Natrol, Inc.

views updated

Natrol, Inc.

21411 Prairie Street
Chatsworth, California 91311
U.S.A.
Telephone: (818) 739-6000
Fax: (818) 739-6001
Web site: http://www.natrol.com

Public Company
Incorporated: 1997
Employees: 283
Sales: $87.1 million (2000)
Stock Exchanges: NASDAQ
Ticker Symbol: NTOL
NAIC: 325411 Medicinal and Botanical Manufacturing; 325412 Pharmaceutical Preparation Manufacturing

Natrol, Inc. manufactures and distributes a variety of nutritional and herbal supplements through supermarkets, drugstores, health food stores, and mass-market retailers nationwide. In addition to providing vitamin, mineral, and herbal supplements for general health, Natrol offers a variety of products for specific health needs, such as men’s, women’s, and children’s health, joint health, weight loss, energy enhancement, sleep enhancement, and brain function. Natrol’s subsidiary ProLab Nutrition, Inc. produces sports nutrition products and Laci Le Beau Tea offers a variety of herbal tea products. Essentially Pure Ingredients sells bulk ingredients to other supplement makers.

Origins As a Cosmetics Firm in the Early 1980s

Founded in 1980 by Elliot Balbert, Natrol originated as a cosmetics company. In 1982 the company began to market nutritionally based weight loss products, hence the name Natrol, for “natural control.” Natrol expanded organically in the area of nutritional supplements, using manufacturing contractors to produce the company’s vitamins, minerals, herbs, and specialty formulations, such as Natural High, an energy enhancer, and Oat Bran Fiber Caplets. In 1986 the company introduced its first major product, Ester-C, a form of vitamin C absorbed into the bloodstream rapidly. Although FDA rules did not allow Natrol to promote Ester-C as a cure for the cold or treatment for symptoms of a cold, common knowledge of the benefits of vitamin supported sales of the product. Natrol advertised Ester-C in magazines directed to health-conscious consumers, such as Delicious, Better Nutrition, Great Life, Prevention, and Health, and in mainstream magazines, such as TV Guide, McCall’s, Family Circle, and Women’s Day. In 1990 Natrol began to advertise on the radio show “Larry King Live.” Another long-term success, Calms Kids, provided parents with a natural alternative to treating hyperactivity in children. Natrol reported sales of $2.5 million in 1989 and nearly doubled sales in 1990, with profits at approximately 8 percent of sales.

Natrol distributed its products to health food stores through wholesale distributors Tree of Life and United Natural Foods and direct to General Nutrition Centers. The company expanded distribution of its products through independent mail-order catalogues; through mass-market drugstores, such as Walgreen’s, American Drug Stores’ Osco, and Sav-On stores; through mass-market merchandisers Wal-Mart and Target; and through grocery store chains, including Von’s and Ralph’s. Other outlets included resort hotels, salons, airport shops, and on the Internet via such sites as MotherEarth.com. Natrol began to vertically integrate the company, first packaging supplements purchased in bulk, then acquiring encapsulating and tableting equipment to manufacture its nutritional supplements. By 1993 Natrol revenues increased to $9.5 million, garnering net income of $279,000.

Benefits of Federal Law for Natrol and the Supplements Industry in the Mid-1990s

The Dietary Supplements Health and Education Act of 1994 had a profound impact on Natrol and the nutritional supplements industry. The law allowed supplement marketers to state claims as to the health benefits of nutritional products on merchandise labels, without claiming that they treated or cured disease. In addition, several new studies helped to promote the benefits of certain herbs and substances, attracting the attention of aging baby boomers. High-profile products that drew strong consumer response included Melatonin, a hormone that acts as an antioxidant and sleep aid; DHEA, an anti-aging substance; kava kava, an herbal relaxant; and St. John’s Wort, shown to relieve depression.

While the supplements industry reported 20 percent to 40 percent growth between 1994 and 1998, Natrol exceeded those growth rates. Revenues increased 95 percent in 1995, to $23.6 million on the strength of Melatonin sales, which accounted for $6.7 million or 28 percent of total revenues. In 1996 Natrol experienced a 73 percent increase in revenues to $40.8 million. Sales of Melatonin and DHEA, introduced in March, accounted for more than half of total revenues, with $22.9 million in sales. In addition to publicity from clinical studies on health supplements, Natrol’s national advertising campaign served to increase sales as well.

Increased public interest in health supplements benefited Natrol, but the company’s ability to maintain sales growth relied on the introduction of new products. In 1997 Natrol experienced a 57 percent decline in sales of DHEA and Melatonin, or $13.1 million. Sales from new products offset the decline, accounting for $8.9 million in sales. Natrol introduced 30 new supplements in 1997, a total of 58 stock keeping units, including different quantities and tablet and capsule forms. Two popular supplements, Kavatrol, made with kava kava root, and Mood Support, made with St. John’s Wort, sold well due to publicity surrounding clinical studies about the herbs.

