Financial Puzzles

Exploring curious trends in investment and purchase behavior in a down economy.

ByAdam Ismail

There are several interesting things happening in the nutrition industry financial markets today that make one pause to think about the implications. For one, in the past few months U.S. companies in the nutrition and natural products industries have been buying or investing in non-U.S. companies at a much faster rate compared to previous years. Additionally, companies making premium-priced products seem to be in high demand, despite the slowing economy.

Cross-Border Transactions

First, let’s look at cross-border transactions. These types of deals carry more risk because currency fluctuations could hurt the financial return from the deal, even if the company being acquired exceeds its financial targets. According to the Nutrition Capital Network, there were 19 investment or acquisition transactions in April and May in the industry, and nearly a third of these were cross-border deals, including Hain Celestial buying U.K.-based Daily Bread and Pepsico buying V Water. European acquisitions are particularly attractive at the moment, especially in the natural and organic sector. While these sectors have benefited from many years of double-digit growth, keep in mind that the U.S. dollar has risen 15% in the past year…roughly the same rate as the growth of natural and organic foods in Europe.

If these companies invested a year ago, they would have at least doubled their return in the past year, capitalizing on both the growth of the industry as well as the currency. The flip side, however, is that the currency could move in the opposite direction in the coming year, erasing the return. How likely is this? Ultimately currencies move based on interest rate expectations. If the markets expect to earn higher rates of interest in Europe than the U.S., then the euro will rise in value and the dollar will fall. The companies investing in European nutraceutical companies are essentially betting that the U.S. dollar will not increase in value. However, the U.S. Federal Reserve recently indicated that it is going to stop cutting interest rates to spur the U.S. economy on, due to rising inflation. When inflation rises, the standard weapon is raising rates. As a result, it is highly likely the dollar will RISE in the coming year. Companies making investments in Europe would be well advised to hedge their investments to avoid currency risks.

Buy Premium, or Go Home

The second financial puzzle worth exploring is trying to understand why companies making premium-priced nutraceuticals and natural products have been among the most sought-after investments recently, despite the prospects of a global economic slowdown. Recent earnings reports from retailers like Wal-Mart and Costco have far exceeded expectations, while other supermarket chains have been lagging behind expectations. These results have been representative of other countries as well. It appears consumers are responding to economic uncertainty by choosing to shop at stores where they can get better values. So why are natural and organic and network marketing companies finding new investors and buyers at record rates? Well, for one, these markets have continued to grow at double-digit rates and do not show any signs of slowing down in the near future. In the case of natural and organic foods, some analysts say consumers are in­creasingly viewing natural and organic foods as the new “comfort foods.” Regardless of their efforts to buy cheaper food, consumers still want more wholesome products ranging from natural skin care to organic fruits and vegetables. In addition, rising fuel and chemical prices have helped close the gap in profitability between industrial and organic farms. This in turn has been passed onto the consumer in the form of a lower premium for organic products.

Network Marketers

In the case of network marketers, financial investment activity has also remained strong. In fact, in May alone MonaVie got a new minority investor and USANA Health Sciences management launched its own bid to take the company private. There has been a lot of talk about how the network marketing industry may be at the bottom of a growth cycle, which seems to hit ap­proximately every seven to eight years. This is usually the best time to buy into these companies, but the existence of the “cycle” is more a rough rule-of-thumb than actual fact.

Traditionally, most large network marketing companies are based in the U.S., but they tend to be the least exposed to the U.S. economy. In fact, they actually benefit from a weakening dollar. For most network marketers, while their U.S. businesses are slowing, their international businesses are more than making up for the decline. Many companies are even continuing to expand into new international markets, which can require steep capital investments.

Keep in Mind…

These financial scenarios seem at odds with where the overall economy is headed. But they make sense when you dig deeper. Perhaps most important, they have some serious implications. International financial markets look like attractive investments, but companies need to remember that they are only attractive in hindsight and going forward they may be much less so. In addition, premium-priced sectors are finding ways to continue their high growth rates and profitability by capitalizing on a trend that is more powerful than the economic slowdown…for the moment.NW