Natural Products Insider

SEP-OCT 2017

INSIDER is the leading information source for marketers, manufacturers and formulators of dietary supplements, healthy foods and cosmeceuticals. Since 1997, INSIDER has been serving the needs of the global nutrition industry.

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4 INSIDER September/October 2017 In the News In mid-June 2017, Amazon (NASDAQ: AMZN) upended the retail world by announcing it would buy struggling Whole Foods Market (NASDAQ: WFM) for a staggering US$13.7 billion, sending shares of the natural foods retailer from $33 to about $42 per share (roughly the price offered by Amazon). While beloved by its shoppers, Whole Foods Market has experienced lagging sales and been under fi re from shareholders over the retailer's future, including an attempted shareholder takeover. It is still the country's No. 1 natural and organic foods retailer, but pressure from Walmart, Target and other major retailers, combined with the often- ridiculed cost of shopping at Whole Foods Market, has threatened this category leader. According to Elizabeth Lim, senior analyst, Mergermarket, the proposed transaction would be the second-largest U.S. grocery deal on record, behind only the acquisition of Albertsons by Cerberus Capital Management, CVS Health Corp. and SuperValue in 2006 for $17.4 billion. The Amazon-Whole Foods Market transaction would also represent the fourth-largest U.S. deal in the retail sub-sector over the past 10 years, according to Mergermarket records. The initial reaction by many people across social media centered on why Amazon would pay so much for a retailer with an uncertain future—many joked Amazon founder and CEO Jeff Bezos spent a fortune at Whole Foods Market, like many shoppers, and only got limited goods. Humor aside, many theories on Amazon's potential plans for Whole Foods Market have emerged. The online retail leader is testing a new checkout-less, app-driven store format—AmazonGo—as part of its exploration of brick and mortar distribution. Whole Foods Market could supply crucial data for the development of this concept. Other options for utilizing Whole Foods Market include using the physical stores for retailing items people like to purchase in person, not online; or integrating Whole Foods Market with Amazon's online business, including the use of Amazon's Alexa to buy natural and organic foods. The acquisition could also help Amazon better compete with Walmart, which recently acquired online retailer Jet.com, and grocery delivery services such as PeaPod, Blue Apron, Google Express and Lidl, an import from Germany. Whatever the plans, Amazon's few statements about the acquisition have included praise for the brand strength and the spirit it represents. "Millions of people love Whole Foods Market because they offer the best natural and organic foods, and they make it fun to eat healthy," Bezos said. "Whole Foods Market has been satisfying, delighting and nourishing customers for nearly four decades—they're doing an amazing job and we want that to continue." For Whole Foods Market, the proposed acquisition could be a savior. John Mackey, co-founder and co-CEO of Whole Foods Market, has long touted his company's "conscious capitalism" and has invested heavily in assembling a sustainable supply chain. "This partnership presents an opportunity to maximize value for Whole Foods Market's shareholders," Mackey said, "while at the same time extending our mission and bringing the highest quality, experience, convenience and innovation to our customers." Despite the potential stock returns, not all shareholders are convinced. A group of shareholders fi led lawsuits to effectively tie up the sale, some alleging false and misleading fi nancial statements, and others arguing Amazon's offer was inadequate. A Sign of the Times? On one hand, Amazon's quest for a brick-and-mortar presence is a cruel irony for many traditional brick-and-mortar retailers that have lost escalating amounts of market share to the online sales giant. This includes natural health and wellness retailers such as Vitamin Shoppe and GNC. Amazon has also wrestled the protein powder sales title—with a 57 percent market share, according to 1010data—from Bodybuilding.com. Both GNC and Bodybuilding.com have recently undertaken major restructuring efforts, although not entirely due to the Amazon effect. And in its fi rst quarter (1Q) fi nancial report, Vitamin Shoppe (NYSE: VSI) noted a decline in comparable store sales due mostly to lagging sports channel performance, which appears partly due to Amazon. While not announcing a full-scale restructuring, Vitamin Shoppe executives have suggested major efforts to turn around sales. In a statement on the release of second quarter 2017 (2Q17) results, Colin Watts, CEO of Vitamin Shoppe, noted the market environment evolved quicker than his team anticipated, especially in sports categories. For GNC, the restructuring initiatives announced last year have begun to bear fruit, or at least provide hope. Its 2Q17 results, released at the end of July, showed small improvements in transaction volume and same-store performance. "We made good progress in the second quarter, and our investments in pricing, loyalty and improving the customer experience continued to deliver positive results," said interim CEO Bob Moran, in a press release. Bodybuilding.com's founder and CEO Ryan Deluca resigned in October 2015— not long after the company settled federal charges of alleged misbranding of supplements that included anabolic steroids and synthetic steroid clones. It has since gone through several interim and permanent leaders, and rumors swirled about a possible sale of the company. In December 2016, Bodybuilding.com laid off at least 90 employees in an effort to downsize or streamline. In its parent company's most recent 2Q fi ling, results showed revenues in the portfolio that Bodybuilding.com dominates fell by $40 million, compared to the same period last year, and store visits, average order value, order volume and conversion rates all declined under similar comparison. Amazon turned up the pressure, stating it would lower prices of Whole Foods Market items and give Amazon Prime members an even bigger discount. The price drops started Aug. 28 with several items, including organic produce, eggs and fi sh. Continued Disruption? Amazon's proposed Whole Foods acquisition could further shift natural products retailing by Steve Myers

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