Natrol took several steps to support and continue swift growth. In the spring of 1997 the company opened a new, 90,000-square-foot manufacturing facility, quadrupling the company’s manufacturing capacity to produce 100,000 million tablets and capsules and to fill 20 million bottles per year. Natrol increased its advertising budget incrementally from 10.5 percent of sales in 1995 to 16.2 percent in 1997, stabilizing at 15 percent of sales, and launched its first television campaign to promote Kavatrol in 1997. On high-profile national radio shows, such as Rush Limbaugh’s and Dr. Laura Schlesinger’s programs, Natrol provided nutritional supplement information on the “National Health Minute.” A new sales team enhanced relationships with health food store customers, leading to $6.8 million in growth from existing customers. Natrol reported total revenues of $42.9 million in 1997.

Expansion Through Acquisitions and Initial Public Offering of Stock in the Late 1990s

Natrol diversified its product offerings through vertical integration. The company acquired Pure-Gar, Inc. for $11 million in February 1998. Pure-Gar manufactured and distributed garlic supplements under two brand names, Quintessence and Highgar Farms. In addition, the company sold bulk nutritional ingredients to other nutritional supplement makers. Pure-Gar supplied garlic, primarily, as well as vegetable, fruit, and herbal and other botanical powders. In November Natrol purchased Laci La Beau, maker of a line of herb teas for weight loss. Natrol paid $7.5 million for the company, which recorded $7.2 million in revenues for the fiscal year ending June 1998. Laci La Beau added nine new teas in 1997. The July 1998 initial public offering of stock supported expansion. At $15 per share, the stock offering garnered $59.1 million and netted $44.64 million.

Sustaining a line of 145 products and continually adding new products required Natrol to seek additional shelf space with existing customers. During 1998 several major retailers added new products to their existing lines of Natrol products. American Drug Stores added 16 products to its offerings at more than 1,500 locations, including Lucky grocery stores. Fedco, a high-volume mass-market merchandiser in California, added 49 products and Rite-Aid drugstores added 20 products to its current line of five products at nearly 4,000 stores nationwide. Other retailers that accommodated new Natrol products included Schnuck’s, with 170 grocery and superstores in the Midwest, BJ’s Wholesale Club in the Northeast, and The Caldor Corporation, a mass merchandiser with 130 stores in the Northeast. Sales reached $68.2 million in 1998, garnering $7.5 million in net earnings.

In February 1999 Natrol acquired Essentially Pure Ingredients (EPI), a provider of raw materials to supplement manufacturers. Natrol combined EPI with Pure-Gar and retained the EPI name for that division. In March 1999 Pure-Gar obtained exclusive rights to distribute MelaPure, pharmaceutical grade Melatonin by VitaPure Ltd. in the United Kingdom.

New products in 1999 included several herbal products, such as hawthorne berry, licorice root, damiana leaf, gotu kola, and ginger root supplements. In June Laci Le Beau repackaged and relaunched its line of herb teas and extended the line of Super Dieter’s and Green Tea, adding decaffeinated and flavored products, such as cherry, peppermint, and tropical fruit. Natrol introduced specialty herbal tea products under the Laci Le Beau name, including Throat Care, Heavenly Nights, and Tummy Care. New products for women involved Cran Support for urinary tract health, Woman’s Multiple, and a calcium supplement with magnesium and vitamin D.

A new media campaign in 1999 featured television advertisements with Balbert talking about Natrol’s mission to provide high quality products and services. Outlets included “CNN Headline News” and “Larry King Live,” TBS, TNT, and network TV game shows. A print campaign supported the television spots. Natrol redesigned its logo as well, to attract consumer attention.

Company Perspectives

Natrol will produce the highest quality, most efficacious, superior value, health related dietary supplements that science and nature can deliver. Natrol’s continuous pursuit of this goal will be a standard by which all companies will be measured. Achievement of this goal will be the contribution that Natrol makes to the good health of the community of the world.

Natrol continued to attain additional shelf space with its customers. Eckerd Drug Stores, with 2,900 stores in 20 states, added 60 stock keeping units to its line of eight Natrol products. Target stores added 29 new Natrol products. With 4,000 stores in 24 states, CVS drugstores added 32 products to its line of Natrol products and Pharmor added 43 products for distribution at its 130 drugstores. Albertson’s and other grocery stores expanded their lines as well.

Natrol sought to expand its product line with the acquisition of ProLab Nutrition, Inc. for $29 million cash and stock. ProLab specialized in sports nutritional products for body builders, athletes, and other physically active customers. ProLab produced powdered supplements for weight gain, weight loss, meal replacement, and performance enhancement. With $30 million in annual revenues, ProLab sold its products through gyms and health food stores nationwide as well as in Canada, Germany, and the United Kingdom. The acquisition benefited each company, as Natrol planned to facilitate improvements in manufacturing, product development, and marketing at ProLab, and ProLab planned to assist in the international distribution of Natrol products and in domestic distribution in the sports fitness market. ProLab operated a 32,000-square-foot distribution center in Bloomfield, Connecticut, which Natrol expanded to 52,000 square feet.

