The Gluten-Free Craze Is Sweeping America

Gretchen is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

America loves its fad diets, and now many consumers have latched on to gluten-free living. How many people are buying gluten-free products? Up to 3 million people need a gluten-free diet, but some estimates suggest that up to 35 million people are going gluten-free, not for health issues but as a new weight-loss plan.

Gluten-free eating isn't a lifestyle choice for many people, it's a daily requirement to combat celiac disease. Shopping for gluten-free products is now easier thanks to the USDA's decision that standardizes labeling on products that claim they're gluten-free.

About 5% of products labeled as gluten-free won’t meet the new USDA standard. That was one concern voiced by the executive vice president at Boulder Brands (NASDAQ: BDBD), who announced the company’s delight about the new standard. It’s been clear for a few years that large-scale food companies want to enter the segment in a bigger way.

The USDA is careful to weigh regulation changes before jumping and this decision took six years. The change in gluten-free labeling, a win for some companies in the niche-food industry, is a tacit acceptance that one size does not fit all and more regulation is needed to ensure consumers' health safety.

Boulder Brands is a staple in gluten-free

Boulder Brands' Glutino and Udi's are two food lines that fall well below the new requirement that limits gluten-free products to less than 20 parts per million of gluten (.002% of gluten). The company provides the most well-known brands and some of the most extensive offerings in gluten-free foods. It’s no wonder that bigger companies want part of the market, as they’ve watched the success of Boulder Brands in recent years.

The company reported second quarter net sales of $110.7 million, up 45.7% from same quarter 2012, when net sales were $76 million. With strong growth from both Glutino and Earth Balance, and having acquired Udi’s in July 2012, Boulder reported an increase in organic net sales of 11.9%, compared with second quarter 2012. This figure assumes that Boulder owned Udi’s for the whole second quarter of 2012.

Boulder will see continued increases in revenue, as the gluten-free industry is beginning a strong ascent in popularity. Market research in the fall of 2012 reported that the gluten-free market in the United States was worth $4.2 billion in 2012, and predicted that figure will reach $6.6 billion by 2017.

Big companies

The new USDA policy is an important part of the recent trend among large food providers geared toward refocusing products on specific health needs. There’s good reason for smaller companies like Boulder to worry about increasing competition.

General Mills (NYSE: GIS) already offers Betty Crocker gluten-free brownie mix, among others, and Bisquick Gluten-Free Pancake and Baking Mix. General Mills isn't known for jumping into small-production segments without cause. The big positive for revenue in gluten-free foods is the high price tag for each item. For example, one loaf of Udi's gluten-free white sandwich bread averages around $6.25, and most products cost about two to three times regular product prices. Many big companies, including Heinz and General Mills, list all their gluten-free products on a special page within their website, a nod to rising attention from consumers.

At General Mills, net sales were up by 8% to $4.43 billion, with new businesses adding 6 points of net sales growth. Outside of new businesses, net sales went up by 2%. The company’s 2014 plan includes a number of new gluten-free products, including more mixes from Betty Crocker and Vanilla Chex. The company reformulated several Chex varieties to gluten-free several years ago, including Honey Nut, Chocolate, Cinnamon, Rice, and Corn Chex.

A trend among big companies is to test products and announce which are gluten-free. For example, Zatarain’s has tested and verified that 20 of its rice mixes are gluten-free. And its parent company, McCormick (NYSE: MKC), has a specific section on its website dedicated to discussing how it lists gluten vs. gluten-free products.

McCormick grew its net sales by 2% in the second quarter with industrial sales down slightly and 4% growth in consumer sales. It recently acquired Wuhan Asia Pacific Condiments in China, and is following a growth pattern into markets worldwide. With the WAPC addition, it expects sales growth of 4% to 6%. The company foresees a near-future turnaround in industrial sales and continued growth in consumer sales.

Fast food restaurants are also trying to gain a foothold in the gluten-free industry, notably P.F. Chang’s China Bistro and Subway. Some bloggers have written about concerns that food coming from the unseen kitchen at P.F. Chang’s wasn’t verifiably gluten-free, or was placed on the wrong plate (different plates are used for gluten-free meals there), although Subway received high marks for handling gluten-free meals separately from other foods, under the customer’s watchful eye. As more dieters cut out gluten, expect to see more restaurant menus with gluten-free sections.

All diets fade in popularity

In the coming months, I suggest investors watch companies like McCormick for new products and increased performance in the world market and industrial sector. Companies that can reinvent their image for today’s health-conscious consumer will be big winners in the U.S. market.

As the gluten-free dieting trend continues, big companies like General Mills will add more products and change labeling on their present products. Many of the currently available products come from small, private businesses, but expect a lot of elbowing and shoving as the giants try to cash in. Like other clean-living diets, such as the Atkins and paleo diets, gluten-free foods and higher protein foods will be trending in the next few years. If prices don’t drop on these foods, the diet’s popularity will wane and America will move on to its next diet fad.

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Gretchen Stone has no position in any stocks mentioned. The Motley Fool recommends McCormick. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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