Changes in the Natural Products Industry
and to the Role of a Natural Products Broker

The Growth of the Natural Products Industry

The natural foods industry is a $34 billion business that has experienced what Wall Street folks call ‘hyper growth' over the last decade. This has primarily been due to growing awareness about the importance of healthy food choices within the mainstream population, which in turn drives the expansion of natural products within the mass market and through natural products retailers. During the '90s the natural products industry saw growth in the double digits, unheard of in the grocery business. While growth has slowed slightly over the year 2002 to a solid 8.3 percent, this is still substantial when compared to the flat 0.1 percent growth experienced by the top 10 supermarket chains.

If you have been patronizing your local health foods store for a number of years, you have experienced the change directly. Ten plus years ago, if you were looking for soymilk, non-dairy yogurt, or non-dairy cheese, you might be lucky to find one shelf designated for these products in your local health foods store; there was only a slight possibility of finding any of these products in the mainstream markets. Now, the situation is quite different. You can find an entire “dairy” section dedicated to soy, tofu, and other dairy-free products in national food store chains, and most mainstream markets have sections designated for what was typically known as “health food products.” Today, you have more variety, more brands, more companies to support, and most importantly, more choice in satisfying specific health and ethical needs. This has been a direct result of consumer demand.

There are many avenues and channels that natural food products go through in order to find their way onto your supermarket or health foods store shelf. Of the many ways a product reaches the consumer at the store/retail level, the work and efforts of a natural products broker is preeminent.

What is a Natural Products Broker?

The functions of a natural products broker are multifaceted. A natural products broker acts as a liaison between the manufacturer and the store/corporate buyer, providing service at both the distributor and retail level. The following is a list of some of the most common responsibilities a broker fulfills:

• Introduce new products/manufacturers to the buyers
• Bring in line extensions (when a manufacturer comes up with new products in an existing line)
• Provide in-store support with merchandising assistance (how the product looks on the shelf)
• Maintain inventory levels (some brokers hire staff to just do weekly/monthly counts to ensure a product doesn't disappear from the shelf)
• Design displays and end caps (end-of-aisle displays that are "prime real estate" in a grocery store because of the high visibility and traffic they garner)
• Provide education and training for staff (the more education the staff has, the more likely it is they will pass information on to consumers)
• Provide consumer lectures (these presentations drive product sales through customer demand)
• Process orders (some buyers can deal directly with a broker, and the broker then "turns over" the order to a distributor or directly to the manufacturer)
• Create marketing and sales programs (newsletters, sales specials, monthly promotions, etc.)
• Provide product samples for staff and consumers (think about how many times you tried a sample in a store and then proceeded to purchase it)
• Negotiate better deals with manufacturers and distributors (sometimes brokers will kick in their commission to allow a retailer a better discount; this creates goodwill and larger volume for the broker)

The overriding goal for a successful natural products broker is to secure the largest percentage of market share possible for each manufacturer's goods, or as one broker stated, “My sole goal is to get it on the shelf and off the shelf into a customer's hands.”

A broker's salary is dependent on that success, as he or she gets paid on a commission basis. Typically a direct line, one that the manufacturer ships directly to retailer, can garner the broker a percentage ranging from 7-15 percent of wholesale costs. If it is a distributed line, the percentage is somewhat lower, ranging from 3-10 percent. Even though the percentage is lower, the broker can make up the loss of percentage points with larger sales volume and wider distribution.

The Changing Face of the Industry

Despite the industry's growth during this last decade, its landscape changed in many ways. As the demand for natural products expanded, the key components shrank when mergers and consolidations began to affect all layers of retail, distribution, manufacturing, and brokering. Where once the industry was dotted with independent health foods stores, brokers, manufacturers, and distributors, the scenario now is more a conglomeration of large corporations. There still are independent “mom and pop” retailers and remnants of how the industry used to be, but more than ever, big business has penetrated the natural products industry and continues to do so as the demand escalates and the profits mount.

Many of the smaller stores/co-ops and independent “mom and pop” stores that have lasted work very much the same way the chains initially worked with brokers—a broker would stop by, often without an appointment, and talk about the lines and products they were representing. The buyer might have some questions about pricing, introductory promos, distribution, ingredients, and the sourcing of raw materials. (This was a paramount issue for me when I was a buyer; many products that were presented to me were promoted as vegetarian, but further investigation revealed they were not.) Oftentimes the buyer would, on the spot, decide whether to bring in the line. A buyer working on the floor knew who their customers were and what these customers were looking for. On the same day a broker visited the store, an order could be placed with an expected arrival date a few days later. While this can still be the process for many of the independent stores, those days are gone for the chains.

"It could take upwards of three years from the introduction of the line to the right people before it can be found at the store level."

Depending on the size of the store and whether the store is part of a bigger chain, the policies and procedures that a broker must follow can vary quite extensively. These changes dramatically affect the way brokers conduct business as well as the retailers' expectations of those brokers.

