NYSSA CONFERENCE

MATTHEW W. EVANS

NEW YORK -- Rival health-food supermarket chains Whole Foods Market, Austin, Texas, and Wild Oats Markets, Boulder, Colo., may be well-positioned for long-term trends in the nutritional supplement industry, according to an analyst who spoke to a small group of peers and investors here last week, Dec. 4.

"We're seeing a channel shift," said Scott Van Winkle, vice president, senior analyst, Adams Harkness & Hill, Boston. Sales of these products are going "back to natural food stores."

"A lot of faddish growth spurred mass market [adoption of these products] but the core business in this industry is in health-food stores," Van Winkle explained. He addressed about 20 attendees during the first session of a one-day natural products conference put on by the New York Society of Security Analysts, also here.

It was not all bad news for the more traditional grocery chains, however. Although he sees flatness and declines in the food channel's herbal supplement sales over the next six to 12 months, multi-vitamin and one- and two-letter vitamin sales are expected to remain positive during the same period.

This is due to a consumer realization that multi and letter vitamins are "commodity" items and, with the current channel shift, supermarkets will get back to the commodity business, Van Winkle said. In doing so, grocery chains will be appealing to those consumers who want to buy vitamin E in outlets that are comparably cheaper.

Demographics will maintain this demand, according to Van Winkle, who pointed to a correlation between the age of a consumer and the rate of consumption of supplements. The rate of consumption increases as a person ages, he said. The highest consumption rate is among those age 60 or above, Van Winkle said, followed by baby boomers age 35 to 60 years old.

The faddishness that Van Winkle spoke of, bringing supplements into mass retail doors, was prompted in large part by positive media coverage of nutritional supplements from 1996 through 1998, he said. This led to an explosion in the amount of mass-retail shelf space dedicated to the products. In some instances, the space tripled, according to Van Winkle, and "sales would spike in Wal-Mart the day after a [television] report."

More recently, however, there has been a turnaround in media coverage. Additionally, the efficacy of herbal supplements has been questioned, with some herbal products not doing what they claimed, according to Van Winkle. These primary factors have contributed to a 30% overall decline in mass market consumption of nutritional supplements, he said.

He pointed to other factors as contributors to the decline as well. Nutrients and herbs that "used to be in pill form are now in foods" and beverages, he said, questioning why a consumer would want to take an oral solid if "SoBe beverages provide Echinacea now." Also, there are currently no hot products, he said.

Combine all these factors and "the nutritional supplement industry is in turmoil," Van Winkle said. He does not expect the turmoil to be long term, however.

Tougher manufacturing standards will weed out smaller players in that sector who can't afford to outsource production, he said. As a result, the number of stockkeeping units at retail will be rationalized. Also, aside from Royal Numico, the Netherlands-based manufacturer which acquired General Nutrition Companies, Pittsburgh, last year and Rexall Sundown, Boca Raton, Fla., this year, another large player is expected to emerge as a byproduct of consolidation.

The nutritional supplement industry, a $15 billion pie, is part of a larger natural products market totaling $28 billion, Van Winkle said. Included in this market are natural foods and beverages, nutritional supplements and natural consumer products.