Vitamin maker Nutraceutical International Corp. is breaking down the boundaries between supplier and buyer, quietly acquiring not only branded supplements products, but naturals retailers as well.
The Salt Lake City company has, without fanfare, acquired retail outlets in California and Arizona, with the hope of stepping into the shoes of its core customer base, natural foods stores. The goal: Learn which products are hot and which are not.
?We want to learn from the day-to-day,? says Korry Kieffer, spokesman for Nutraceutical. He says the information could give insight into upcoming trends and perhaps lead to new products, not to mention adding to top-line growth.
So far, retail hasn?t been an easy road for Nutraceutical. And increased consolidation in the retail world puts more pressure on independent retailers, analysts say.
Nutraceutical operates under the radar. Started in 1993 by venture firm Bain Capital, the company?s growth strategy has been to roll up small vitamins makers. Today, Nutraceutical owns such brands as Soloray, KAL, NaturalMax, VegLife, Premier One, Sunny Green, Natural Sport, ActiPet, Action Labs, Miztique, Ultimate Nutrition and Thompson. The company earned $12.6 million last year on sales of $124.5 million.
Despite its wide array of brands, the 700-employee firm keeps a close lid on operations, occasionally issuing brief press releases and sometimes nixing traditional conference calls with Wall Street analysts. Nonetheless, the company seems to get noticed. In 2002, Forbes magazine recognized Nutraceutical as one of the 200 ?best small companies? in America. Business Week followed suit this summer, ranking the company No. 61 among ?100 Hot Growth Companies.?
Nutraceutical?s focus on manufacturing took a venturesome turn when it began its retail store acquisitions program. In mid-2002, the company bought three Real Foods Co. stores in San Francisco for $2.7 million in cash. In 2003, Nutraceutical bought Arizona Health Foods, a chain of 11 stores, for $3.5 million in cash. Earlier this year, it added Cornucopia Market, a small Carmel Valley, Calif., store.
Some manufacturers and distributors won?t even consider leaping into the retail business for fear of competing against their retail customers. After the Arizona Health Foods acquisition, one Arizona store owner complained that Nutraceutical intended to compete against him as well as selling to him, says Kieffer of Nutraceutical. But that?s a minor problem, he says. ?We operate a dozen stores. We sell to 10,000 health food stores,? he says.
?Up to a certain size it shouldn?t be a problem,? agrees David Block, a health and nutrition analyst with Seidler Cos., a Los Angeles investment bank. ?If they got to 25 percent market share, then maybe some red lights may start flashing,? Block says.
Still, independent natural foods stores face increasing pressure by mass-market retailers and naturals supermarket chains that command greater buying power and control over distribution. ?They?re feeling the squeeze,? says Amy Jacobsen, inside sales and marketing manager for SPINS, a San Francisco market research firm. To compensate, smaller grocers are banding together to create cooperatives. The National Grocers Cooperative, which represents 94 independent natural foods co-ops with 111 retail locations, reorganized its structure in April to improve independent store clout among a growing field of larger players.
Natural products sales in mainstream grocers saw a 7.8 percent uptick last year. ?When you have a market that is growing and transitioning to the mass market, independents are losing a little bit of share,? says Scott Van Winkle, managing director of Adams Harkness Inc., a Boston-based investment firm.
The roll-ups driven by Nutraceutical and others won?t convince Art Watkins to cave. Last year, he declined an offer by Nutraceutical to buy his Oakland, Calif., store, the Food Mill. Health insurance costs, workers? compensation and safety in an inner-city neighborhood worry him more than consolidation. ?I?ve got enough adversity here in Oakland,? he says.
Watkins didn?t want to be part of the Nutraceutical plan, but he doesn?t think its strategy is all bad. ?They?re not foolish. They want to be as profitable as possible,? he says. ?Whether it works for them, I don?t know. But it makes good business sense.?
Company executives eyed acquisitions in the San Francisco Bay Area because the city was the ?birthplace for the natural foods industry,? says Nutraceutical?s Kieffer. But that birthplace hasn?t been too welcoming. The company stirred up controversy when it abruptly closed one of the three San Francisco Real Foods stores in June 2003, giving no notice to customers or to the 30 fired employees. Employees filed four grievances with the National Labor Relations Board.
Newspaper articles reported that employees were organizing a union when the store closed. Local activists talked of boycotting the store if and when it re-opened. It never has, although Nutraceutical?s Kieffer says the company still has plans to renovate the store.
?They made two faux pas,? says Tom Maravilla, who for years owned a neighboring grocery called Mikeytom?s. He says he wants to assume Nutraceutical?s lease in Noe Valley and reopen. ?You don?t fight unions, and you don?t leave customers hanging out to dry.? Nearly a year later, neighbors in San Francisco?s Noe Valley still cringe at the name Nutraceutical, says Maravilla. ?People have a very negative reaction,? he says. ?It?s a politically charged issue. In a nice, upscale neighborhood, it?s a blight to have a boarded-up building ? I don?t see anything right about what they?re doing.? Kieffer says Nutraceutical officials worry about the bad rap. ?We?ve listened to both sides of this and we participated in meetings,? he says. ?We?re concerned. We?re doing all we can.?
Joseph Murillo, who turned down Nutraceutical?s buyout offer for his Pacifica Farmers Market in Pacifica, Calif., told the San Francisco Chronicle in late 2003 that company officials told him that demand for vitamins was slowing and Nutraceutical wanted to boost sales by controlling more retail outlets.
Despite its recent store acquisitions, Nutraceutical has no plans to get away from its core supplements business, says Kieffer. Nutraceutical claims 6 percent to 8 percent market share for supplements in natural foods stores, according to Seidler Cos.
This summer, Nutraceutical continued its acquisitions pace. It paid $9 million to buy supplements maker Natural Balance Inc., based in Castle Rock, Colo., and $600,000 to buy the Montana Big Sky brand of nutrition products.
Kieffer says his company aims to be diversified. It also owns a small publishing unit that churns out health books, besides producing 3,500 nutrition SKUs sold in 30 countries, he says.
For supplements makers, selling out may be a good idea, says Jacobsen of SPINS. It?s becoming far more difficult to get on store shelves with a smaller line of perhaps four or five branded supplement products, she says. ?There are so many products out there. We have over 400,000 UPCs for supplements in our database,? says Jacobsen. ?The guys getting distribution have a full line of supplements.?
Block, the analyst from Seidler Cos., sees better growth for Nutraceutical in personal care products like lotion and shampoo. The organic personal care market grew 81 percent in 2003.
Even if Nutraceutical doesn?t become a national retailer, the company still faces the cumbersome task of integrating the stores it already owns. That means unifying business operations such as purchasing and distribution to realize the financial benefits of the acquisitions.
?The difficulty will be when you consolidate them,? says analyst Van Winkle. ?And they haven?t done that.?
The company?s other challenge will be to resist overstocking its own products on the shelves of its newly acquired shops, says Jacobsen of SPINS. Consumers like variety, and that?s a key reason why many shoppers will shop health foods stores instead of mass consumer outlets, she says.
Block says he doesn?t believe the retail strategy by Nutraceutical will be long-lived. ?Everything is geared towards enhancing branded products.? The retail acquisitions provide Nutraceutical with competitive intelligence and more knowledge about its customers. Block expects retail deals only if it makes economic sense. ?It won?t be a focus,? he says.
Jenniver Alsever is a free-lance writer in Denver. Reach her at [email protected]
Natural Foods Merchandiser volume XXV/number 10/p. 60, 62