Natural foods: growth should remain strong
Carole Buyers, RBC Capital Markets
Dec. 31, 2001
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As an equity analyst for RBC, Buyers covers "healthy lifestyles" stocks, including those of companies in the natural and organic foods industries. She believes the sector will grow steadily over the next few years. An excerpt from an industry overview she wrote at the end of 2001:
We are forecasting the natural/organic food and beverage sector to grow 8 percent to 9 percent compound annual growth rate over the next three to five years. Our forecast implies that the category will experience only modest maturation in coming years. While this may appear optimistic, given the industry’s slowing growth trend, several growth catalysts should enable the industry to increase its penetration of the overall food market.
- First, the pending implementation of organic standards should help the industry sustain its 20% growth in organic food sales.
- Second, declining prices, which are resulting from supply chain efficiency,
should help capture price sensitive customers.
- Third, the industry should continue to benefit from distribution gains in massmarket
sales channels.
Success Factors: The winning formula
Several factors should prove critical to succeeding in the increasingly competitive natural/organic food market. Such factors include strong brands, large size, and the ability to establish a clear leadership position in attractive categories.
Branding: The most successful companies should have strong brands, since natural food consumers are emotionally connected to the food they consume. These consumers are likely to pay a premium for a product they trust, and a strong brand is the most effective means of communicating an image of trust. For example, branding has become prevalent in categories such as dairy, where food safety concerns are most prevalent.
Size matters now more than ever: Size has recently become a critical success factor. In the past, the natural foods business was confined almost exclusively to independent natural food retailers, where competition for shelf space is relatively lax.
Today, however, much of the industry’s growth is occurring in mainstream food channels, where competition is far more intense. Gaining and retaining shelf space in the mass market requires heavy marketing expense in the form of slotting fees
(which natural food retailers do not charge) and consumer advertising. Smaller companies are not only less capable of supporting this level of spending, but they also have more difficulty gaining attention from the highly consolidated supermarket chains.
Leaders in attractive categories: Given the high level of competition for shelf space in the mass market, we expect clear leaders to emerge in most product categories. These category leaders, combined with large diversified marketers, should be the main beneficiaries of growth in the mass market. Rewarding categories include:
organic and alternative dairy, refrigerated soy, organic juice, “super premium” juice, frozen foods, and various snack categories. Examples of companies with what we believe are established leadership positions in attractive categories include: Horizon Organic (organic dairy); Galaxy Nutritional Foods (alternative dairy); White Wave (refrigerated soy); Odwalla (“super premium” juice) and Amy’s Kitchen (frozen food).
Here are some of Buyers' latest reports on companies she currently covers. The Adobe Acrobat reader is needed to read them:
» Whole Foods
» Wild Oats
» United Natural
» Hain Celestial
» Horizon Organic
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