Inside Hain Celestial’s fight to regain its swagger
This story is the first in a two-part series examining the turnaround of Hain Celestial. The second piece will profile company CEO Mark Schiller, a Pinnacle Foods and PepsiCo executive, who brought to Hain his expertise of rehabilitating down-on-their luck brands to make them relevant again for modern-day consumers.
Mark Schiller describes himself as an “adventurer” and a “thrill seeker.” He’s gone skydiving twice. In 2016, Schiller hiked the strenuous 33.7-mile Inca Trail to Machu Picchu in Peru, and he’s making plans to climb Mount Kilimanjaro in Africa with his son.
But for the 59-year-old, his biggest challenge yet may be found inside the headquarters of Hain Celestial, where Schiller is orchestrating a multiyear turnaround of the healthy food and beverage maker.
“It’s been quite a ride,” the seasoned food industry executive said with a laugh at the beginning of a nearly 90-minute interview with Food Dive. “I like to kind of go into places that make me uncomfortable. And I get great satisfaction out of conquering things that I’m afraid of … I like to push the envelope. And for me, this was a career envelope push this late in my career.”
When Schiller took on the president and CEO roles of Hain in November 2018, the maker of Celestial teas, Terra chips and Sensible Portions Garden Veggie Straws was in disarray and in danger of losing its enviable position as the leader in organic and natural foods.
After more than a half decade where revenue grew more than 20% annually, Hain was suddenly facing a slowdown in sales and shrinking margins. Large CPG manufacturers such as General Mills and Nestlé were flooding into the health and wellness channel in an attempt to offset slowing sales elsewhere in their businesses.
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Christopher Doering/Food Dive
It was an abrupt awakening for Hain, which was founded by Irwin Simon in 1993 before the better-for-you category was trendy. For much of its history, the company was the go-to player in natural and organic with its products lining shelves at health and wellness stores, specialty retailers like Whole Foods and later online at Amazon.
As eating better grew in popularity, other seasoned food manufacturers and countless startups began crowding into the category. Suddenly, Hain was no longer the only game in town. Competition for acquisitions, shelf space and customers was suddenly amplified.
“That’s when we really needed to be a good operating company, and we didn’t have that kind of philosophy,” Schiller said. “We didn’t have the skills.”
Hain felt pressure not only outside from its competitors but also internally with a drumbeat of self-inflicted financial headaches. The company’s profits in North America had plunged, sliding 75% in the two years before Schiller arrived.
Hain went a year without reporting earnings after it uncovered potential irregularities in how it accounts for revenue dating back to 2014 that needed to be reviewed. A 2017 company assessment found no internal wrongdoing or need to materially revise old statements, but Hain did announce it would be updating some of its prior reports. The delay in reporting its financial results meant Hain was only a few weeks away from having its stock delisted.
To compound matters, the company announced the U.S. Securities and Exchange Commission also was looking into its accounting practices. The regulatory agency later chided Hain for weak end-of-quarter sales practices designed to meet internal targets but it did not administer a fine.
Investors fled Hain’s high-flying stock, pushing its share from nearly $70 in 2015 to under $16 just three years later.
“It just collapsed,” Anthony Campagna, director of research at ISS ESG, said of Hain. “That’s kind of the story of the business. They were this darling of the ‘greenification’ of snacks and then the sales stopped.”
Back to the basics
Schiller inherited a company that was overly complicated and lagging behind its competitors when it came to innovating. It was throwing millions of dollars at brands that were “hemorrhaging cash” and had no business being in Hain’s portfolio, he said.
“The great thing that I love about food is it’s not rocket science, right? It really is about figuring out what the simple problem is to solve and go solve it,” Schiller said. “My mandate from day one has been figure out how to turn this back into a profitable growth company.”
For years, Hain had employed a strategy of rolling up brands that rapidly increased the size of its portfolio. During a 25-year period it made 55 acquisitions. The growth-at-any-cost mentality supercharged sales but left Hain with a disparate group of brands in 37 different categories and a portfolio with little coherence.
