We asked people from different industry perspectives to share their insights and expectations for the natural products industry in 2018.
The Independent Retailer
Corinne Shindelar, President/CEO, Independent Natural Food Retailers Association (INFRA), St. Paul, MN
The Independent Natural Food Retailer has an excellent opportunity in 2018 and beyond. The acquisition of Whole Foods Market by Amazon has basically opened the door even wider for independents to shine at what they know best.
Excellent customer service, intimate experience, high-functioning food service departments and knowing what is on their shelves will keep the independent retailer well-positioned.
Expanding and providing more in the area of prepared foods, fresh produce, cheese, meats, soup counters, self-serve hot and cold bars is where the growth is at. And while we have known this for some time and the numbers are illustrating this, we are challenged with whether or not our industry partners — especially distribution — can keep up with this area of growth while at the same time the center store shrinks.
The biggest challenge independents face in the near future will be the ability to keep the product in stock. The demand for organics and Non-GMO Verified product is outpacing the supply. We have seen this already with our distributor partners being challenged with keeping products in stock in the warehouses. We are seeing manufacturers not keeping up with the demands, and we anticipate there will be even more challenges in 2018.
Additionally, when it comes to center store merchandising, the independents who pass on all of the discounts they receive from their brokers and vendors will be in the best position. This is no longer the place to make up margin. For healthy retailers, this is the place for having high turns on lower, competitive prices. Keeping the customer coming back and spending more time in the fresh departments is where we need to be innovative and efficient.
The other big challenge for 2018 and beyond is keeping up with the ever changing Biotechnology methods. What does this mean for our products, the ingredients on pack and the philosophical discussion we will have in the near future when it comes to what is the risk of these new genetic engineering techniques and what is the risk without them?
Keeping ourselves and our associates educated is not easy as the information is changing radically and the issue is complex. As a natural and organic food industry we have a responsibility to continue to understand the changing food system. We must question new techniques, educate ourselves and each other, and work together as a community to stay abreast of what is next.
Independents still — and always will — have a role in being leaders in the food systems. What “leading” means will look different in the future as technology increases the role it plays in food.
One Legal Opinion
Scott Tips, Food and drug lawyer and president of the National Health Federation, California
First of all, keep in mind that the so-called Food Safety Modernization Act (FSMA), signed into law in January 2011, enacted among the most sweeping changes in our food laws in 70 years but is still in the process of taking effect.
By Jan. 26, 2018, for example, large companies (>$500K/year) will have to comply with FSMA’s Produce Safety regulations, while by Sept. 17, 2018, very small companies (<$1 Million/year) must be in compliance with FSMA’s onerous and costly preventative controls.
Many very small companies will not be able to afford the compliance costs and will either be driven out of business by the regulatory burden or will be bought up by the “Big Fish.” This long-standing prediction on my part is a sad one because very small companies are often the engines of innovation in any industry. But as we all know, the FSMA was never about food safety; rather, it is about industry consolidation into the grasping hands of the privileged few who run the government. FSMA will not make our food supply safer.
On the positive front, President Trump’s Executive Orders 13771 (the 2-for-1 rule killers) and 13777 (the appointment of Regulatory Reform Officers) may result in the reduction of other burdensome regulations on the food-and-drug industry. Last July, The New York Times stated that “that there is consensus among politicians and voters of all political stripes that Washington should do a better job streamlining regulations.” And, in fact, the U.S. Senate confirmed anti-regulation attorney Neomi Rao as the head of the Office of Information and Regulatory Affairs, an obscure but powerful office found within the larger Office of Management and Budget.
Administrator Rao may very well take an axe to Title 37 of the Code of Federal Regulations, in which case we could see more breathing room for industries regulated by the FDA. That would be extremely positive for these industries. On the other hand, if there is one thing we know, it is that once given powers, government agencies fight tooth and nail to keep them. So, expect a big battle in 2018 between these two conflicting camps.