In 2000 ProLab introduced the Solutions line of nutritional supplements for women, primarily nutritional powders and power bars under the Awesome brand. Cory Everson, six-time Ms. Olympia winner and renowned fitness expert, represented the brand. To promote the product line, Natrol sponsored a sweepstakes offering a four-day stay at Everson’s Fitness Adventure Camp, held twice a year in Malibu; second prize was $250 worth of Solutions products. Other women’s products introduced by Natrol, under the Natrol for Women line, included soy protein bars and nutritional powders with ingredients beneficial to women, particularly for hormone balance during menopause.

Natrol redesigned and expanded its line of children’s products, the Kids Companion line. The new trade dress involved two cartoon characters, Nate and Kate, dragons designed specifically for Natrol. New nutritional products included multiple vitamins, a supplement to enhance memory in chewable or liquid form, and nutritional bars in peanut butter, blueberry, and other kid-friendly flavors. Natrol targeted the Kids Companion line to upscale, health-conscious parents. Promotional products included tattoos, lunch boxes, and a growth chart, all featuring Nate and Kate.

Dramatic Decline in Interest in Nutritional Supplements at the Beginning of the New Century

The boom in popularity of nutritional supplements during the mid-1990s subsided by 2000, affecting Natrol and the supplements industry as a whole. New studies questioned the validity of health claims of nutritional supplements, particularly St. John’s Wort and Vitamin C. Balbert attributed some of the decline to poor quality products on the market. As new competitors sought to capitalize on public demand for nutritional products, less knowledgeable buyers used lower quality ingredients. For instance, Balbert declined to purchase thousands of kilos of St. John’s Wort when the stock did not meet Natrol’s standards for quality. It was likely that the seller found a buyer in another nutritional supplement manufacturer and that consumers found the products to be ineffective.

Other factors that affected Natrol included a slower consumer market, leading to a high level of product returns from retail stores, triple the norm, and a related write-down of losses. The supplements market matured quickly during the 1990s, with market saturation expanding the availability of nutritional supplements to a wider array of retail stores. Furthermore, a spectacular new product did not appear and draw extraordinary sales as in previous years. In addition, Natrol lost a private-label manufacturing contract.

The fickle nature of consumer trends dissuaded investors; in August 2000 Natrol’s stock dropped to between $2.00 and $2.25 per share, despite the company’s strong reputation in the industry. Natrol reported an increase in sales in 2000, at $87.1 million; much of that increase was attributed to ProLab revenues after its first full year of operation as a Natrol subsidiary. Without ProLab sales of $21.2 million in 2000, Natrol revenues actually declined from $76.8 million in 1999 to $65.9 million in 2000. Natrol recorded a net loss of $5.2 million in 2000 in contrast to a net income of $9.2 million in 1999.

By January 2001, Natrol decided to reorganize the executive offices and to institute budget cuts and several marketing initiatives to improve sales. To reduce excess inventory Natrol initiated a buy-one-get-one-free offer, reduced prices to retailers, issued coupons, and provided value-added purchases.

Natrol continued to launch new products and to seek new outlets for them in 2001. The company introduced GlucoChews for joint health, which replaced glucosamine and chondroitin in the body, as the body makes less of these substances as it ages. Natrol relaunched the Quintessence brand of garlic products. New multiple vitamins under the My Favorite Multiple line included a Complete Care supplement with antioxidants; 50-Plus, specially formulated for joint, vision, and heart health; and My Favorite Energizer. Other products included REMEDIEF for pain management; Dry Mouth Relief; Natrol Complete Balance AM/PM Menopause Formula; and Natrol My Defense, containing patented Immune Enhancer AG. A significant new product, FlexAnew for joint health, became available at more than 25,000 retail stores nationwide within three months of its introduction in June. GNC agreed to carry ProLab sports nutrition products at more than 4,500 stores. In September Natrol initiated a multimillion-dollar advertising campaign to support the sale of new products; the campaign included television and print advertising, as well as public relations activities and special promotions.

Key Dates

1982:: Natrol enters dietary supplements business with a natural weight loss product.
1986:: Natrol introduces its first major product, Ester-C, a highly assimilative form of vitamin C.
1995:: Natrol launches its Melatonin sleep aid product.
1996:: Sales of Melatonin and DHEA, an anti-aging product, help boost total revenues 78 percent.
1998:: Initial public offering of stock funds acquisitions and growth.
1999:: Natrol acquires ProLab Nutrition, a sports supplement manufacturer and distributor.
2000:: Consumer interest in nutritional products begins sudden decline in demand.

Difficulties in the supplements industry were reflected in Natrol’s financial results for 2001. The company recorded revenues of $76.2 million and a net loss of $20.3 million. The loss included a $20 million write-down on goodwill on ProLab as the product line did not produce the financial results anticipated when Natrol purchased the company. The company reduced its debt and improved operating costs, however. In March Natrol launched Natrol Stress Complex, a premium quality sleep aid, a combination of Melatonin, valerian root, the amino acid glutamine, and vitamin E; the company initiated a national campaign for the product in September 2002.