More than a third of its nearly 60 brands were losing money, with its 10 biggest offerings responsible for generating nearly two-thirds of its sales. Hain also had a presence in categories that strayed far from its center of expertise in chips, teas and baby food. At one point, it was raising and slaughtering turkeys, and selling fresh fruit, and frozen and refrigerated products.
Retailers “were all saying you guys are the hardest company to do business with, you got to make it easier. You’re not delivering on the promises you make. And so we spent the first 18 months just trying to reestablish credibility.”
Mark Schiller
CEO, Hain Celestial
Left in its wake was a complex and decidedly inefficient business. Many brand divisions had their own way of forecasting sales and submitted revenue figures to Hain using different formats and at different times of the quarter. They worked with their own ad agencies and co-manufacturers, and operated a distribution system unique to their brand.
The difficulties plaguing Hain’s broader operations were spilling over into its relationships with retailers, who were growing increasingly frustrated with the natural and organic supplier, he said.
When a customer like Walmart or Kroger wanted to purchase items from Hain, it had to order each individual product on a separate invoice. The items often came from different distribution centers and were delivered on multiple and often partially empty trucks — an expensive and challenging process that frustrated retailers with limited space at their stores to unload products.
“They were all saying ‘You guys are the hardest company to do business with, you got to make it easier,’ ” Schiller said. “You’re not delivering on the promises you make. And so we spent the first 18 months just trying to reestablish credibility, and get them to see that we would do what we said we were going to do, and then bring them things that would grow their category.”
Cleaning house
Within days of joining Hain, Schiller quickly went to work overhauling the company. He tapped into prior relationships he cultivated while working as an executive at Pinnacle Foods and PepsiCo to improve Hain’s strained relationship with mainstream retailers.
Schiller started selling off brands, and has since divested 20 of them including Tilda rice, Arrowhead Mills baking products and poultry brand Hain Pure Protein — eliminating roughly 1,000 of its 2,500 SKUs to focus on the most profitable and best-selling lines. He consolidated Hain’s sales force from five groups into one, and reduced its 40 distribution centers into three main locations.
Schiller put in place incentives to encourage retailers to fill up their trucks — making the ordering process more efficient and cost-effective for Hain, which is already paying for gas, the truck driver and maintenance on the vehicle. Schiller also did away with exclusives for retailers, which in the past would increase Hain’s revenue but often cause it to lose money. Instead, it gave them a window to sell the item before it was made available to other companies.
Hain Celestial’s profit margins have grown steadily during the last two years
Profit margin percentages from quarterly earnings reports
Scott Mushkin, a retail analyst at R5 Capital, said Schiller and his hand-picked management team brought a much-need “kind of discipline” to Hain that has left the business financially stronger and better positioned to compete in an increasingly crowded organic and natural products category.
Profit margins at Hain have steadily climbed from 20.7% in third-quarter 2019 to 26.4% in the same period this year. Gross profit also has improved to $130 million in third-quarter 2021 compared to $125 million two years earlier. Investors have taken notice, pushing the company’s stock up more than 90% since Schiller took the helm.
Still, analysts said future success is far from guaranteed. Hain will need to prove it can keep the shelf space it is gaining in mainstream retailers and rebuff deep-pocked CPGs and scrappy startups who are encroaching on the better-for-you space with their own product launches.
Mushkin said Hain’s leadership also will need to show Wall Street they are as good at sustaining growth as they were in improving the company’s operations in order to justify their stock price.
“Honestly, I think the jury’s still out on sustainable growth,” Mushkin said. “That puts pressure on the management team.”
Let’s make a deal
For a company that was built on dealmaking, acquisitions and divestitures will continue to remain an integral part of Hain’s business model. Schiller said the company’s portfolio is still too bloated, and while the pace of offloading brands will slow, it remains on the lookout to divest items that are not core to its business or scalable for future growth.
Schiller acknowledged Hain’s personal care portfolio of cleansers, shampoos, sunscreens, lotions and baby care products, which make up less than 10% of its sales, doesn’t mesh with its chips, tea and yogurt. Hain is working to rebuild margins and sales that had “collapsed” in personal care before deciding whether to sell the business or create separate food and personal care divisions similar to what has been done at Unilever.
