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Natural Foods Merchandiser

Investment Roundup

The relentless economic downturn continues to take its toll on the naturals and organic industry. With credit markets drying up and the stock market fluctuating, consumers haven't been the only ones pulling back on shopping. The merger and acquisition market, which had slowed to a crawl in the latter part of 2008, came to a complete standstill in the first part of 2009.

As sales dropped, some naturals retailers cut back on new store openings or put expansion plans on hold. Yet despite these dire straits, a few industry experts see glimmers of hope in the coming months.

"For a lot of companies, the goal in 2009 is going to be survival," says Stephen Tardio, managing director of HT Capital Advisors in Chicago. "But there are probably signs of life out there."

Retailing: holding its own
For natural and organic foods retailers, Tardio sees "decent sales growth," of about 5 percent to 15 percent this year. He is seconded by Corinne Shindelar, development CEO of the Minneapolis-based Independent Natural Food Retailers Association, which has 41 members in 80 locations nationwide. "The industry seems to be holding its own."

About five of the group's members are expanding or relocating, and two just opened new locations, Shindelar says. One member, GreenFresh Market in Renton, Wash., closed. "Most of our retailers that had secured financing before the end of the year are moving forward, but those in the planning process that have not secured financing aren't," Shindelar said. "I'm not seeing planning for new locations in 2010."

Sales dipped in the first quarter of 2009, reversed themselves a bit in the second quarter, and are likely to be flat in the third quarter, she said. But, she added, "We have very few members who are experiencing negative store comps."

The National Cooperative Grocers Association, with 111 member co-ops, reports that about 15 percent of its members plan to expand in 2009, down slightly from 2008.

Phoenix-based Sprouts Farmers Market, which a year ago announced it had increased its growth rate to 15-plus stores a year, said it currently plans to open just 11 stores in 2009. The company operates 31 stores in Arizona, Texas, California and Colorado.

Mike Gilliland, who heads Sunflower Farmers Markets in Boulder, Colo., said that instead of the 12 to 15 stores originally planned, "we'll hit eight this year. And we'll plan eight stores a year here on out until the credit markets loosen up." The company, which operates 24 stores in Arizona, Colorado, New Mexico, Nevada, Texas and Utah, will "do what we can do with our own resources," Gilliland says. "As far as business loans—we've kind of stopped asking."

M&A: at a standstill
The collapse of the credit markets created the roadblock in the merger and acquisition market as well. Natural and organic company M&A activity, which started out vigorously in the first and second quarters of 2008 thanks to cash-rich strategic as well as financial buyers, slowed later in the year, and ground to a halt in the last quarter and into the first part of 2009. Tardio points out that most of the deals in the latter part of the year were already in the pipeline before the economy tanked last fall.

Nutrition Business Journal reported that total M&A activity in the United States dropped 37 percent to $986 billion in 2008, and initial public offerings fell to a 31-year low.

Tardio notes that during the past six to nine months, "most deals were small and cautious." M&A activity is likely to continue to lag due to the ongoing recession, tight credit, slow growth and poor sales, experts say. Cash will be king. Deals are likely to take longer to complete.

"You can't borrow to buy right now," Tardio says. "That puts financial players on the sidelines. And strategic buyers are having their own problems." Rather than auctions, "a lot of buyers and sellers are talking directly to one another right now," he says.

Valuations have come down, and "there's still a gap between expectations of buyers and sellers in terms of price. In the past, even smaller sellers were looking at [purchase prices of] one times their sales or more," Tardio says. "That's not true anymore." He expects the gap to narrow this year, however.

Looking to sell? Tardio says the investment community is likely to target organic-ingredient suppliers and companies using innovative technologies to produce products that are either organic or have a functional component. Private label will continue to be big. "It seems to be that companies that will be attractive for buyout are those with innovative products rather than me-too products," he says.

Tardio expects deals to get bigger over the next 12 months, "if only because the selling companies have finally grown up a bit and are bigger, and buyers have more cash. But valuations will serve to counteract that a bit."

Jane Hoback is a Denver-based writer and editor.

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