Growth Market: China
William S.J. Hood, Managing director, William Hood & Co., New York, NY
After a recent week spent traveling through China, my colleague Jill Staib and I continue to be impressed by the energy and focus on the growing role of health and wellness in the attractive and increasingly wealthy Chinese consumer market. According to the Economist, China’s middle class is 220 million people today and will be larger than the entire population of the U.S. by 2020. These consumers, particularly urban dwellers and millennials, are driving new consumer preferences and the time lapse between U.S. and Chinese adoption of new health and wellness trends is shrinking by the day.
With its heritage in traditional Chinese medicine (“TCM”) and natural remedies, China is an attractive market for vitamins, minerals and supplements. While the TCM market continues to be fragmented with many local brands, both local and import brands of vitamins and supplements are driving overall category growth. However, the big story is the growth of leading Western import brands like Blackmores, Swisse, Nature’s Bounty and Jamieson, which collectively are growing at twice the rate of the local brand category.
We are also amazed at the speed of evolution of the food and beverage category. From Greek style yogurt to duck snacks and fresh milk tea, China’s consumers are splurging on innovative food trends, with both start-ups and large established local and foreign players racing to offer up new products that feed this demand. New brands are being created overnight and multi-billion dollar food and beverage categories are being created in a matter of years.
Like any sustainable growth story, China’s growing and evolving consumer market is attracting the attention of equity investors and corporations at home and in the West. In vitamins, minerals and supplements specifically, the trend has resulted in significant outbound M&A activity.
Chinese corporations and private equity firms are seeking to acquire leading Western brands for their potential in China. In 2015, Australian brand Swisse was acquired by Biostime and Nature’s Bounty formed a joint venture with By-Health. In 2016, Iovate (Muscletech and Six Star) was acquired by Xiwang and in 2017, Vitaco was acquired by Shanghai Pharma.
Leading Chinese private equity firm Primavera participated in at least two of those transactions and other Western brands like Jamieson and Nature’s Care are rumored to have attracted significant attention from China over the past few years. We expect to see similar interest in select areas of the food and beverage market as well, with companies like China Resources and COFCO showing interest in global food and beverage opportunities.
Outbound M&A from China does have its challenges. The regulatory process to complete a transaction is more cumbersome than in the U.S. and the government has imposed capital controls from time to time limiting the ability of Chinese companies to get enough money offshore to do a deal. However, we did observe on this most recent trip that the government is making progress on a more streamlined approval process, as well as an easing of the capital controls which bodes well for more outbound M&A activity.
Diane Ray, VP, strategic innovation, NMI (Natural Marketing Institute), Harleysville, PA
Boomers control the bulk of the wealth in the country yet everybody’s focused on millennials. Millennials will be the future and if you get them early and keep them brand loyal you’ve got them in your brand franchise for life. But short term, you’ve got 74 million boomers who have $3 trillion in spending power. They are spending and they are living longer and should not be overlooked!
Boomers are not only invested in health and wellness but are also growing in their sustainability behaviors. The largest group coming into many sustainable actions such as buying Fair Trade Certified products are what NMI calls the Conventionals. These are boomers who were busy raising families. Maybe they didn’t have time to pay attention. Now they’ve got a little bit of time on their hands and realize making their families, neighborhoods and the planet sustainable is important.
In the product arena, especially in supplements, I see the next big wave being products with clinical data to support efficacy. Before it’s often been inference marketing, if a = b and b = c, then a = c. People have bought into inference marketing and don’t believe you’re intentionally lying to them but in some cases, if it doesn’t prove out, the industry takes a credibility hit.
I think the independent retailer has a strong role as the adviser, the third-party intermediary, the knowledge holder. When people go to buy at a big box store, they’re not expecting anyone to be knowledgeable. On the internet, reviews are all suspect. There’s so much conflicting information. You don’t really know. Not every independent retailer is knowledgeable, but it’s a great place to invest in education for your staff in order to help bring new supplement users on board smoothly and instill industry credibility. These knowledge experts, whether it’s independent retailers or medical professionals, are becoming more and more important.
