Interview: Boulder Brands CEO Stephen Hughes - part one
By Dean Best | 12 September 2013
Hughes believes Udi's and Glutino owner Boulder can become world's largest gluten-free company
Boulder Brands is a business under a decade old but one now approaching annual sales of over US$450m. CEO Stephen Hughes set up an investment vehicle in 2005 that became Smart Balance in 2007 when it acquired GFA Brands, the owner of the Smart Balance brand. However, in the last two years, with the spreads sector under pressure, Hughes has brought balance to the business with moves into gluten free - and changed its name to reflect its wider portfolio. In part one of a two-part interview, Hughes discusses Boulder Brands' buoyant gluten-free business.
"We are feeling pretty bullish," Boulder Brands CEO Stephen Hughes insists. The founder and chief executive of the US group has just reported its second-quarter results. While Boulder's Smart Balance business has seen its sales and gross profit come under pressure, the company's larger "natural" division, which includes gluten-free brands Glutino and Udi's, has enjoyed another robust period.
The brands saw organic sales jump 47% and 36% respectively in the quarter, as they capitalised on growing US interest in gluten free "We are getting great customer engagement from all channels and all geographies," Hughes says.
Boulder is only eight years old but this year expects turnover to reach $455-460m. Hughes, whose career includes stints at McCormick & Co., Tropicana and ConAgra Foods, set up Boulder Specialty Brands in 2005 as a vehicle to acquire an unidentified business; two years later, it had bought GFA Brands, the owner of the Smart Balance range of spreads, cooking oil, peanut butter and popcorn.
In 2011, Smart Balance made its first move into gluten free with the acquisition of Glutino Food Group. It followed that up last year with the purchase of gluten-free firm Udi's Healthy Foods. That deal was a factor, along with the move to Boulder in Colorado, which Hughes has described as "the Silicon Valley of natural foods", for Smart Balance to change its name to Boulder Brands.
The company's "natural" division, including the gluten-free business and a smaller, natural spreads brand, Earth Balance, now accounts for 60% of sales, Hughes says. He says Boulder is the largest player in what is a fragmented US gluten-free sector, a position he insists will give it clout with customers. "Given the fact we are 10:1 the size of our next largest competitor and we are making capital investments, we are kind of the go-to partner," Hughes says.
Euromonitor says US retail sales of gluten-free products in the US were $405.1m in 2012, up almost 16% on 2011, a year that saw a 13.5% increase from 2010. The growth in the gluten-free sector, coming from both increased diagnosis of coeliac disease but also a growing perception among mainstream consumers that a gluten-free diet is healthy, has unsurprisingly attracted interest from some of the conventional food manufacturing heavyweights in the US. In the last month, General Mills has expanded its range of gluten-free baking products, Mondelez International has launched gluten-free rice snacks under its Nabisco brand, Italian pasta group Barilla has introduced gluten-free pasta in the US and JM Smucker has snapped up California gluten-free firm Enray. Does the increased attention from the major corporates concern Boulder?
"I could be wrong but I think there is so much untapped potential that we are going to be better served having higher-quality products better supported than the current competitive set, which is fragmented and under-capitalised," Hughes insists. "I think it will be a net positive for the consumer, which should make it a net positive for the trend.
"We don't really see any empirical evidence that it's impeding our growth at all. As more of these large guys get into it, they are going to do it somewhat defensively, to flank their current businesses. Given the uniqueness of the packing of these products, in many cases, when they launch a gluten-free product, it's going to be a lower-margin proposition than their gluten-full businesses. We're spending significant marketing dollars developing a good relationship with a gluten-sensitive and gluten-concerned consumers. I don't see anybody else focused that way. That could change in the next couple of years [but] if we get any competitive pressure in any particular channel, we have all kinds of white space opportunity. I don't lose sleep on that."
That said, the US, as one of the three booming gluten-free markets worldwide, alongside the UK and Canada, has also captured the attention of gluten-free specialists worldwide. Italy-based Dr Schar, the world's largest gluten-free company, has a presence in the US, the UK's Genius Foods has expanded into the market in the last two years, while Australia's Freedom Foods Group this spring set up a dedicated subsidiary to look at North America.
Hughes says Boulder "keeps a close eye" on competition but is confident about its position, not least now the company has a new plant in Denver up and running after a move to consolidate five Udi's centres into what it has called a "gluten-free centre of excellence".
