Organic food CEOs see growth ahead for industry

Nicole Sinclair
Markets Correspondent
Organic food CEOs see growth ahead for industry

With two-thirds of the country overweight or obese, according to the Centers for Disease Control and Prevention, one of the most powerful trends driving consumer market dollars today is health and wellness.

Restaurants, grocery stores and fitness studios are all trying to capitalize on healthy food, the fastest growth sector among defensive consumer staples companies.

Yet some of the names most exposed to the healthy-living trend have gotten hit hard in the last year. Whole Foods (WFM) sank 30% in 2015 on declining same-store sales and pressured margins. In its fourth quarter, the supermarket chain saw its first same-store sales decline, down 0.2%, since 2009.

Despite some outside pressures, though, the potential in the organic food category remains strong, says Irwin Simon, founder, chairman and CEO of Hain Celestial (HAIN), who joined Yahoo Finance at the ICR Conference in Orlando, Fla., this month.

Hain, which manufactures and sells natural "better for you" products like Celestial Seasonings, Earth’s Best baby food, Terra vegetable chips, Garden of Eatin’ tortilla chips, and Greek Gods Yogurt, has become increasingly "channel-agnostic," says Simon, meaning the company is focusing on sales across multiple channels from natural food grocers to traditional grocers, online and club outlets. Simon emphasized the company is seeing strong sales beyond Whole Foods in outlets including Walmart (WMT), Amazon (AMZN), Kroger (KR) and Target (TGT). 

This month Hain lowered its 2016 guidance to 7%-12% revenue growth, down from its previously forecasted pace of 10% to 15%. But Simon says some of the shortfall is related to softness from its natural grocer customers, seen in Whole Foods' latest results, along with other temporary issues like lost sales during Albertson's distributor transition. He remains optimistic for the long term: "I've never seen more retailers that focus on [health and wellness] than today."

Comparable-store sales at natural-foods retailers like Whole Foods and Sprouts Farmers Market (SFM) have recently slowed as competition heats up from conventional grocers, discount and club stores like Walmart (WMT) that have expanded into natural and organic offerings. But continued square-footage growth of these natural-foods retailers -- an estimated 11% over the next five years-- should continue to support solid sales growth for Hain in this channel, according to Wunderlich analyst Mitchell Pinheiro. Meanwhile, Hain says there's more room for it to expand in traditional supermarkets and grocery stores looking to augment their selections of natural food brands.

Snacking sells

Within natural food makers, the snack category is posting outsized growth -- and Hain is benefiting from that trend, as the company's snack brands saw 22% distribution growth last quarter.

Newly-public Amplify Snack Brands (BETR), maker of SkinnyPop popcorn and Paqui tortilla chips, aims to ride the interest in better-for-you snacks, too. But the stock has fallen 40% since its ill-timed market debut in August. Nonetheless, CEO Thomas Ennis told Yahoo Finance he sees upside in healthy snacking: “If you’re going to be in food, the place you want to be is snacks.” Warehouse clubs particularly Costco (COST), Sam's Club, and BJ's -- remain key for the brand. The salty snack category in the U.S. stands at over $20 billion and is growing with the fastest growth rate within better-for-you snacks, according to Ennis.

"We believe in snacking without compromise," he said, noting the transparency of the company's ingredients.

Nielsen estimates global retail snack sales to be in excess of $370 billion and North American retail snack sales in excess of $120 billion in 2014. Amplify targets salty snacks, which is expected to grow 3-4% through 2019, but believes that the better-for-you sub-segment of salty snacks should lead to 10% annual growth.

If anything reflects the durability of the shift to healthier eating -- and upside ahead -- it's the old-guard food giants getting in the space. Two big examples: General Mills (GIS) acquired Annie’s, the organic food company, for $820 million in 2014, followed by Pinnacle Foods (PF), which acquired Boulder Brands for $975 million in 2015.

“Eating healthy is not a fad,” Simon said.