What do twerking and gluten have in common?

FIRST EDITION THE TRUTH ABOUT GLUTEN FREE: Market Size and Consumer Behavior for Successful Business Decisions David Sheluga, Ph.D., Director, Commercial Insights, Ardent Mills Introduction Our team has been researching the glutenfree marketplace and consumer since 2009. What do twerking and gluten have in common? Answer: both were among the top five most-searched words on Google in 2013. In the past five years, gluten has steadily advanced in consumer online-search interest. It has become the hot topic in food publications and business news. With a market size estimated in the billions and projections of continued growth, this is a market worth close attention. But is this hype or reality? Are sales of gluten-free products in line with the media and public interest? What does it take to succeed in this category? Business decisions require accurate information. Wrong business decisions are made when an opportunity is sized too large or too small. Businesses have to get it right and not be swayed by the hype. And it takes meticulous attention to detail to get to the most accurate answers. Our team has been researching the gluten-free marketplace and consumer since 2009. In 2013 and early 2014, our Commercial Insights group conducted its most comprehensive review of gluten-free sales data and consumer information to date. The goal of this comprehensive research is to provide the most accurate size and trend of glutenfree product sales available anywhere, and to yield the most detailed picture of the gluten-free consumer. Together, these pieces of information can help businesses looking at entering or expanding their offerings in the glutenfree market. The truth about gluten free will surprise you. 1

Part 1: Defining Gluten-Free Specialty Products The Gluten-Free Market Ardent Mills defines gluten-free products as those specialty products that are intentionally directed to the consumer who needs or wants to buy a substitute for wheat-, barley- or rye-based products. Our analysis focused on twenty broadly defined gluten-free product categories, ranging from bread, bagels and baking mixes to pasta, pizza and salty snacks. We included dry grocery, frozen and refrigerated products. Specifically: Products that make an obvious frontof-pack gluten-free claim Products made by companies that show a commitment to offering gluten-free specialty products Ardent Mills analysis was a meticulous, multi-month effort beginning with over 5,500 gluten-free product UPCs, identified from actual sales data from leading sales information companies (see below on methodology). Products were examined one by one, leaving 2,600 that met our criteria for being a gluten-free specialty product. Products eliminated were either inherently gluten free (such as corn meal), did not carry obvious gluten-free package claims or were sold by diversified companies that were not targeting the gluten-free community with their product. Methodology Ardent Mills analysis started with gluten-free retail sales in Nielsen ScanTrack and IRI Food/Drug/Mass Merchandiser stores (FDMx). Both sources were used as a cross-check for thoroughness. We then progressed to the IRI Multi-Outlet (MULO) store universe which captures Walmart, warehouse clubs, dollar stores and military commissaries. Finally, we progressed to the broadest store universe IRI s All Outlet. This captures Internet purchases, health food stores and specialty stores, in addition to the traditional stores captured in the MULO definition. The sales data are not projected; the actual sales data, as provided by Nielsen ScanTrack and/or IRI, are used. Gluten Free is Big. But Not as Big as You Thought. After we analyzed the 2,600 products and their 2012 sales data, we calculated that the market for grain-based glutenfree specialty foods totaled $831.8 million. This is a significant number but far less than other estimates. This number includes all places where glutenfree products could be bought: all grocery, drug, mass merchandising, club, dollar, military, Internet, health food and specialty food stores. Ardent Mills Commercial Insights group confidently believes that this is the most accurate sizing of the gluten-free market and advises that this number is the best estimate for making business decisions. Gluten-Free Specialty Products Annual Sales ($ millions) $1,219.5 $189.6 Millions of dollars $831.8 $106.0 $616.4 $448.5 $93.2 $1,029.9 $320.4 $71.0 $725.8 $62.8 $523.2 $377.5 $257.6 2009 2010 2011 2012 2013 MULO Internet/Specialty Source: IRI Worldwide. Total U.S. All Outlet Store Universe and MULO Store Universe. +40% Average Annual Growth 2009 2013 Other published sources have estimated that 2012 gluten-free sales range from five times larger in the $4 billion range 1 to over $10 billion. 2,3 In our opinion, and based on our analysis of how we define gluten-free products, these estimates neither accurately portray the size of the market nor align with the size of the consumer audience for gluten-free specialty products. Methodology Another important number we ll reference is IRI s MULO store universe, which shows that gluten-free specialty products amassed $725.8 million in sales in 2012. This is a narrower definition of places where gluten free can be bought; however, it is a very useful definition given the depth and granularity of sales data available. At various points in this report, we will quote insights from the MULO store universe. 2

