Natural Foods Merchandiser

Q & A with Patrick Rea of Nutrition Business Journal

Q: How did last year’s economy affect the natural and organic industry?
A: It took a bite out of the organic industry’s swagger. Anything with an organic label, whether it was food or personal care, was affected because those products often carry a price premium. Some people stopped buying anything organic as a way to cut back even if, in some categories, prices were only slightly higher than conventional products. In the store, consumers were trading down to private label or natural. By and large, people don’t understand the difference between natural and organic anyway. When your spouse is out of work, it’s pretty easy to make a choice between a $7 gallon of organic milk versus a $5 gallon of natural. After a year like 2009, the widely quoted circle of industry founders are less likely to say organic is recession-proof in the future.

Q: What do you expect for the rest of this year?
A: The industry is concerned about whether consumers will return to the food lifestyles they led previous to what’s being called the “great recession.” Will they go back to buying name brands or will private label continue to grow? Consumers have learned to live without, and that has reset their values. Still, it will be hard to repeat the dismal performance of 2009. If there’s a silver lining to this economic downturn, it’s that many natural industry companies that had previously experienced nothing but successive years of growth were forced to reevaluate their levels of fiscal discipline. If they survived the downturn, they’ll be healthier businesses going forward.

Q: In what sectors do you expect growth and by how much?
A: Supplements tied to immunity health saw growth last year because consumers viewed them as a way to ensure health in the wake of H1N1 flu. Will that growth continue in 2010? After a year like 2009, it’s hard to say where the rebound will begin and at what scale. The canary in the coal mine will be retailers. Whole Foods, Vitamin Cottage and The Vitamin Shoppe are all turning in improved quarterly performance. Growth will be felt by retailers and distributors first, then manufacturers and eventually ingredient suppliers.

Q: Do you expect more or fewer mergers and acquisitions in the
industry this year?

A: I think a lot of industry analysts, myself included, expected to see more mergers and acquisitions in 2009 because acquirers were expected to “bottom feed” the market. What we learned is that mergers and acquisitions in the natural products industry are not only tied to how good or bad a company is doing, but also the availability of capital. If you can’t get your hands on the cash, there’s no possibility of deals happening. I suspect we’ll see more mergers and acquisitions this year, as the financial markets open up.

Q: Are more new, smaller manufacturers getting into the industry?
A: That also relates to the access of capital. There’s no shortage of good ideas in this industry, and certainly growth can largely be attributed to new product introductions. A lot of these ideas come from small startups, but if you don’t have access to capital to start your business (many entrepreneurs use an American Express card), it’s hard to get started. Still, the barrier for entry is quite low. People don’t need big capital investments to get going. This year, we should see more access to capital and thus more startup activity. You could also point to the success of Expo West as one indicator. Attendance, booths, booth sales, everything was up. I think that means that there are very positive prospects for the industry in 2010. If you were to ask me that last year, I wouldn’t have been able to say the same thing.

–Interview by Kelsey Blackwell

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