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January 11, 2002
Natural Foods Industry Savors 2001 Performance
    by William Baue

The natural foods industry defied dire predictions for 2001, demonstrating the commitment of consumers to social and health values over cost

At the beginning of 2001, the natural foods industry braced itself for the impending economic downturn, as did most market sectors. Some analysts predicted the slump would hit the natural foods sector particularly hard, as they believed consumers would retreat to the lower-cost foods found in mainstream supermarkets. However, results showed that natural foods consumers consider more than just cost in their purchasing decisions.

"2001 was a very strong year for the natural foods industry," said analyst Scott Van Winkle, a vice president of the Boston-based investment banking firm Adams, Harkness & Hill. "The industry clearly demonstrated that natural foods are not economically sensitive as many believed, a fact that I attribute to the social and health motivations for purchase rather than purely economic factors."

Mr. Van Winkle cited several developments for the sector's strong performance. "2002 saw several industry participants dramatically improve their business, such as Horizon's improving sales and profitability and Wild Oats' beginning of a turnaround," Mr. Van Winkle stated.

On October 31, Horizon Organic Holding Corp. (ticker: HCOW) and Wild Oats Markets Inc. (OATS), both Boulder, Colorado-based companies, announced their financial results over the first nine months of 2001. Net sales for Horizon, the largest organic food company in the U.S., rose to $115.2 million, up 29 percent from $89.4 million in the first nine months of 2000. Horizon President and CEO Chuck Marcy attributed the strong results to expanded distribution, the successful introduction of new products, and increased productivity and cost reductions.

Sales increased to $671.1 million at Wild Oats, the second-largest natural foods supermarket chain in North America, up 6.3 percent from $631.2 million in the first nine months of 2000. In March, Wild Oats appointed Perry Odak as CEO and president. Mr. Odak had recently served as CEO and president of Ben & Jerry's Homemade, Inc., renowned for its corporate social responsibility as much as for its ice cream.

"The hiring of Perry Odak was a good move for Wild Oats," commented Mr. Van Winkle. "He is equipped to turn the company around and return an industry leader to prosperity."

Austin, Texas-based Whole Foods Market Inc. (ticker: WFMI), the largest natural foods retailer in North America, had more than one reason to celebrate in 2001. In May, the company announced a two-for-one stock split, its second since 1992. In October, Moody's Investor Service upgraded Whole Foods, raising the company's ratings in all categories one notch, due to the company's strong performance over the past three years. Higher ratings by Moody's will allow Whole Foods to secure loans more readily.

"Whole Foods' two-for-one split is one of many more to come over the years. It is a reflection of the strong growth of the business and excellent management execution," said Mr. Van Winkle, who added that the Moody's upgrade speaks for itself.

Rumors that the Dutch firm Wessanen might acquire United Natural Foods Inc. (UNFI), the largest distributor of natural foods in the U.S., seem to be unfounded. Wessanen owns UNFI's chief rival, Tree of Life. On October 31, UNFI announced record sales for the first quarter of its fiscal year 2002, up 14.8 percent from the first quarter of fiscal 2001.

"I don't believe that a Wessanen acquisition of UNFI is likely in the near-term and discount the rumors," said Mr. Van Winkle.

Mr. Van Winkle mentioned several other developments indicating the strength of the natural foods industry, most notably the further acquisitions of natural foods interests by large food companies. Two such transactions transpired in October.

The Coca-Cola Company (KO) acquired Santa Cruz, California-based Odwalla Inc. (ODWA), the leading producer of organic juices in the U.S. And New Hampshire-based Stonyfield Farm, the largest organic yogurt producer in the U.S., entered into a strategic partnership with Paris-based Groupe Danone (DA), which will control a 40 percent interest. Mr. Van Winkle expects continued strong performance by the natural foods industry.

"I anticipate further growth into the mass market, more natural/organic product launches by major food companies, and further evidence of the superiority of natural and organic foods," concluded Mr. Van Winkle.


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