Q: What do you think the naturals industry is going to look like in a year?
A: NFM's market overview reports that the industry is showing some growth in dollars, but if you really look at inflation, there isn't much unit growth right now. I think we have stopped seeing conversion of new customers, and we're probably not going to see that change until the economy picks up. Here's the exception: People will still start families, they'll still realize they don't want to give their kids conventional milk and they'll still be buying organic baby food. I also suspect we'll see some of the weaker competitors in the naturals space—some of the manufacturers that overbuilt capacity or got a little leveraged—run into financial problems this year. There's going to be a few of them; there's not going to be a lot. The larger competitors are going to continue to chug along really well and are going to be able to drop prices and be more aggressive with customers that aren't jumping up and down to pay premium prices.
Q: Which sectors of the industry are most vulnerable in the current economic climate?
A: It's all about price. I'm not sure the big organic price premium will be able to overcome the market. It's not going to be a massive decline, but that growth has gone away. There are two considerations—one is absolute price and the other is the relative price premium. I believe that the highest price points—even relatively small premiums from conventional foods—are going to be impacted the most. Now consider low price points but high premiums. The price premium for organic meat over conventional might be 50 percent to 100 percent. That's big. It also happens to be a relatively high price point. So you've got a double whammy. Then there are categories in which organic is relatively new and price premiums are high because of a lack of availability of organic ingredients.
Q: What role will Whole Foods play in the future?
A: Whole Foods is beginning to change customers' perceptions of value propositions by promoting price. Its focus is on comparing its organic products to the same ones sold at Safeway, and saying, "Hey, we're not more expensive." If consumers start to perceive that the value proposition is a little bit better, then they won't immediately look at natural and organic and say, "This is too expensive; I'm not going to buy it." In this environment, I don't believe the major grocery chains are setting their sights on Whole Foods as their top competitor. Conventional grocers have shifted from trying to control the fresher, locally sourced, organic, natural and higher-end to competing with Costco, Sam's and Walmart.
Q: Do you anticipate any big mergers or acquisitions coming down the pike in the natural products industry?
A: Everything's been locked up for about nine months now. The most significant recent speculation was that Nestlé was looking to acquire NBTY, the big vitamin manufacturer based in Ronkonkoma, N.Y. I don't put a lot of credence in that. Normally, when companies' market valuations drop as much as they have, we see an increase in acquisition activity. The problem is the lack of capital available for strategic acquirers like Hain Celestial. And private equity investors that have invested heavily in this industry in the last couple of years are having to use more expensive equity—their own money—to make acquisitions, because they can't leverage the company they're buying with debt. So that kind of negates the benefit of cheap prices for companies.
Q: If you came into a bunch of money, what would you invest in?
A: The direct-selling and multilevel-marketing channel—it works really well in a weak economic environment. The idea is that as unemployment rises, more people are boosting their income by selling that great diet product someone else sold them from Medifast or Take Shape for Life. Beyond that, I think nutritional supplements and functional foods will be in pretty good positions as consumers start to become more health conscious. I would also probably invest around stevia, which really has the potential to take away the market for aspartame, Splenda and NutraSweet. It may also start taking some market share from sugar because it is a natural product. From an investment standpoint, stevia is what omega-3s were a few years ago.