Ten years ago, no doctors were even getting nutritional science as a part of their core training. Now it’s in medical schools, but it’s still a minute part of overall training. It’s still oriented toward the body as a machine. Let’s grease the joints. Let’s keep these certain functions moving, but what’s happening in your gut biome? If you look at every major university, they’re all looking at the gut biome, the nutrients being absorbed, building up the lining of your intestinal walls, etc. Nutritional science advances will be fueling industry growth, both supplements and food/bev, for the foreseeable future.
There needs to be a credible pipeline of how the bench chemistry research translates into real products for real people. Consumers are crying for some diagnostic cascade to help them know what to take and help them assess results. They don’t know what they should be taking and they don’t know if what they are taking is really doing anything for them. It very quickly becomes overwhelming. So they decide “I’ll just take a comprehensive multi because that’s the simple solution” or “I’ll just attack one specific issue” without always addressing health holistically.
The physician channel, or specialist channel, is helping grow the industry as there is an increasing number of health care professionals working to better understand nutritional science. You’re not seeing this in a physician practice that is all about getting more people through in a given day or a super-uber specialist who turns first to Rx solutions, but there’s this group in the middle, physicians, dieticians, nutritionists, etc., who are more often recommending nutrition-based health and wellness solutions.
All-in-all, the outlook is strong for continued growth of the supplement industry!
The CEO Entrepreneur
John Foraker, CEO, Once Upon a Farm, San Diego, CA
A lot of people think the combination of Amazon and Whole Foods Market will be the beginning of the end of all other retail. I don’t believe that at all. I think in general there’s tremendous opportunity for retailers with millennial parents and organic eating trends. Exciting companies will start. Retailers will really tap into that. The world is not going to end.
Plant-based dairy will continue to accelerate. The quality level is getting so much better as leading brands continue to up their game.
The organic industry will continue to grow in the high single digits. I think the only thing that could stop that is a big financial shakedown that affects the whole economy. I think the opportunity for natural and organic food companies has never been better.
Even though organic supply has been growing, it does take time. I think over the next year you’ll see announcements out of General Mills and some other companies. There are some big conversion projects that will be coming to market.
The Regulation Front
Scott Steinford, Managing partner, Trust Transparency Consulting, Spring, TX
It’s clear the FDA has slowed down its inspections and enforcements and the regulatory impact on our industry has lessened. I foresee that continuing in 2018. That has both positive and negative impacts. We sometimes rely on the regulation to instill trust and confidence because the No.1 criticism is often that we are not regulated and the fact is we are. When no enforcements or inspections are occurring, it gives the impression we’re not.
Operating in a less regulatory environment from a cost standpoint is certainly beneficial — short term. But if we’re not instilling confidence, we might have further conflicts down the road.
Next is the commodity conundrum, that is, the pro and con of a price-based supply chain. The pro of many of our ingredients being treated as a commodity — and for that matter I can safely say CoQ10 and many of our other ingredients from other associations could apply. When ingredients are treated like commodities, then they are price-based. For the consumer, prices come down and the product becomes more affordable to more people.
On the flip side, science and education suffer first and foremost. For instance, there’s been very little science and education afforded to CoQ10 since 2007 and while the sales still remain strong it’s clear it’s not being supported in a long-term fashion as strongly as it used to be. If the industry category fails to generate relevant and contemporary science to support claims the consumer is likely to lose confidence and interest.
So in the long term, it’s harmful to have the products and ingredients be commoditized.
I think the growth we’ve seen in 2017 overall has been positive. We are trying to focus on innovation and I can see that it’s not just the large corporations that are dominating the airwaves. It’s the Amazons and ecommerce people who are contributing significantly more. The fact there are more innovators getting into the game is exciting. As long as they’re adding to the value of our industry rather than threatening it by taking advantage of lightened, lessened regulation.
On the topic of New Dietary Ingredients, I tend to think there will be action. I know that Steven Tave, director of the FDA’s Office of Dietary Supplement Programs, got up in front of the audience recently and requested advice and direction. There is an issue and the budgets are being cut. There were hiring freezes in 2017. When there’s turnover, there’s no replacement. When there are freezes, and no raises, it’s hard to keep good talent. The manpower, not the desire, is the contributor to the declining enforcement. It’s a matter of resources, in my opinion.