Rapid Growth All Outlet (Total Market) sales boomed to $1.2 billion in 2013. Average annual sales for gluten-free specialty products grew 40% from 2009 to 2012, advancing from a base of $320.4 million to $831.8 million. A 40% annual growth rate is consistent with the uptrend in sales quoted in other published sources. 1,2,3 We have just completed our 2013 gluten-free sales update and remarkably, gluten-free sales have accelerated. All Outlet (Total Market) sales boomed to $1.2 billion, a gain of +47% over 2012. Total sales were $387.7 million higher in 2013 than in 2012. MULO stores grew about as expected, advancing +42% to a little over $1 billion. That s a gain of $304 million over 2012. Unexpectedly, sales in non-mulo outlets which includes Internet, health, specialty, Whole Foods, Trader Joe s and Costco jumped +79%. This sector generated $189.6 million in gluten-free sales in 2013, an $83.6 million increase over 2012. Gluten Free is a Highly Niche Market Gluten-free specialty products are a highly fractured, highly niche market. Out of the 2,600 products we identified, an astounding 87% (over 2,200) have less than 10% ACV distribution in IRI s MULO store universe. In 2012, these 2,200 products averaged only $91,000 in sales per product annually. Although they account for nearly nine out of every 10 gluten-free products sold, they account for only three out of every 10 sales dollars. By contrast, there are only 18 glutenfree products that have over 40% ACV distribution. These gluten-free products have average sales in the $3 million to $10 million range large by gluten-free standards, but highly niche by traditional standards for consumer products. Manufacturers are small too. We counted 403 companies selling gluten-free products in 2012. Of these, 325 (81%) had total manufacturer sales of less than $1 million in 2012. Further, there were only 17 out of 403 companies (4%) with 2012 gluten-free sales over $10 million in IRI s MULO store universe. Gluten Free by the Numbers $831.8 2012 All Outlet Sales (Millions) +40% Average Annual Growth Rate 2009 2013 87% Gluten-Free Products with Less Than 10% ACV Distribution 81% Companies with Less Than $1 Million in Sales 77% Survival Rate from 2009 to 2012 1% Average Size of Gluten-Free Category to Parent Category 2.5% U.S. Households That Are Heavy Buyers Unconventional Survival Rate Historically, a consumer product with low sales is here today and gone tomorrow. Grocers want products with strong turn rates on the shelves, not products with long purchase cycles and low sales. Gluten-free specialty products are an exception. They have proven resilient despite their low sales rates. A staggering 77% of products that existed in 2009 survived and indeed grew into 2012. Only 23% fell by the wayside. The Class of 2009 not only had staying power but also actually grew sales 25% annually from 2009 to 2012. The incredibly high survival rate is a testimony to the commitment of manufacturers that offer gluten-free products, the grocers that serve the glutenfree community and the consumers who commit to a gluten-free diet. 3