“If I’m going to sell this at some point, I’m going to sell it from a position of strength, not fire-sale a great asset from a position of weakness,” Schiller said, before adding, “You know, if you ask me five years from now ‘Will this be part of the portfolio?’ Probably not.”
The prior divestitures have strengthened the company’s balance sheet and placed it in a stronger financial position where it could return to being a buyer once again in categories like plant based, snacks, tea and yogurt.
“Honestly, I think the jury’s still out on sustainable growth. That puts pressure on the management team.”
Scott Mushkin
Retail analyst, R5 Capital
For example, in snacks, Hain could purchase a potato chip brand to complement its puffed and popped offerings, or a salsa to go with its tortilla chips, Schiller said. In beverages, the addition of green and black teas would complement its deep presence in herbal.
Hain has long been rumored as an acquisition target, and analysts who cover the company believe a more focused portfolio and improved balance sheet would make it more attractive to a potential buyer who could easily digest its $4 billion market cap. In addition, Hain’s foothold in health and wellness products that are in greater demand with shoppers will increase its value for a larger CPG looking to quickly bulk up its presence in the category.
Schiller said “if someone comes and makes an offer we can’t refuse,” the board would consider it. Glenn Welling, founder of Engaged Capital — Hain’s largest shareholder — acknowledged the sale rumor that has followed the company. “If at some point and time the answer is a sale, [the board] would consider it,” he said.
“That’s not our focus everyday,” Welling added. “Our focus is how do we make this thing a more valuable company, and I think we’re succeeding in doing that.”
Engaged Capital disclosed in June 2017 that it had amassed a 9.9% stake in Hain, making it the largest shareholder. Just three months later, the hedge fund reached an agreement with Hain where the food and beverage maker would overhaul its board and name six new members, including Welling.
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Christopher Doering/Food Dive
In what amounts to a rarity in the activist investor world, Welling and his firm remain shareholders and are active in Hain several years after disclosing their initial stake. Welling has increased his ownership in the food and beverage company to about 15%.
“Our work is not done yet,” he said. “We still have opportunities to make Hain a better business and create a bunch more value for all the stakeholders. This board and management team have no sacred cows.”
King of the hill
Despite the influx of competitors, Schiller remains steadfast about the company’s promising future.
Hain’s decades of expertise in health and wellness, and its ability to put all its innovation dollars into these areas, allows it to uncover products that consumers will want to buy, Schiller said. He added that Hain also can provide stores with valuable insight on the consumer when it comes to organic and natural products and assist retailers in doing everything from managing their shelf and price points to ensuring they carry the right product assortment.
Other CPGs will dabble in the category, but they will not devote a meaningful chunk of their resources to it, Schiller said. Big food and beverage giants are reluctant to create products in many natural and organic categories because the revenue streams are too small, a move that creates more opportunities for Hain. Retailers will value these attributes and Hain’s position of strength as they carry more of these products, he said.
“We should be the leader in health and wellness for years to come,” Schiller said. “Because for the big guys, this is a hobby, this is not what pays the bills. For us, it’s all we do. We’re the experts at it.”
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Permission granted by Hain Celestial
Despite these advantages, large food companies remain a formidable competitor for Hain.
Campagna with ISS ESG said they have the ability to spend a lot of money acquiring customers through practices such as discounting, influencing where the products are placed in stores or how much shelf space they control. Hain and other niche players need to excel at connecting with consumers and uncovering space in the food sector that is undeveloped or too small for Big Food to enter, he said.
Hain may not be able to recapture its heyday when sales were surging 20% annually, but even a growth rate of 3% to 5% will show it’s moving in the right direction, Campagna said. Sales during its 2020 fiscal year rose 3% once currency fluctuations, divestitures, discontinued brands and culling of SKUs were factored in.
“It’s on Hain to position their brands in such a way that differentiates them from the competition,” he said. “The new management team has started to right the ship, but they’ve got a lot of work ahead of them.”