Jon Clinthorne, Ph.D., Manager of scientific affairs and nutrition education, Natural Grocers, Lakewood, CO
The collagen trend is really, really big. People understand that protein is good for them and for so long we’ve focused on protein for building muscles. Now people understand it can be used for many things.
Take vanity. The aspect of collagen helping skin health, hair, and nails is attractive. It’s so multifunctional and it addresses so many concerns. Some use it for detoxification. Someone else looks for digestive health.
The collagen supplement powders seem to be popular. The better it dissolves in liquids, the better we see our customers like them. I like the ones you can stir into a hot beverage and it just dissolves. There are types you can put into smoothies.
I really like the trend of traditional medicine meeting modern science. Dietary supplements have been a little bit criticized by the media but consumers understand these have been used for thousands of years in Ayurveda and Greek medicine. This gives consumers confidence and now you can back that up with science. We’re seeing turmeric in everything.
I am particularly fond of the drinking vinegars. People are trying to get away from sweet beverages. There is so much concern about what sugary beverages are doing to our health. People still want something with flavor. They know it’s not just natural, it’s something that’s good for them. They lend themselves really well to using in cocktails or other beverages. You can make it whatever sort of journey you want. People aren’t just looking for something sweet, but want something that has a tang to it.
People are shopping the perimeter of the store a lot. Really looking for products that are super-transparent. Labels are really important. We’re seeing consumers looking up ingredients on their phone as they go through the aisles.
Third-party verification. Grass-fed. People want to know where their food comes from and many know some food companies are taking the words very literally, i.e. cage-free only means no cages rather than chickens having access to the outdoors. There’s the humane aspect and the sourcing aspect. There is a lot of demand for more local and regional foods.
The Supplement Advocate
Mike Greene, SVP government relations, Council for Responsible Nutrition, Washington, D.C.
Our main focus for the last couple of months and through most of this year is the Farm Bill where all the SNAP (formerly known as food stamps) resides. We’re looking at ways to improve nutrition, looking at demonstrating ways the multivitamin would be necessary. It’s regulated as a food, yet prohibited from being purchased through the SNAP program.
Certainly there’s a lot of nutrient inadequacy and what’s known as “hidden hunger,” individuals who are filling their bellies but with poor nutrients. There are other issues involved with this – poor health, younger individuals lacking drive to focus on education or to study. I think what’s most important is we want to give low-income Americans a choice. Make sure they are healthy rather than just having a full belly.
We understand there’s a move to pull the Farm Bill together in the next quarter – the first three months of 2018 – so our effort continues to focus on the SNAP Vitamin and Mineral Improvement Act of 2017 (H.R. 3841). We’ve got a very diverse group of legislators behind it: Reps. Mike D. Rogers (R-AL), Krysten Sinema (D-AZ), Mia Love (R-UT) and Tony Cárdenas (D-CA). Our effort now is to try to get a similar bill in the Senate and continue to talk about how important it is to improve nutrient deficiencies. We just want to make the multivitamin available to low-income populations.
Michele Simon, JD, MPH, Executive director, Plant Based Foods Association,San Francisco, CA
The Plant Based Foods Association was launched at Expo West in March 2016 with 23 members. It’s now at 94 full members, more than 70 allied company affiliate members, and 10 investor members, a category that just launched.
Focused on plant-based substitutes for meat and dairy, the association’s growth reflects general consumer awareness and awakening of healthy eating. Another driver is the explosion in really great tasting alternatives. No longer do you have to sacrifice by giving up meat every day.
We did a data analysis with Nielsen in September that showed if you add up all the plant-based alternatives, it’s more than $3.1 billion in sales, and that’s probably an underestimate because it was grocery stores, drug stores, mass merchandisers, club stores, dollar stores, military stores and Whole Foods Market. Overall growth was 8.1% since last year, as compared to a decline of 0.2% for all foods sold in the same channel.
