BOCA RATON, FLA. — A major inflection point has been reached in the level of consumer appreciation for natural and organic foods, putting the already growing category even more solidly on an upward trajectory, said Irwin D. Simon, president and chief executive officer of The Hain Celestial Group, Lake Success, N.Y.
In a recent presentation, Mr. Simon touted the growth prospects of the still modest better-for-you category and contrasted this outlook with what he called the lackluster performance and prospects of conventional food companies. He spoke Feb. 17 at the 2015 annual conference of the Consumer Analyst Group of New York at the Boca Raton Resort & Club in Boca Raton.
Estimating the current U.S. retail food market at $800 billion, Mr. Simon cited Spinscan data indicating only $40 billion is in the natural and organics category in which Hain Celestial focuses.
While baby boomers represent Hain’s principal consumer base currently, he said that profile is rapidly changing.
“Who is the audience of tomorrow?,” he asked. “Millennials – 18 to 35. Millennials are not buying brands our parents did. They are very educated about ingredients. Millennials today go back and check what a product is made from, where it came from, how the animal was treated. That is something Hain is focused on.”
The millennial impact is being felt now in broad consumer perceptions, Mr. Simon said.
“If you go back and look at where we were in 2012, 40% trusted organic, 38% thought it was safer,” he said. “If you come back now and consumer purchases, this is 2014, two years later 75% of U.S. consumers purchased organic, and 36% use organic on a monthly basis. Look at what’s happened in just two years. This is not just natural independent food store. This is conventional. This is mass market.”
He contrasted the current mindset with the lack of familiarity with the idea of wellness in 1993 when Hain was established.
“Early in the 1990s, if I asked, 10% of consumers knew about wellness, and 90% of consumers today know about wellness,” he said.
Over the course of his hour long presentation, Mr. Simon touched on many of his company’s brands and product lines but devoted particular attention to a few he cited as especially promising. Established in 1993, the company in fiscal 2014 (year ended June 30) had annual sales of $2.2 billion, has 6,000 employees and operates 30 manufacturing plants. The company is targeting 10% annual compounded sales growth through 2018, with a target for that year of $3.5 million. Guidance for 2015 projects sales growth of about 23%, to $2.7 billion, with earnings growth of 17% to 19%. Net profit in fiscal 2014 was $35.7 million. The United States accounts for 60% of the company’s annual sales.
With annual sales of just over $2 billion globally, Hain accounts for a small part of the $800 billion U.S. food market, Mr. Simon said.
“I’m not asking for a lot,” he said. “One per cent, that’s $8 billion. Each 0.1% is $800 million. I’m not going out to recreate the food industry. What I want to do at Hain is replace conventional food that is not healthy and go into those categories. Wherever baby food is sold, we want to have either Earth’s Best or Ella’s. The category isn’t growing, it’s what are we replacing in regards to conventional brands. Soup. The canned soup category is not growing. So we’re looking to take away from conventional soup with asceptic soup, Recart soup and fresh soup.”
Hain currently has a presence in 10 of the 15 largest natural and organic categories, and the company’s meat business was among those Mr. Simon said was poised for rapid growth.
“This year we acquired the remaining part of Hain Pure Protein,” he said. “When we acquired our percentage of Hain Pure Protein, 2005-2006 combined, it was a $32 million business. Back then, the consumer was looking for more and more antibiotic free, more and more organic protein. Today, it is a $230 million business, growing at 23% on its way to being a $300 million business. With that, we see a consumer that eats 88 lbs of chicken per year, consumer eating 18-20 lbs of turkey a year, and moving away from beef and moving away from pork.
“Stay tuned here because today 40% of our products are branded and 60% are private label. There is a big opportunity for us to roll our FreeBird brand into multiple categories, whether its deli, turkey, tray pack or ingredients. Here is a big category for us to roll out into food service.”
The company also has expanded recently in baking, with its 2014 acquisition of Rudi’s.
“We’ve spent some time getting the bakery up to speed,” he said. “We’ve put capital in the bakery. The opportunity for frozen gluten-free, for fresh gluten-free products around the U.S., not only at retail but also food service, is tremendous, along with organic breads. Not just gluten-free products but organic products, too.”
Growth at Hain has been fueled by the growing importance of e-commerce at the company, Mr. Simon said. Amazon has grown to become Hain’s sixth largest customer.
