Tips for Success in the Natural Products Market

Natural product firms gearing up for this year’s Natural Products Expo West trade show share one common question: "How can I succeed in this crowded market?" We asked longtime natural products consultant Bob Burke for his advice. While we’re obviously just scratching the surface here, Burke talked briefly about how the market has changed, what its biggest challenges are, and what are some sure hit-makers-for now, at least.

On March 4, Burke will moderate the all-day “Natural Products Business School and Investor Learning Summit.”

Nutritional Outlook: To start, how would you say things have changed in the way we sell and market natural products? What are the biggest challenges for natural product firms?

Bob Burke: Probably the biggest thing that has changed in the last 20 years is the sheer amount of consolidation that’s occurred at every level-retailer, distributor, broker, manufacturer-in terms of M&As, etc. So it might be that 20 years ago, there were two or three times the number of retailers that there are today. When I started at Stonyfield almost 30 years ago, there were 20 regional small retail chains in New England, and now there might be only three or four supermarket chains. Whole Foods has grown to be about 400 stores through a combination of acquiring regional chains and obviously opening their own stores. There were just more opportunities for newer companies to get shoehorned in on the shelf and get a chance to gain some exposure and to grow at a little more of a manageable pace.

The same goes for distributors. There were lots of regional distributors before, but now it’s basically just United Natural Foods Inc., KeHE, and a few other larger regional distributors like Haddon House and DPI Specialty Foods. Before, there were dozens of distributors, and it wasn’t like you had to get into a major national distributor or else you weren’t getting exposure.

Another challenge today is that there is a higher level of scrutiny. If you’re going to make claims about organic, non-GMO, gluten-free, any of those things, they pretty much are all being third-party verified.

So how difficult is it these days for a company with a natural product to stand out in a cluttered marketplace?

This is going to sound like a motherhood virtue, but you have to have something that’s pretty highly differentiated, something that really has a reason to be in the market. When you’re sitting in front of a regional buyer, a broker, a distributor, an investor, they’re putting you through the filter of, “Is this really innovative and going to drive growth in the category, attract a new user, beat incremental sales margins, and so on?” Or is it a “me too” product where you’re just swapping dollars from one pocket to another?

So much of the innovation is coming from smaller companies who are a little more nimble, a little more responsive. They can afford to have a small business. If it’s a large consumer packaged goods company, they need initiatives to be big, to move the needle for their business. When General Mills acquired Annie’s Homegrown, Annie’s was doing $200 million in sales, and the story was that even that wouldn’t necessarily move the needle at General Mills. It will move the needle at General Mills’ Small Planet Foods division, which includes Cascadian Farm and Muir Glen. But for General Mills as a whole, it’s not meaningful. And that’s a $200 million business. So if you are the newest Paleo diet product or a raw food or something that’s still emerging as a fledgling category, you can be an entrepreneur at making a market in something that’s meaningful to you long before a large CPG is going to say, “Okay, that’s been validated. That’s something we’re going to go after.” (Continued below)

Natural Product Hitmakers

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That’s intimidating. Where does one even begin in terms of attempting to bring a new product to market?

Again, this is probably just obvious and commonsense. So many of these stem from someone’s passion, right? I know that X number of new products come out of focus groups and consumer insights and market research, etc., but if you walk Natural Products Expo West or Expo East or the Fancy Food Show, chances are that a company was founded by someone who was a consumer and wasn’t having his or her needs met by the marketplace, or else maybe the case was that somebody in his or her family had a food allergy or that he or she became intrigued about eating Paleo or had some kind of transformative experience. Take David Asprey, who founded the Bulletproof coffee brand and who calls himself a “biohacker.” Essentially, he’s putting butter in coffee, and he says it has all of these salutary effects on him. There’s always going to be some number of people who have an insight, who have the passion, who do something. That’s the starting point.

Secondly, ask yourself, “Do I have the potential for a viable gross margin?” Your net sales minus your cost of goods divided into your net sales-is that 40% or better so that you can cover all those other costs of bringing products to market and make money?

Thirdly, can you crack the proverbial code of what it takes to sell off the shelf? Figuring out the optimal selling price, how to merchandise it, how to tell your story to the trade and consumer-what are all those key variables that result in the product selling off the shelf? I’ve been conducting seminars on raising capital for seven or eight years, and at each one, we have the small venture capitalist, a big venture capitalist, a strategic investor, an angel investor. They all essentially, independently, unrehearsed, and unprompted, say similar things, like “We’d rather see you in just 100 stores flying off the shelf than growing your business by getting into new stores every month.”

Understand what drives velocity, have a good gross margin. And make sure you have the basis for a good brand, one that’s going to connect with consumers and one that can be extended into different categories. Look at all of the product categories that Kashi has gone into or that Annie’s Homegrown has gone into. Think about that up front so that as you start to build your brand, you’re not pigeonholed into one kind of business.

How important is it for natural brands to address a global market?

My standard caution to most companies is to be very wary that exporting doesn’t become this shiny, glittery thing that becomes a money and time suck for you. There are so many companies minding their own business and then somebody shows up from somewhere else-the UK, Australia, Korea-and says, “We love your brand and we want to bring it in and be your exclusive distributor.” And all of a sudden these companies get pulled into figuring out regulatory rules, labeling, language, new packaging, etc., and they might be a company that’s not even selling in Chicago yet, or they’re an East Coast company that hasn’t built out distribution yet in the United States.

For the most part, I would say that companies should have a pretty strict set of criteria for the circumstances under which they will do it and whether you’ve got someone who’s essentially doing a lot of the work for you-repacking or relabeling, picking up at your plant, wiring you money in advance so that it’s not a big credit risk. I would make it a pretty high bar to clear because otherwise you’re probably better off filling out distribution in this market, which is so huge.

Having said that, in my time I’ve certainly met companies who will say, “Oh, we’re doing a half a million per year shipping organic personal care products to Korea, and it’s like clockwork.” It’s on automatic pilot. And that’s great. But it’s very rare.

There are 100 things somebody needs to think about when they’re launching a brand. You have to have a highly differentiated product, good gross margins, be able to test it in a local area where you have good visibility of what works and what doesn’t work, figure out how to fund it-getting into all of the nitty-gritty practicalities of what it takes to have a viable business. But just from a big picture perspective, these are places to start.

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