When organic was transitioning from “granola” to gourmet in the late 1990s, Hain Celestial Group Inc. scooped up soy milk producer Westbrae Natural Inc. just as larger corporate players took aim at customers roaming natural food store aisles.
Hain turned Westbrae’s brands bought for just $23.5 million in 1997 into the cornerstone of its grocery division, which rung up net sales of $341 million last year, slightly more than half of Hain’s total. Those torrid sales were at least partially due to mainstreaming of organics, which even now fill the shelves of Wal-Mart Stores Inc.
Today, Hain could be standing on the precipice of another leap from hippie to yuppie, this time in the natural and organic personal care segment.
Starting with the purchase of Jason Natural Products two years ago, Melville, N.Y.-based Hain has been picking up niche brands and rolling them into its personal care division in Culver City, which is projected to hit $100 million in sales in the next couple years.
“As popular as organics are, it is still a small part of the overall food world as natural care is still a small part of the regular personal care world,” said Andrew Jacobson, the division’s president. “But we have growth where the mass or drug side of personal care is sleeping.”
Jacobson is well aware of organics’ maturation process.
He was president of Westbrae when it was swallowed by Hain and has seen the organic food industry increase at an annual average rate of 15 to 20 percent since 1997 to reach $14 billion in sales last year, or 2.5 percent of all retail food sales, according to the Organic Trade Association. The natural personal care segment is now showing similar growth, with the Natural Marketing Institute estimating sales jumped almost 23 percent to $4.9 billion last year from $4 billion the prior year.
But it’s also a segment that is being noticed by large, mainstream companies, posing a risk for smaller natural food mainstays more used to battling against themselves for store space.
“Due to the attractiveness of the categories in which Hain competes, further entry by larger food marketers is likely and poses risks of share losses,” wrote Scott Van Winkle, an analyst with Canaccord Adams, in a recent research note.
Still, Van Winkle has a “buy” rating on the company, which trades on the Nasdaq National Market and has generated 15 consecutive quarters of positive EBITDA. The stock closed at $26.18 on June 1, up from $17.84 a year ago.
Balancing act
The acquisitions signal a wave of consolidation in the personal care segment not yet seen before. It resembled the start of the organic food squeeze years back that’s turned that market into the playing field of conglomerates: veggie burger maker Boca Foods Co. is owned by Kraft Foods Inc., Odwalla Inc. by Coca-Cola Co. and Horizon Organic Holding Corp. by Dean Foods Co.
However, the personal care segment, which includes bath and body as well as hair, skin and oral care, has seen few mergers on the same level as organic food. But heftier deals are popping up in the segment. Colgate-Palmolive Co. finalized a $100 million agreement to buy natural toothpaste company Tom’s of Maine last month. And mainstream cosmetics companies, such as Estee Lauder Cos. Inc. with the brand Aveda and L’Oreal SA with its recent bid for the Body Shop International plc, are searching for ways to pump up their presence in the natural arena.
And with the purchase of decades-old Jason, Hain showed it was getting serious about personal care organics, an area dominated by entrepreneurial brands without the research budget and infrastructure of mainstream companies. Moreover, Hain didn’t stop with Jason.
The company recently locked up Zia Cosmetics Inc. for $10 million and Para Laboratories Inc., the manufacturer of Queen Helene products, for about $27.6 million. Jacobson said both companies will eventually be wrapped into the Culver City personal care headquarters.
With consolidation accelerating, fostering growth becomes a tough balancing act for any natural care products company. The trick is to woo mainstream consumers while retaining natural and organic loyalists, and to push into drug and supermarket retailers while keeping a high profile in specialty food stores. At the same time, more established players have to confront a proliferation of products introduced by both tiny, often regional companies and sophisticated newcomers that are hoping to gain a foothold.
To keep up with the crowds, Hain’s personal care division is ramping up its product development. Jacobson said the division is launching 44 products and has been creating products extending from Hain’s non-personal care brands. For example, the division has created baby brand Earth’s Best lotions and sunscreens, among other items. Jason Red Elements is a skincare line that features red tea, which Hain’s works with for its Celestial Seasonings tea products.
Finicky customers
Gwynne Rogers, a business director at the Natural Marketing Institute, said there are two primary groups of natural consumers: diehards who’ve been trolling their neighborhood store since it opened to find the safest and most environmentally friendly products, and organic freshmen who are just getting initiated. For both, it helps to overcome the perception and frequently fact that natural personal care products don’t perform as well as the mainstream variety.
“It wasn’t all that long ago that people thought about organic and natural as an inferior product. Manufacturers have upped the quality, so it is more attractive to the majority of the population,” Rogers said.
As a result, companies like Hain are coming up with more advanced products sculpting gels that go with shampoos to entice entrenched customers to shell out more for personal care items. In the quarter ended March 31, Jason personal care products brand sales were up 34 percent over the same period a year earlier.
But the moves that companies like Hain make to increase margins and draw new customers aren’t always welcome by long-time patrons.
Melissa Reynen, body care buyer for Country Sun Natural Foods in Palo Alto, said the store’s customers often recognize ingredient adjustments. “Any time a company is bought, these changes are made. Of course, they are all business decisions really,” she said. “Especially in natural products, there is a lot of brand loyalty based on formulas because so many formulas are specific.”
And Country Sun shoppers aren’t only aware of products’ contents, they also keep up on company news. When Colgate-Palmolive announced it was buying Tom’s, Reynen said a customer informed her of the takeover before she saw it in the papers. Consolidation is a “touchy subject” in an industry in which Reynen said “artisan products” are valued.
“It is a real Catch 22 because when larger companies buy out smaller companies, they are able to give them support and make changes that will benefit everyone,” said Reynen. “But it is almost like a farce when you look at a brand and think it is a small company, and there is a huge conglomerate behind that.”
So far, Hain’s personal care division appears to be staying afloat in organic waters. “Hain is still perceived as a pretty natural company,” said Rogers. “If we were talking about a more mainstream company, like Kraft or General Mills, that might be a different story.”
