Can Granola Grow Up?

By Daniel Eisenberg

Few people appreciate the promise and the peril of the fast-growing natural-foods business as well as Irwin Simon, the energetic founder and CEO of the Hain Celestial Group. In the decade or so that Simon, 46, has been cobbling together the niche category's leader by buying up dozens of mom-and-pop brands, he has had to deal with all sorts of situations that aren't typically covered in business school. During one of Hain's recent acquisitions, the seller tried to insist that his factories be closed on Saturdays for religious reasons. Then there was the time not long ago when Simon discovered that a firm Hain Celestial Group had just purchased had absolutely no workers' compensation insurance. And soon after Hain made its biggest acquisition ever, shelling out more than $300 million for herbal-tea pioneer Celestial Seasonings in 2000, Simon had to get used to the idea that employees there sometimes came to work in sandals and shorts.

True to its grass-roots heritage, the fledgling, fragmented health-food industry has always attracted its fair share of eccentrics--people who kept their company records in shoeboxes and didn't worry too much about profits, marketing or even good taste. Without necessarily having to lose the unique, even quirky, flavor that has contributed to much of the industry's appeal over the years, Simon thinks he can take natural foods to the next level. By bringing together a top-notch management team with some of the best brands in the field--from WestSoy soy milk and Celestial Seasonings teas to Terra and Garden of Eatin' chips, Health Valley cereals and soups and Earth's Best baby foods--Simon believes healthy food can attain the kind of healthy bottom line enjoyed by its more mainstream cousins.

Though a mere fraction of the retail food pie's more than $500 billion-a-year total, natural foods' estimated $16 billion in annual sales is one of the few bright spots in a generally flat industry. Spurred by the soaring popularity of such natural retailers as Whole Foods and Wild Oats and expanded natural sections at the likes of Kroger and Safeway, as well as rising concerns about obesity, natural and organic foods are growing at 5% to 10% a year, and they could claim 10% of the entire food universe within a decade. "I don't think natural and organic food is a fad. It's a way of life," says Simon, a fast-talking native of Nova Scotia, Canada, who started his career in the U.S. by expanding H??agen-Dazs' chain of ice cream shops in the 1980s. "And no major food company is built for the 21st century."

Not everyone thinks Simon's budding empire, begun in 1993 with the purchase of a small Brooklyn, N.Y., kosher-food company, is ready for the future either. Given the size and breadth of Hain's portfolio, it is true that "if a retailer wants to build a natural section, they almost have to come to [Hain]," says Scott Van Winkle, analyst at investment firm Adams Harkness. Still, while Simon has assembled an enviable assortment of brands, expected to generate upwards of $600 million in revenues this coming year and fast approaching the $1 billion-a-year mark, he has yet to deliver fully on their potential by consistently meeting earnings targets, keeping expenses down and maintaining a smooth, uninterrupted supply of products to stores. Instead, Hain has repeatedly disappointed Wall Street, hurting its credibility along with its share price. As Prudential Equity Group analyst John McMillin recently wrote, "With Hain, the saying 'if it isn't one thing, it is another' may be appropriate."

At a time when giant food companies are making inroads into the business, the margin for error is getting smaller. Frito-Lay has launched a line of natural snacks, and General Mills recently announced that all its cereals will soon be made from whole grains. In the four years it has owned Kashi, Kellogg has increased the cereal brand's sales from about $20 million to nearly $200 million. And backed by a $22 million marketing campaign, courtesy of its new parent, Dean Foods, refrigerated-soy-milk leader Silk is grabbing more of the business from primarily aseptic shelf brands like Hain's WestSoy. Meanwhile, with its distribution muscle, Kraft has expanded the Boca line of veggie burgers and Back to Nature cereals and snacks. "We get audiences with retailers that other companies could only dream of," says Kevin Scott, senior vice president of natural and organic foods at Kraft.

The competition is particularly daunting since Simon, who originally entered the natural-foods business because it had been largely ignored by the big boys, has at his disposal an arsenal that is so much smaller. In the first nine months of last year, Gerber spent more than $20 million on advertising for all its baby-food lines, including organic, while Earth's Best shelled out a piddling $760,000, according to TNS Media Intelligence. But Simon is full of the breezy confidence you'd expect from a risk-loving entrepreneur who in 1994 bid $21 million for his first big acquisition, the decades-old Hain Pure Foods company, before he had lined up most of the financing.

What accounts for his unshakable optimism? For one thing, at major food firms niche brands are "only a small percentage of a much larger organization" and often get neglected, says Hain's new executive vice president, John Carroll. More important, the Kelloggs and Krafts of the world won't necessarily be able to translate their household names into success in the natural arena. It's no coincidence that you will almost never find the well-known parent company listed anywhere on the packages of their New Age offerings. "There is a credibility gap with these [brand name] companies as they try to represent themselves as healthy brands," says Steve Demos, founder of White Wave and creator of Silk. In fact, Simon argues that Hain can benefit from other companies' marketing campaigns. "We have great products, but our industry needs to do a better job of telling its story," says Simon, who was fired after a short stint at Slim-Fast Foods Co. in the early '90s for his outspoken views on the company's single-minded approach to diet. "Hain alone can't educate consumers about eating healthy. They will help us get our fair share."

Still, Simon, a father of four young children whose weekly family grocery shopping doubles as a market-research field trip, doesn't take anything for granted. "We're like a little speedboat circling around an ocean liner, so we have to be more innovative," he says. In the past year, Hain has joined forces with two U.S. institutions--providing its Yves veggie burgers as part of the McVeggie at select McDonald's locations and working with Sesame Street on co-branded Earth's Best products. Earth's Best baby food is seen as a key to the company's success for its ability to draw in mainstream shoppers willing to pay a premium for organic food for their little ones.

A serial dealmaker, Simon is just starting to focus more attention on his company's organic growth. Only a few months ago, Hain finally hired an in-house vice president of investor relations. (Hain's share price has always got a bit of a boost because of a widely held perception on Wall Street that Heinz, which owns about 16% of Hain in a fairly hands-off role, may eventually take it over entirely.) And Simon has handed off much of the day-to-day management duties to a coterie of seasoned, mass-market-foods veterans, most notably Carroll, formerly head of frozen foods at Heinz. Carroll's mandate: to cut costs, scale down Hain's dizzying array of products--almost 2,000--and perhaps shed some of its less important brands.

Ideally, that should leave more time for Simon to do what he does best--rally the troops and plot strategy. "Irwin has an uncanny ability to get people to charge the mountain for him," says Beth Bronner, senior vice president of marketing at Jim Beam Brands and a longtime Hain Celestial board member. After an earnings disappointment last fall, Simon gathered about 150 employees at his Long Island, N.Y., headquarters for an inspirational screening of Miracle, the feel-good film about the 1980 U.S. Olympic hockey team's improbable gold-medal victory. Now he has to hope that Hain, and the budding industry it commands, can likewise reach its full potential.