Event Report: Natural Products Expo West

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Rising consumer interest in natural and organic products is continuing to drive substantial growth in this food industry segment. That’s according to Harris Williams Managing Director Tim Alexander and Director Ryan Freeman, who recently attended Natural Products Expo West, the world’s largest natural and organic products event. Read on for their insights on this rapidly growing space, including the three factors setting the best assets apart from the rest.

Healthy growth

Alexander reports that purchasing and consumption behaviors are changing as consumers seek healthier options, which is driving growth in natural, better-for-you products. Indeed, as shown in Figure 1, there has been strong and steady growth in natural product sales for the past several years.

Figure 1: Strong Growth in Natural Product Sales

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Source: SPINS Healthy Living Consumer Products: Industry Update, Deal Review and Impactful Trends, September 2017

That, in turn, is attracting significant attention from consumer packaged goods (CPG) companies and private equity investors seeking new growth opportunities. 

“Each year the presence of large CPGs at the expo increases, which is indicative of the growth potential these strategic buyers see in the natural and organic products segment,” notes Alexander. “At the show, the big brands are both educating the natural foods community on their commitment to sustainability, and seeking new up-and-coming brands they can invest in or acquire.” 

Two major dynamics are underlying growth: The shift toward clean labels free of additives and other synthetic or over-processed ingredients, and the trend of more foods with added ingredients that will provide health benefits, especially additives that are naturally occurring.

An increasingly specialized market

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As Freeman explains, consumer interest in foods with specific health benefits is leading to a more specialized market. Products that are generally healthy are being replaced by products targeting more niche functions.

“Products that promote cardiovascular health or improve digestion are attracting significant attention,” he says. “There is a significant scientific research about the connection between gut health and both physical and mental health, helping probiotics such as kefir, kimchi and kombucha grow rapidly in popularity. Plant- and vegetable-based protein additives are also hot trends, and interest in cannabidiol (CBD) products is growing quickly.”

Specialization also helps companies differentiate their products as the category becomes increasingly crowded. However, the inherent challenge with some niche products is their limited ability to scale. As Alexander observed, “Winning concepts combine specialization with growth potential. The few products that do that are positioned to really disrupt the food category.” 

Three factors that matter

As strategic buyers and investors try to take advantage of growth in the natural and organic products segment, three characteristics make companies in this space particularly attractive.

Authenticity: Some of the most successful natural, organic, healthy products have an authentic, larger purpose, says Alexander. For example, Deep River Snacks was founded to provide healthy snacks and, equally, to raise awareness for nonprofit organizations important to its owner and employees. As Freeman points out, “It’s very difficult for a big CPG company to incubate a brand with an authentic story. That is why they ultimately look to acquire these types of brands. And authenticity seems to be a very important differentiator for consumers.”   

Scalability: It’s critical for a company’s product to be unique and differentiated. However, as noted above, it is a delicate balance between being differentiated and not so niche that the brand is not scalable. “It is important for strategic buyers to see a large addressable market for high-growth brands. This can be accomplished both through creating scale in a brand’s core category, and, importantly, through expanding the brand into new categories,” says Alexander. “Annie’s, for example, has gone from a macaroni and cheese business to a brand that crosses product categories, including snacks and meals, and across refrigerated, frozen, and shelf-stable. A home run is having a key product in a large and growing category and the ability to expand.”

Opportunities beyond brands: As the number of investors focusing on the food industry grows exponentially, competition can be tough for brands that are on-trend and show potential to scale. Freeman says that’s driving buyer interest in companies further up the supply chain. “We are now seeing a lot of investor interest in co-manufacturing and ingredient companies, for instance. There’s less pressure to pick a winning brand, but the same end-market trends are at play. If you are a supplier to multiple companies, it doesn’t matter which brands win as long as the category wins.” 

Conclusion

Fueled by ever-increasing consumer interest in healthy eating, the growth of the natural and organic products segment shows no sign of slowing. And that signals continued opportunity for strategic buyers and financial investors in both healthy brands and their value chain partners. 

Published April 2019