• Stevia: The FDA has declared a natural zero-calorie sweetener derived from the herb stevia safe for use in foods and beverages.

• Monsanto and dairy hormone: Earlier this year, Monsanto Co. agreed to sell to Eli Lilly & Co. a business line that makes the controversial hormone used to boost milk production in dairy cows. We believe that this is a sign that consumer opinion is turning toward milk that comes from hormone-free cows.

• Food costs coming down: During the quarter, wheat, corn, and soybean prices all dropped by more than 25%, which should make for better margins for food manufacturers and eventually better prices for consumers.

People continue to spend on the health of their families.

We find evidence of this in:

• The success of Hain Celestial’s Earth Best brand of organic baby food, the fastest-growing brand in its portfolio.

• The stability of Martek’s sales of algae-based DHA to infant formula producers.

• The proliferation of BPA-free baby bottles and the introduction by Benjamin Moore of a line of zero-VOC paint.

Shake-out in the industry

At the Natural Product Expo East, held in October, we heard of many exhibitors and retail buyers (including some from Whole Foods) that pulled out of the show. Many decided it was too expensive to travel and attend and that they would just wait until the larger Expo West, in March. We believe this means that smaller companies that relied on the show for exposure will have a harder time competing. Those such as Hain, which has existing relationships and can distribute more products through those existing channels should do well with less competition, in our view.

Natural Marketing Institute Survey Results

The Natural Marketing Institute’s surveys consumers once a year to determine their attitudes towards a green and healthy lifestyle. We lay out the results on the next page, but we found that the ercentage of consumers who prioritize green living for either health or environmental reasons, and may even be willing to spend more on these types of products, has been shrinking over the past couple of years. We think that this makes sense as a symptom of a tougher economy, as consumers have other concerns to worry about, and that it implies a difficult selling environment for those companies relying on a “green” perception to sell their products.

The LOHAS Lifestyle
The Natural Marketing Institute’s (NMI) LOHAS (Lifestyles of Health and Sustainability) Market Report breaks the population into five groupings based on attitudes towards a LOHAS lifestyle and surveys consumers once a year to find what percentfall into each group.

1. LOHAS – around 17% of the population, LOHAS consumers are dedicated to personal and planetary health and make
their purchasing decisions based on these principles.

2. Naturalites – around 17% of the population, Naturalites are focused on their own personal health, but are not politically committed to the environmental products. They find LOHAS products valuable only as they impact the individual’s personal health.

3. Drifters – around 24% of the populations, Drifters have good intentions about acting in a more environmentally friendly way, but there are other factors that have greater influence over their decisions. They are price-sensitive and trendy.

4. Conventionals – around 26% of the population, conventional consumers do not have particularly strong green attitudes but do put in a minimal effort, such as recycling and conserving energy.

5. Unconcerned – around 16% of the population is completely unconcerned about environmental health.

Results:

We see the first two categories, Naturalites and LOHAS, as making up the consumers who prioritize green living for either health or environmental reasons, and may even be willing to spend more on these types of products. We can see that the percentage of consumers who fall into that category has been shrinking, not growing, over the past couple of years. Only 34% fall into the first two categories, versus 40% in 2006. We think that this makes sense as a symptom of a tougher economy, as consumers have other concerns to worry about, and that it implies a difficult selling environment for those companies relying on a “green” perception to sell their products.

High-Income Spending Survey

In October, we surveyed over 100 consumers, 65 of which come from households earning over $175,000 per year. Of those high income households, over 70% have been cutting back on spending within the past few weeks. We outline below the affected categories. We believe that the results indicate that all categories of the consumer economy are suffering, though some worse than others. Based on these results, we believe that there continue to be strong trends toward health and wellness in the United States and that consumers will be less likely to cut back on products and services that promote their own well being.

23% of those cutting back planned to cut back on food, while only 10% planned to cut back on healthier food options. Only 6% planned to cut back on personal spending, while only 13% planned to cut back on spending at the gym.