Hain’s innovation strategy under Schiller has gone beyond simply introducing new flavors that risk cannibalizing a brand’s existing sales. Its strategy has centered on attracting more customers by tapping into other food trends that lack a healthy food presence.
Hain noticed, for example, that hot and spicy flavors were popular, especially among men, but products with this flavor profile were virtually nonexistent in its categories. Within a matter of months, Hain developed a Sensible Portions Screamin’ Hot Veggie Straws line. It sold so well that the spicier flavor was expanded the following year to other brands like Terra and Garden of Eatin’ chips.
Hain also brought health and wellness trends that were prevalent in categories like coffee or yogurt into teas. It introduced Celestial teas with caffeine to give consumers a boost, and an offering with melatonin to help them sleep. It debuted a gut health tea with probiotics, prebiotics and fiber; and another with ginger and probiotics.
Hain’s strategy seems to be paying off, with more people purchasing its products more often.
The number of shoppers purchasing Hain’s food and personal care products is up 3% for the 12 weeks ending June 13 compared to two years ago, according to IRI data provided by the company. Repeat purchases for its so-called “get bigger brands,” or those products that have the most mainstream potential, have increased 12% from 2019. Figures are especially robust for its best-selling brands like Sensible Portions, Celestial teas and Greek Gods yogurt.
At the same time, retailers are now more likely to carry its products. Overall distribution of Hain’s “get bigger brands” has jumped 10% during roughly the same time period versus two years earlier, IRI data showed — a benefit of the company’s ongoing push into mainstream outlets. Meanwhile, the average number of items carried on shelves at each store has increased nearly 10%.
Go big or go home
For most of its history, Hain has generated much of its sales in natural channels like retailer Whole Foods and online through Amazon. One of Schiller’s first goals in taking over Hain was to mainstream health and wellness in grocery stores and mass merchandise channels such as Walmart, Target and Kroger — a potentially lucrative market that could be worth hundreds of millions of dollars for his company.
The challenge in making inroads often times lies in convincing retailers. New products that address current trends or fill unmet needs, as well as empirical data from other stores showing the benefits of carrying these products, goes a long way in showing retailers why they should do the same, Schiller said.
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But Hain found while some retailers are quick to include their products on shelves, many others, fixated on data like sales per square foot, “really need a lot of education” on how better-for-you products can increase sales in a products category, build bigger basket sizes and attract a more upscale customer.
“There’s huge upside [for us] by getting more retailers on the bandwagon,” Schiller said. “But it takes time and it’s an education process.”
Currently, 60% of Hain’s products are sold in places such as grocery and drug stores, mass merchandisers, club stores and dollar stores — a percentage that is skewed higher by a large presence in personal care products.
With the right mix of persuasion and successful innovation, Hain is optimistic it can further increase revenue for many of its brands.
Greek Gods yogurt is only sold in 35% of stores, and doubling its reach could add another $100 million in revenue. Even its best-selling brands, like Sensible Portions and Celestial teas, are each stocked in 75% of food outlets. Further U.S. growth for Hain could come from an expanded presence in foodservice, such as by getting its snacks into sandwich shops or tea into hotel rooms.
Welling and Schiller both said Hain’s promising outlook stems from the fact that it has room to improve its productivity and margins, especially in Europe, where the business hasn’t been subjected to the same level of improvements as its U.S. operations. Hain’s international business provided 43% of its $2.1 billion in sales in 2020.
There also are opportunities to divest additional non-core brands in the U.S., and innovation rollouts in many of its core brands like Veggie Straws and Wellness Teas, delayed by the pandemic, are just starting to make their way to store shelves.
Hain also built up an early presence in e-commerce. Today it generates about 12% of its revenue from the channel, which could give it an advantage as more consumers move online.
“I’m a big believer in controlling what you can control. I didn’t plan for Brexit, I didn’t plan for COVID. There’s always gonna be curve balls thrown at you,” Schiller said. “But if we do the right things for our consumers, and our customers and our employees and our shareholders, at the end of the day, everybody will be happy and rewarded for it.”
Source: fooddive.com