As chain naturals product retailers became bigger (as they bought up many of the independent retailers), they learned to buy further up the chain of supply and make their own deals with manufacturers directly. When this occurs the manufacturers' brokers commonly get left out of the process. On the other end, as manufacturers are squeezed for deeper and deeper discounts by the retailers. The manufacturers look for ways to cut “costs,” and dismissing a broker is common.

When the brokers are able to deal with the chains, it can be a long and tedious process. Depending on the chain and the size of the stores, the managers at the store level may have no authority or buying power and must follow orders dictated from corporate offices. As one corporate buyer stated, “This is happening for a variety of reasons, primarily that the chains need to have more control over what the stores are buying and a better understanding of their market. Brokers were coming in and disrupting the managers' time and sold them stuff the store didn't need. Purchasers at the corporate level need to get a better picture and understanding of what stores have and implement the best buying practices. If you have 100 stores making independent buying decisions, it loosens the buying power of the corporation as a unit, and we don't leverage our buying power effi- ciently.” This seems fair enough until you look at who makes those buying decisions and the methods used to make those calls.

As mentioned, natural foods have grown in popularity in the retail mass market. However, corporate executives in many key positions in the health foods chains have come from a background with very little, if any, education about the roots and reasons for health food. Often the people who make the important determinations of what is allowed at the store level are not necessarily health food-minded and are more focused on the bottom line and profitability. As more attention focused on the growth and the profit of the industry, “big business” got involved and started buying up many of the companies that were pioneers in the natural products industry. So now, companies like ConAgra and Phillip Morris own many of the health foods brands you find at your local food store. These companies have the marketing dollars and can give the retailers the kind of financial support demanded.

The food's placement on a shelf has enormous impact on its visibility and sale. For example, eye level certainly gains a lot more attention than the very top or bottom. There is great competition for these spots, which allows the retailer to charge a premium for shelf-space. In the mass market, a slotting fee is the charge to simply be allowed in the store. Healthful products made by smaller companies that can't afford these “start-up” expenses are often squeezed out.

The Health Food Consumer

Let's not diminish the role of the consumer and the changing demographic of the health food shopper. In the early years, the consumers who sought out health food products had a working knowledge of ingredients, and many could distinguish hype from reality when reading labels. The consumer was savvy, and health was not a marketing gimmick. Today, while those consumers still exist, they have been joined by shoppers who are moving in that healthy direction, but ease and convenience are a driving motivation. (Convenience is the single most important factor that sells food these days.) Quality is no longer the sole motivating reason for a purchase. With this new reality, the definition of what is healthy and “pure” gets diluted, and you can now find white sugar-laden whole-wheat crackers containing hydrogenated oil next to the unadulterated ones in most health foods store chains. As that happens, shelf-space becomes more and more precious and competitive.

So is it impossible for a new company to emerge onto the retail scene, and can a broker expect to have positive results in “showing” a new product and/or line? “Not impossible,” according to a corporate buyer for one of the nation's largest chains, “but not as simple as it used to be.” According to this buyer, “The company has to have a clear selling point, unique packaging, and a strong financial backing to weather the process. They must have the money to support demos and provide free fills (an industry term that basically means a product is supplied at no cost to the retailer, simply for the benefit of having their foot in the door of retail stores), as well as marketing dollars to participate with their retailer's marketing partner program. All of these expectations of today's chain and larger retail outlets require lots of financial backing for a start-up company. Many don't have that type of backing and never make it in the door.”

And as I discovered when interviewing many start-up companies, even if all the policies and procedures are adhered to, many experience what one manufac-turer described as the “black hole of no return phone calls or follow-up.” Frustration can run high when one spends years following protocol only to have the chain refuse to carry the product. It could take upwards of three years from the introduction of the line to the right people before it can be found at the store level. That's a big chunk of time for a start-up company, and most cannot survive the duration. Focusing on the independents and smaller chains is what many small start-up companies and independent brokers resort to and rely upon. Also, as many buyers have stated, the people behind a company have to have a lot of energy, marketing advice, and legal guidance about labeling (especially with the new organic regulations), then basically “weather the storm.”

What Does This Mean for Consumers?

What does all this mean to consumers, those who care about what they eat and purchase? In brief, it means to ask for what you want. Even if you don't have a specific product or company in mind, you can simply request more of a selection of what you desire. If you are vegan, you can write a suggestion card that requests more of those products be available for your purchase. Every time you patronize a market, ask for the manager or buyer, and let them know that you'd like certain products stocked on the shelf. If you come across an ad for a company you would like to support, present the information to your store buyer, and request that they stock this item. If they choose not to carry it, ask why. Many of these managers and buyers can make these decisions completely arbitrarily. Some simply don't have the time (or desire) to look into it. Be pleasantly persistent, find out who makes the ultimate buying decisions, and remind them that the customer should never be ignored. If you are not satisfied with the response, keep going up the ladder to the manager's manager and, if need be, the CEO. These folks are not inaccessible. Retailers are thriving because they are fulfilling the needs and wants of their customers—YOU. If you succeed, you may be responsible for providing a non-dairy, wheat-free, or other choice that may not have been available otherwise. It could be a company's or broker's survival that you impact, and who knows what ripple effect that may have.