As Echinacea, Ginseng, St. John's Wort and other nutritional supplements come under fire, the recent M&A activity fueled by their popularity may wane. Earlier in February, New York Attorney General  Eric Schneiderman ordered GNC Holdings  Inc. (NYSE: GNC), Target Corp. (NYSE: TGT), Wal-Mart Stores Inc. (NYSE: WMT) and Walgreens Inc. (NYSE: WAG) to stop selling store-brand herbal supplements after DNA tests showed a whopping 79 percent of the supplements at select New York stores did not contain the key ingredient advertised, or were contaminated with other materials.

Laura Nolan, vice president at Little Rock, Arkansas-based investment bank Stephens Inc., advises on consumer and retail deals and is an expert on the better-for-you category. We asked Nolan about how the  scandal will affect transactions in the vitamins, minerals and supplements (VMS) sector.

 

What impact do you expect the New York Attorney General’s investigation have on the VMS industry?

Regardless of what actually happens in terms of regulation, I think the event is clearly a negative for the broader VMS industry. Historically, that has led to weaker demand from consumers, so I think it could be a challenging year. The press has a big impact and can potentially create a lag in sales. It could take as long as 12 to 18 months for the news to dissipate from the forefront of consumers' minds.

 

Before the controversy, how was the industry doing?

January sales grew five percent year over year for the vitamin category, compared with three percent in December. That's a really noticeable uptick, and it seemed like some of the headwinds that faced the industry because of previous media claims against efficacy had subsided. It seemed really encouraging, but the next week there was negative news.

 

Despite the news, are there subsectors that will continue to deliver M&A activity?

Problems from the supplements category won't have a huge impact on the protein category, because they are an arms-length distance away. There is definitely going to be more M&A in the sector, especially in protein alternatives in drinks geared towards women . We go to two industry conferences, Natural Products Expo West and Expo East. I like to look at those shows as an indication of what is trending in the natural and organic space, and protein alternatives for women are one thing I saw. That is going to be an area of focus, and there will be investments around that category. In terms of M&A, we expect to see investment in juices, coconut waters and other fortified waters. There's an interesting company called Vertical Water, based in New York, that makes maple water that tastes like syrup, but it’s light. There are a lot of juices, and as people look to become healthier, this is another area to watch out for. In the broader healthy-living world there are a lot of good ideas, a lot of great growth, and I think it will be an exciting 2015 in healthy-living land.