal, included comments from industry experts the lack of a concerted response is reason for concern. 

Despite nearly three years of lousy publicity fostered by questionable science that refutes years of research and thousands of studies on Vitamin E and Echinacea among other studies, the vitamin and nutritional supplement has been as proactive as a corpse. 

The passage of the Dietary Supplement and Education Act in 1994 (commonly referred to as DSHEA) was a huge victory for the nutritional supplement industry.  This bill allowed supplement manufacturers to state so-called ‘structure-function’ claims on product packaging and promotional literature.  Prior to this bill's passage, it was illegal for manufacturers to make any such claims. Doing so would result in a FDA raid of your warehouse.

Upon DSHEA's passage many products soon offered information to consumers as packages promoted claims noting benefits to the immune function (a wide range of products, notably the herb Echinacea), prevents bone loss (calcium), supports a good mood (St. John's Wort), maintains proper anti-inflammatory response (Turmeric) and more.  Furthermore product names now included keys to their use, such as Osteo-Support, Mental Edge, Positive Thoughts, CardioSupport, Occugard and thousands more. 

The addition of this information to products played a large part in the huge growth in nutritional supplement sales that took place at the end of the 1990s. Furthermore this regulatory change allowed retailers, led by GNC, to arrange store shelves by health condition rather than ingredient, furthering consumer acceptance and ease of self-diagnosis and selection of products.  No longer did consumers face a large wall of supplements bereft of any useful information (other than the occasional sales clerk).

Yet upon passage of this bill the industry failed to recognize that with the ability to state product claims would could greater scrutiny, from curious researchers to those who claim supplements are snake oil. 

While an industry group, the Dietary Supplement Education Alliance has conducted several remarkable studies none have received any publicity.  The most notable, conducted by health care research consultants The Lewin Group, showed that geriatric populations taking omega-3 fatty acids and the carotenoids lutein and zeaxanthin could save the Medicare system  $3.1 billion and $2.5 billion respectively over five years due to less hospitalizations, trips to the doctors and “avoided transitions to dependency,” due to less cardiac conditions and cataracts.

At the time of the study I wrote about it on my website and contacted the then newly elected president of the Dietary Supplement Education Alliance.  For over four months I emailed and called all in an attempt to write an opinion piece that could be submitted to newspapers across the country.  I received no response for months and finally gave up.  A year later at a trade show, a salesman who like me was extremely frustrated with the lack of response told me that Dietary Supplement Education Alliance efforts were aimed at lobbying Congress.  He added that he too was shocked at the lack of broad based efforts aimed towards educating consumers.

Implications: Many observers have written or stated that the purchase of Wild Oats is consistent with Whole Foods growth through acquisition.  This is wrong as the Oats purchase is vastly different from previous acquisitions which were of small, regional well-run chains..

Additionally, the current environment for Whole Foods is in transition. Whole Foods has been losing high volume shoppers to places like Trader Joe’s for years and transitional natural and organic shoppers like Suzy New-Mom are going elsewhere too.

Analysis:

As noted above the purchase of Oats purchase is inconsistent with previous buyouts. The chains that WFM purchased on its way to revolutionizing the grocery business were regional, small chains  (usually between 10 to 20 stores) that were extremely well run leaders in their respective markets.  Among others, Mrs. Gooch’s in Southern California, Bread & Circus in the Boston area, Fresh Fields in the D.C. metropolitan area were all considered equals to Whole Foods. 

<!--[if !supportEmptyParas]--><!--[endif]--> Wild Oats has always been a distant runner-up, plagued by an ill-advised growth strategy, yet at the same time blessed by the huge growth in the demand for natural and organic foods.  Currently its stores are a disparate group, with formats ranging all over the map in size, profitability and marketplace appeal. 

So if anyone thinks the Whole Foods purchase is pure opportunity they’re mistaken.  Integration efforts will be difficult. Look for WFM to close or sell between 30 to 40 stores.  Managing the integration of the remaining stores could distract resources and talent from Whole Foods  aggressive pre-acquisition growth strategy.  However, as key managers to take on Wild Oats stores as part of the merger, don’t expect existing Whole Foods stores to be impacted as the WFM talent well runs deep.

One of Whole Foods greatest unstated ‘assets’ has been the consistent poor performance of conventional grocers in capturing natural and organic shoppers.  Most recently this has changed. As more conventional stores create natural formats (Supervalu's Sunflower, Publix Greenwise) and places like Safeway’s Lifestyle stores the real battle is beginning.  Once, transitional natural shopping dollars have been headed for Whole Foods coffers. Today, more than ever, she can buy organic milk and baby food for her newborn elsewhere these days--Safeway, Kroger, and of course Wal-Mart and Target too.

So while we doubt that if a conventional chain had purchased Oats, this pattern would have gotten more dramatic, we do know the obvious: that by purchasing Oats, Whole Foods has kept the competition from getting instant access, albeit poorly run access, to the natural and organic market. 

Managing the disposal/integration of 110 new stores in this newly competitive market means that WFM will have more than same store sales figures to worry about.

Implications: Despite the fact that the fast-aging baby boomers are looking for the fountain of youth and frequently choosing vitamins and supplements to aid in their search for vitality, the market hasn’t made up whether it believes Nature’s Bounty (NBTY) is flying too high.

Yet overall patterns greatly favor NBTY's multi-channel and premium, mid-range and low-end market strategy.

Analysis: Despite ongoing negative reports in the press, most recently a study disputing the benefits of antioxidants, NBTY rebounded a few points at the end of last week, closing at 47.92.

Even if past patterns of cyclical ups and downs in the vitamin and supplement market continue, NBTY is positioned wisely at the high, medium, and low ends of the market and should continue to grow.   

The company’s 2006 performance of 8.2% growth with a remarkable 43.2 rise in profits led a surge in stock price, peaking in early February at just over $55 a share, yet this same growth has many selling, wondering how NBTY could continue to perform at such a high rate.

Yet even with the recent decline, NBTY’s stock value has more than doubled since a year ago. This is especially notable in a market that analysts frequently view as inconsistent, fraught with ups and downs that reflect consumer uncertainty about taking vitamins and supplements.

Overall preliminary unaudited sales for February 2007 sales show that despite declines in the Puritan Pride line and the company’s Vitamin World retail stores, overall sales growth was at a respectable 6%.

More and more people are buying supplements and the trends suggest this will continue throughout the decade, benefiting NBTY along the way.