The uptake in the face of ongoing industry-wide scrutiny of heavy metals in baby food, including potential regulation, legislation and litigation, speaks to the strength of the company’s strategy for reshaping the brand’s portfolio, retailers' readiness to accept new products and reset categories after pausing these activities during the early days of the pandemic and Hain’s broader efforts to drive distribution gains.
When the House Subcommittee on Economic and Consumer Policy initially released its report highlighting the presence in some baby food brand of heavy metals, for which most FDA has not set thresholds, it triggered an “unplanned slowdown” in Earth’s Best brand, acknowledged company CEO Mark Schiller.
But, he explained during the company’s third quarter earnings call with analysts May 6, the brand’s volume “rebounded significantly in Q4, with Earth’s Best consumption up more than 30% in the most recent four weeks, and share growing and sales also up significantly.”
Part of this likely comes from increased distribution in March and April when most retailers finally reset their baby categories – a move that many delayed in order to keep shelves stocked during the early days of the coronavirus outbreak.
But the success also can be attributed to Hain Celestial strategic reshaping of brand’s line-up.
“We basically SKU-rationalized a huge percentage of that business. We gave up 25% of the sales on that business to move the margins from 0% to 10% EBITDA margin. And now we’re at a point where we’re innovating and we’re moving back toward growth on that business. And you certainly see that in the distribution numbers,” Schiller explained.
Looking forward, he predicts additional “significant gains” in baby, along with snacks in the coming months.
With regards to class-action litigation brought against the company resulting from the congressional report on heavy metals in baby food, Schiller reaffirmed that Hain Celestial meets existing government regulations and is working “collaboratively both to get metals down and to get regulations on the rest of baby food.”
He explained that currently FDA has only set levels for arsenic in rice cereal, with which the company is “100% compliant.”
In fact, he noted, “we rejected 12% of the finished goods last year to make sure that everything we have is compliant. So, we’re confident that we’re doing the right things.”
He added that Hain would like to work with FDA and some of the NGOs that want to reduce heavy metals in baby food further.
However, he noted, “FDA has confirmed heavy metals are in everything we [eat in the food supply]. It’s in the air, it’s in the water, it’s in the soil and everything we are eating. … There is no known way to eliminate metals altogether in our food supply. But we will work with the FDA.”
'Pre-pandemic launches are finally getting slotted'
Hain Celestial’s gains in baby food are reflective of its broader efforts to expand distribution, which increased overall 8% in Q3 over the prior year period.
As more retailers reset categories “pre-pandemic launches are finally getting slotted by many more of our consumers, and on top of that, we have great additional innovation, like Sensible Portions’ Veggie Puffs, Celestial Seasonings’ K-cups and Cold Brew tea, more mainstream flavors on Terra and product improvements on several snack brands also hitting these resets,” Schiller said.
“Importantly,” he added, “we’re also seeing our strongest household penetration and loyalty gains in affluent households, which are less-price sensitive, and with younger consumers who are more health and e-commerce focused. Both of these factors set us up well for the future.”
These factors and others helped drive up Hain Celestial’s net income 37% to $44.7 million and improve gross margins 26.4% from the same time last year, despite an 11% decrease in net sales to $492.6 million.