Stores are selling more gluten-free foods than ever before with 11 percent of families buying gluten-free products in 2013, a 110% increase from 2010. There are gluten-free Girl Scout cookies, and even Dunkin Donuts offers a few gluten-free options. The market for gluten-free products, currently estimated by Mintel at $10.5 billion in 2013, is expected to rise to over $15 billion by 2016.
Why do people avoid gluten?
Gluten is a protein naturally found in grains. There are various reasons why people do not eat gluten. Over 3 million people in the US, about 1% of the population, suffer from Celiac Disease, an autoimmune disorder characterized by an adverse reaction to gluten which damages the lining of the small intestine. Beyond this, many people choose not to eat gluten because they believe they suffer from non-celiac gluten sensitivity, also called gluten intolerance. This condition is often self-reported and is alleged to affect many more people. According to a recent survey, about 30% of the population falls into this category and believes they should cut back the amount of gluten they consume.
Getting into gluten-free
Hain Celestial (HAIN 1.21%) and Boulder Brands (BDBD +0.00%) are two good investments that provide exposure to the rapidly growing gluten-free market. Hain Celestial has had a strong line of gluten-free products for many years and in April of 2014 bought Rudi's Organic Bakery, a large manufacturer of gluten-free baked goods, for $61.3 million.
Overall, Hain Celestial has been very successful in the past few years. Revenue has grown around 20% a year since 2010. Operating margins have also increased to around 10%, which is significantly higher than the 3.3% average operating margin for food distributors. Its many brands are all unified by the overarching goal to provide customers with healthier foods. Hain Celestial has been able to achieve this growth both through increasing internal sales and acquiring successful companies that match its values.
Boulder Brands has made a number of acquisitions to help establish itself as a prominent member in the gluten-free market. Most recently, in 2013, it acquired British gluten-free bakery Davies for $3.9 million following its acquisition of Udi's in 2012 and Glutino in 2011. Both Udi's and Glutino manufacture a wide range of gluten-free foods ranging from baking mixes to pizzas.
Boulder Brands has had some recent difficulties with their stock dropping over 20% last month after weak earnings which they attributed to the increasing cost of egg whites, an important ingredient in many of their products. However, Boulder Brands is beginning to shift focus from its struggling Smart Balance line, which focuses on plant-based spreads, to its newer gluten-free acquisitions that have helped Boulder Brands become one of the largest suppliers of gluten-free foods. Despite disappointing earnings last quarter, Boulder Brands total sales have continued to grow, averaging 24% over the last three years. Traditionally, the fourth quarter constitutes a significantly higher portion of yearly earnings for Boulder Brands so that will be an important measure of its performance this year.
Bottom line
Hain Celestial and Boulder Brands recognize the many opportunities created by the rapidly growing demand for gluten-free products as more and more consumers try to eliminate gluten from their diets and they have been making many acquisitions to grow the gluten-free segments of their businesses. Both of these companies are positioning themselves well to take advantage of the expected growth in the gluten-free market, making them attractive buys.