“If you’re not selling today direct to consumer, you are missing something,” he said. “I know in my house how much product comes every day by FedEx or UPS, What Wal-Mart e-commerce is doing, Target.com. What we do with amazon. What we do with FreshDirect. We have a direct-to-consumer business with Blueprint today, and we’re in the midst of setting up our own direct to consumer with Currantly, not necessarily selling products to (consumers), but we will be sending them information, making sure they know a lot about our products. It’s amazing how many moms and dads visit our sites, and want to know what to feed their babies. We have those consumers.”
Social media has become increasingly important at the company.
“Two years ago our social media group was one person,” Mr. Simon said. “Today it is four to six people, and it will probably continue to grow in the way we talk to consumers and we are getting information back.
“We had a fantastic Super Bowl. We didn’t run commercials. We were streaming the whole day.”
While larger companies have shown great interest in the health and wellness market, Mr. Simon said ingredient sourcing challenges make this incursion difficult for other companies and is an impediment to growth at Hain.
“Sourcing is a barrier to entry,” he said. “Ninety-nine per cent of our products do not contain G.M.O.s. It is difficult to source those ingredients around the world, difficult to source those products. We go through third-party testing. We are very strict with regarding our labeling.
“Hain has set up over the last 20 years a procurement infrastructure around the world. If I had to say, one of the biggest challenges out there today to keeping up with growth is supply of G.M.O.-free and organic ingredients. Together with that is the supply relationships we’ve built with farmers. We’ve worked with farmers and committed to take all their products over the next five years, partner with them and even financially support them. To ensure we have that supply.”
Still, with large food companies devoting more attention to health and wellness, Hain increasingly finds itself with formidable competition when bidding on acquisition candidates.
“M.&A. has gotten tougher because of multiples,” he said. “We saw some M.&A. just recently, and I think there is another one coming with multiples which I refer ‘in the hemisphere.’ Hain has been very disciplined with acquisitions. That’s something we’ll continue to do. And the good news is that we have numerous brands, numerous categories. We’ll recreate some of these categories if we can’t buy them. I’ve always said if we can’t, we aren’t going to pay 9 times revenue or 25 times EBITDA. Maybe that’s what someone should pay for Hain, but we’re not going to go out and do that.”
Pressed on what Hain would be willing to pay for a desirable acquisition candidate, Mr. Simon said the company would stretch on valuations under certain circumstances.
“If they’re accretive, if they are in a growth category, trust me, we’re in there bidding,” he said. “There are a few in which we just didn’t end up being the winner. From a strategic standpoint, we’d like to get it down to 6 to 7, but we’d pay 10 if we know we’ll be getting growth on the top line.”
Even excluding further acquisitions, Mr. Simon said Hain sees “a lot of runway” ahead. Just with the announced expansion plans of retail chains such as Whole Foods and Sprouts that specialize in better-for-you products, Hain expects to generate considerable growth. The company has begun to expand its presence at food service, with products in Panera and Chipotle.
“Where there is a cash register, we want to sell our products,” he said. “That’s where our consumers wants.”
The lower gross margins typical for health and wellness products versus conventional foods were the subject of a question directed to Mr. Simon. One of the reasons for the lower margins and that the lower margins are the subject of surprise, is a misunderstanding about the pricing of organic and natural foods, Mr. Simon said.
“You can’t sit out there and think you can get a 25% or 30% premium on price,” he said, speaking about baby foods and other categories in which Hain competes. While a 10% or 15% premium to conventional products may be charged in certain cases, pricing at parity is not uncommon, he said.
Other factors cut into Hain margins, Mr. Simon said.
“Sixty per cent of our products we make internally, and 40% we outsource,” he said. “When I started this company I never wanted to own one plant. We own 30 today. And I felt I never wanted to become a plant slave. As volumes decline you’re stuck with the plants. You don’t have the volume to put through. I’d rather give up 10 to 15 points on manufacturing. If I said to the world tomorrow, ‘You know what, I’m going G.M.O., I’m going to buy G.M.O. corn.’ It costs us an extra 10 to 15 points because of the ingredients we’re using. That’s why productivity is so important to Hain to take these costs out and scaling up.“I’m never going to have some of these other consumer product companies’ margins. But I hope I never have their growth either.”