Can Granola Grow Up?

Few people appreciate the promise and the peril of the fast-growing natural-foods business as well as Irwin Simon, the energetic founder and CEO of the Hain Celestial Group. In the decade or so that Simon, 46, has been cobbling together the niche category's leader by buying up dozens of mom-and-pop brands, he has had to deal with all sorts of situations that aren't typically covered in business school. During one of Hain's recent acquisitions, the seller tried to insist that his factories be closed on Saturdays for religious reasons. Then there was the time not long ago when Simon discovered that a firm Hain Celestial Group had just purchased had absolutely no workers' compensation insurance. And soon after Hain made its biggest acquisition ever, shelling out more than $300 million for herbal-tea pioneer Celestial Seasonings in 2000, Simon had to get used to the idea that employees there sometimes came to work in sandals and shorts.

True to its grass-roots heritage, the fledgling, fragmented health-food industry has always attracted its fair share of eccentrics--people who kept their company records in shoeboxes and didn't worry too much about profits, marketing or even good taste. Without necessarily having to lose the unique, even quirky, flavor that has contributed to much of the industry's appeal over the years, Simon thinks he can take natural foods to the next level. By bringing together a top-notch management team with some of the best brands in the field--from WestSoy soy milk and Celestial Seasonings teas to Terra and Garden of Eatin' chips, Health Valley cereals and soups and Earth's Best baby foods--Simon believes healthy food can attain the kind of healthy bottom line enjoyed by its more mainstream cousins.

Though a mere fraction of the retail food pie's more than $500 billion-a-year total, natural foods' estimated $16 billion in annual sales is one of the few bright spots in a generally flat industry. Spurred by the soaring popularity of such natural retailers as Whole Foods and Wild Oats and expanded natural sections at the likes of Kroger and Safeway, as well as rising concerns about obesity, natural and organic foods are growing at 5% to 10% a year, and they could claim 10% of the entire food universe within a decade. "I don't think natural and organic food is a fad. It's a way of life," says Simon, a fast-talking native of Nova Scotia, Canada, who started his career in the U.S. by expanding H??agen-Dazs' chain of ice cream shops in the 1980s. "And no major food company is built for the 21st century."