Out-of-stock issues have hit Hains UK business

Out-of-stock issues have hit Hain's UK business

Hain Celestial has rapidly grown its business by expanding into new categories and markets through a series of acquisitions, notably in the UK. However, such rapid expansion has its challenges. Perhaps execution issues at Hain Daniels, the US group's UK-focused business, could be viewed as a warning to management that the group should be careful not to over-extend itself, Katy Askew suggests.

Hain Celestial has been on an acquisition spree in the UK in recent years. The US natural and organic food group has snapped up a number of on-trend brands including organic infant meals business Ella's Kitchen and the upmarket New Covent Garden Soup Co, acquired as part of the acquisition of Daniels Group.

The company has also purchased some less obvious growth engines in the form of a clutch of ambient brands that formerly belonged to Premier Foods plc. Brands including Hartley's jam, Sun-Pat peanut butter and Gale's honey had been starved of investment for a number of years and are clearly in need of some TLC from what one analyst described as a "focused, resourced and dedicated team".

The argument underpinning the acquisition of these ambient brands largely related to bulking out Hain's position in the UK - building scale, expanding distribution and strengthening the firm's relationship with its retail partners.

Just last month, Hain was at it again. The group acquired UK basmati rice business Tilda. The firm has strong penetration in the UK and management was enthusiastic about growing the business in the brand's home market and elsewhere.

In the UK, the group plans to stir up excitement by launching products, such as instant and ready-to-eat variants. Hain also believes the potential for international growth is strong and - with Tilda's gluten-free and GMO-free credentials - the company believes the rice brand will strike a chord with US customers in particular.

All of these businesses clearly have the potential for growth under the right stewardship. However, despite the perpetual enthusiasm and energy of Hain CEO Irwin Simon, they also require a considerable amount of work to capitalise on the opportunities they present.

In this context, news that the group's second-quarter performance was hit by execution issues could be viewed as a cause for concern.

Earlier this week, Hain said sales rose 18%, to $535m - slightly below consensus expectations of $536.5m. Hain Celestial shares lost around 6% in the wake of the announcement as the market punished the group's stock - which has a fairly high valuation compared to peers - for the top-line miss.

Listening to the analyst call to discuss the results, the stand-out issue seems to be the admission that Hain's UK arm - Hain Daniels - has struggled in recent months to meet customer demand.

"Rob Burnett and his team [in the UK] generated net sales of $146m, up 7.4% in local currency with strong demand for key products," Simon enthused.

However, while this growth might seem strong, it is worth noting this result represents the fourth consecutive quarter Hain has missed analyst sales expectations in the UK.

The chief executive conceded: "Our sales were impacted by about $15m of out-of-stocks due to capacity constraints, mainly with our MaraNatha, DeBoles, Earth's Best and New Covent Garden Soup brands, all of which have been resolved except for MaraNatha, which we expect will be resolved by the end of our fiscal year."

The news these issues have apparently been addressed is positive. Simon said Hain spent "close to $70m" last year "building out infrastructure" to support growth. But, in an industry where being a trusted and reliable supplier is key to developing - and maintaining - relationships with retailers, failure to get products on shelves will invariably damage a firm's reputation.

Simon also conceded Hain has struggled to fill the demand for its New Covent Garden soups.

Hain reintroduced the brand to Tesco last summer after being pulled from the shelves of the UK's largest retailer for 12 months. At the time, the manufacturer said the two sides had agreed a plan that would see Hain grow its sales - as well as expanding the category for Tesco. The company was approved for 19,000 distribution points - however, again Hain struggled to meet demand.

"We had some challenges getting the new lines up to speed and had less than ideal service levels," Simon revealed.

As a result of these issues, Hain decided to reduce promotional levels in the key cold-weather months of November and December, a period when soup sales enter their annual upward trajectory. Simon conceded that hit soup sales in the period.

"Consumer demand for our products is very strong, but we could have executed better on our soup to meet this demand and maximize on our higher margin sales opportunities," he admitted.

Perhaps here, it is also worth noting that UK margins lag US profitability levels and - despite plans to increase utilisation and extract integration synergies - UK margins contracted a further 180 basis points in the period.

Hain's US business, in contrast, is going from strength to strength.

It has benefited from the continued growth in consumption of natural and organic foodstuffs in the country - a trend that looks set to continue. According to a recent report from TechSci Research, US organic sales are expected to report CAGR of 14% between now and 2018 - significantly above the industry average.

Hain is also expanding into new channels in its home market. As Simon explained: "We believe white space distribution opportunities continue. As I've said before, wherever food is sold, wherever there's a cash register, I would love to see at least one Hain product, at least. But I know we're going to see a lot more. From airports to college campuses to foodservice and beyond and restaurants like Panera, Chipotle and others, we are looking to improve our distribution and have Hain products out there."

Hain's second-quarter update reads like a tale of two companies. On the one hand, the natural and organic food maker is on a march in the US, growing sales and profitability apace. On the other, basic execution issues are hampering the firm's expansion in the UK, proving a stumbling block that resulted in a sales miss.

Acquisitions have been central to Hain Celestial's drive to expand in the UK. The company now needs to refocus on the heavy lifting involved in integrating these businesses and getting them up to speed.