The association is currently lobbying against passage of Senate Bill 130, the Dairy Pride Act, which was introduced in January 2017. It would prevent replacements of yogurt, milk, cheese and other products derived from healthy and sustainable ingredients such as nuts, oats, and flax seeds from using familiar words like “soy milk” and “coconut yogurt.”
Look for more companies like Campbell Soup Co., maker of Bolthouse Farms Plant Protein Milk, to join PBFA in 2018 as they see the shift in eating patterns and want to get a bigger foothold in the sector. The important thing isn’t numbers. It’s about expanding. We definitely have goals to include more of the food industry in our family.
Hemp and CBD
Sean Murphy, Founder, Hemp Business Journal
Hemp Business Journal estimates the hemp industry will grow to $1.8 billion in sales by 2020, led by hemp food, body care and CBD-based products. The data demonstrates that the hemp industry is growing quickly at 22% 5-year CAGR and being led by food and body care products.
This is a big year for hemp-derived CBD, especially in Canada. The country is on its way to legalizing CBD nationwide in 2018. Some expect sales of this product that don’t get you high will reach $3 billion in the next five years. Canada has proposed changes to hemp regulations allowing for the extraction of CBD, limiting to 10 ppm the amount of psychoactive THC they can contain.
In the U.S., about 25 Lucky’s Markets across the country are selling products that contain CBD. The Drug Enforcement Agency (DEA) did, however, recently state that cannabinol (CBN) and cannabidiol (CBD) are found in the cannabis plant that fall within the CSA definition of marijuana. The DEA and hemp industry are set for a showdown in February where oral arguments will be heard in the 9th Circuit Court of Appeals on whether the DEA’s new drug code (7350) is legal.
PlusCBDOil sold $5.6 million in the third quarter. It’s in 1,500 stores across the country and is the 5th largest product in the natural products industry. Epidiolex, a CBD-based drug by Greenwich Biosciences, recently filed its New Drug Application and commercialization is expected by the end of 2018. The natural products industry and pharmaceutical are set to clash later this year or in 2019. About 34 states have legislation that separates hemp from marijuana and 26 are active with pilot programs for industrial hemp. In Kentucky, farmers want to get out of tobacco because they can’t stand behind that mechanism. They know how to grow at scale.
The Financial Picture
Jay Jacobowitz, President and founder, Retail Insights, Brattleboro, VT
We can thank UNFI, Inc. for having a fiscal first quarter that ends in October, and for announcing these results in December. The quarter reflects the first two full months under Amazon’s ownership of Whole Foods Market. UNFI net sales increased 7.9%, to $2.46 billion, reflecting strong “comparable” sales to existing customers, as UNFI lapped four acquisitions it had completed the year before of Haddon House Food Products, Inc., Global Organic/Specialty Source, Inc., Nor-Cal Produce, Inc. and Gourmet Guru, Inc.
Leading the way in the quarter was UNFI’s “supernatural” segment, which consists entirely of Whole Foods Market, and which drove a 14.3% increase in its wholesale purchases from UNFI. We can surmise that a large part of this increase was the shelf-stable 365 Everyday Value private label products — which UNFI warehouses for Whole Foods Market— and millions of dollars of which Amazon was reported to have sold separately on its website.
UNFI also cited a broad-based industry reacceleration across all its customer segments, with its top 10 customers each growing over 10%. In its conventional supermarket segment, sales rose 4.7%, and in a particularly bright spot, sales to the independent natural products segment grew 6.6%.
From a broader perspective, the U.S. economy has delivered three consecutive quarters of 3% growth, with bullish forecasts for the fourth quarter. Unemployment remains at a low 4.1%, and hiring continues to be strong. Business investment and consumer confidence are both trending up, and it appears that premium natural and organic products — with their “better-for-you” halo — will be one of the beneficiaries of increased household spending, boding well for the industry in 2018.
Please watch for our 40th Annual Retailer Survey in the March issue, along with Retail Insights’ 2018 Retail Universe, updating the entire natural organic food retailing industry. WF