"I'm a bit relieved to have the start up on the Florence Street facility off and running. We literally were out of capacity. We've been holding off going into channels like club because we just didn't have the bread," Hughes admits. "We feel good about things but I've been doing this for 35 years so you just don't take anything for granted. We're right now in a leading position but we're going to have to be very smart and not be complacent if we are going to hold and extend that position."
There has been some concern in the investment community that Boulder's capex ambitions could put pressure on its lending agreements. However, Hughes points to its recent new financing deals and the company's ability to generate "strong" EBITDA. Moreover, firm in the belief of the potential of gluten free in North America, Hughes says Boulder may have to set up a plant further east in two years. "Our 2014 capex projects will probably be more focused on margin improvement. The current bread expansion will probably last us for 18-24 months. If we get a big hit in club, that could pull that date up. At some point we are going to have get a plant comparable to what we have in Denver in the East. We have the plant in Laval, Quebec. We might expand there, we might expand in a place closer to the market but that's a probably a 2015 or 2016 project," he says.
However, there is debate over the prospects for gluten free in the US. Some industry watchers have suggested growth could slacken off in a few years' time. Some feel the size of the market is too large in proportion to its actual consumer base, and the kind of growth experienced within the last few years is not sustainable.
Data from The Hartman Group indicates only 22% of people actually buy into the category because the products are marketed as gluten-free, suggesting gluten free is not the major selling point for many consumers, which will make building customer loyalty more difficult.
And there have been some concerns about the nutritional profile of gluten-free products. Some have been said to lack taste and some manufacturers have been criticised for then using ingredients like sugar to improve the taste of their products, which has turned some consumers towards products naturally free from gluten.
Hughes points to data from Nielsen that claimed 95% of consumers in the US who were eating a gluten-free diet last year had increased their consumption. Figures from The NPD Group, Hughes says, showed 30% of consumers were following "a reduced or elimination of gluten diet".
Hughes recollects his time at ConAgra, when, he says, he led the team that launched the Healthy Choice brand in 1988. "We were the first brand that went after low fat versus low calorie. We went through $1bn in four years. Around us emerged a $10bn low-fat category. We didn't have at lot of insulation or barriers to entry like we think we have on gluten free. This has got similar potential," he says.
Nevertheless, he concurs with peers in the industry like Freedom Foods Group that say gluten-free manufacturers need to focus on taste and nutrition to drive future growth. "The companies that can push the envelope on flavour and responsible nutrition will be the next generation of winners," Hughes says.
Boulder's plan for further growth in gluten free includes not just continuing to grow its business in the US but in overseas markets. In May, the company acquired UK firm Davies Bakery and is set to launch its Udi's brand in the country in weeks. Hughes indicates Boulder could look at more markets in the next year. "If the UK goes well, by the end of 2014, we could be selling into mainland Europe."
International expansion will play a role in Boulder's aim to become, Hughes says, the "global leader in gluten free". Dr Schar is the world's largest gluten-free manufacturer but Hughes believes expansion overseas and in channels like foodservice could see Boulder overtake its rival. A boost could come from M&A in what is a fragmented sector - "there are a couple of brands out there that we have got our eye on that we think could be good complement to our strategy," Hughes says - but the focus seems to be on organic growth.
The company, Hughes says, will secure contracts to supply US coffee shop chains next year. He reveals Boulder has been "getting engagement" from regional burger chains and believes so far unsuccessful talks with McDonald's and Burger King will one day turn the corner. "At some point they are going to have get engaged and given our scale and sophistication we will be high on their list for somebody to partner with," Hughes says.
"Globally, we are number two behind Schar. They are about US$350m, doing about 15% growth. I think they are in 25 countries. With Udi's and Glutino, we are in two countries, now going to our third country, and we are going to be in the $225-240m range this year, growing at 40%. Our objective is to be the global leader in gluten free within two to three years," he says. "I think Udi's and Glutino could be a $500m business; I wouldn't rule out in five years they could be a $1bn business."
Boulder's bullishness could be questioned by some but increased interest from mainstream companies in the sector leads one to wonder whether the firm could itself become an acquisition target.
"We're a buyer not a seller but we're also a public company. We're not really looking to do anything other than build a great business but it's not inconceivable we'd be on some people's radars as they get more focused on the gluten-free space," Hughes says.
As Boulder received any indications of interest? "No - and we're not looking for it."
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