Small Compared with Parent Categories As of 2012, gluten-free specialty products were averaging just 1% of the size of their respective parent categories. For example, gluten-free cookies and crackers were 1.3% of the size of Total Cookies/ Crackers. The most successful categories so far are gluten-free pasta (2.7% of the size of Total Pasta) and gluten-free flour (2.6% of the size of Total Flour) within the IRI MULO universe of stores. Some published sources have stated that gluten-free products will be 5% to 10% of the parent category in the next three to five years. 4 However, this is very unlikely given the 1% size in 2012. Part 2: The Gluten-Free Consumer A Small Core of Loyal Consumers Drives Gluten-Free Sales A small core of consumers 2.5% of U.S. households drives gluten-free specialty product sales. They account for two out of every three dollars spent on gluten-free products, representing 68% of the $831.8 million in 2012 gluten-free sales. These heavy core buyers spent $185 per household in 2012, buying an average of 48 gluten-free specialty products per year. 2012 Buyer Behavior: Gluten-Free Specialty Products Buying Frequency Number of Items Purchased Annual Spend Total 2012 Dollars (Millions) % Share of 2012 Sales Light 2 $6 $120.0 14% Medium 6 $24 $146.3 18% Heavy 48 $185 $565.5 68% TOTAL $831.8 100% Source: IRI Worldwide Consumer Household Panel Further Research An additional 5.1% of U.S. households are medium buyers, spending an average of $24 per household in 2012. They account for 18% of the $831.8 million in sales and bought six gluten-free specialty products on average in 2012. The amount they spend is less than 1% of their total annual grocery purchases. They are not committed buyers of gluten-free products. 4

Households Do Not Eliminate Gluten- Containing Products One of the most common assertions heard in the media is that when one person in a household converts to a gluten-free diet, the rest of the household converts. 6 This is only partially true. Based on in-home ethnographies, we found many instances where family members eat naturally gluten-free foods, such as fresh meat, dairy, fruits and vegetables, with their gluten-free family member(s). And we find they sometimes share gluten-free specialty items, such as gluten-free pizza, snacks or pasta. However, our analysis of buying behavior showed that even among those heaviest of gluten-free buying households, they still bought the same number of regular loaves of bread and packages of cereal, pasta, muffins, bagels and baking mixes as the average U.S. household. There was no evidence that heavy gluten-freebuyer households always reduced or eliminated gluten-containing products. In short, the rest of the family did not convert to eating gluten-free specialty products. Annual Pounds Bought of Parent Category Regular, Non- Gluten-Free Average U.S. Household Heavy Gluten- Free Buyer Household Index Pasta 15.1 17.2 114 Muffins 4.8 5.4 113 Crackers 17.7 19.1 108 Bagels 7.4 7.9 106 Bread 45.3 47.2 104 Baking Mixes Roll/ Croissants 12.1 12.3 101 8.2 8.0 98 Flour 18.1 16.9 94 Buns 10.4 9.2 89 Source: IRI Worldwide Consumer Household Panel Don t Be Fooled By Surveys Only 2.5% of U.S. households are heavy buyers of gluten-free products, and only 5.1% are medium buyers. There is a world of difference between avoiding gluten and buying gluten-free products. Many surveys including our early work ask consumers about reducing or eliminating gluten. Those surveys suggest that 20% to 30% of adults are doing so. However, considering our data analysis, only 2.5% of U.S. households are heavy buyers of gluten-free products, and only 5.1% are medium buyers. Buying behavior is very different than surveys of people claiming to be avoiding or eliminating gluten. And business decisions should be based on actual or potential buying behavior. We followed up with consumers who claim to be avoiding gluten for non-medical reasons in our original survey questionnaires. We had in-depth follow-ups with those who claimed to avoid gluten for weight loss, general health or well-being reasons. Something unexpected was uncovered through that process: avoiding gluten does not mean buying gluten-free products. These consumers, who often vaguely knew what gluten was, were reducing bread, sweet baked goods, cookies and other breadrelated products primarily for diet reasons, but had no intention of buying gluten-free specialty products. In all cases, gluten avoidance was simply a by-product of higher-priority diet choices, which centered on weight loss, sensible eating, general health or well-being. General interpretations of mainstream survey results about gluten free are upside down. Researchers are incorrectly concluding that avoiding gluten is the driving motivation among the non-medical-reason gluten avoiders. 7,8 In reality, gluten reduction for these consumers is a secondary by-product of other, stronger behaviors and motivations. 5

Conclusion Implications for the Future Sales are driven by a loyal core of gluten-free buyers. Contrary to commonly quoted sales figures, the total market for gluten-free specialty products was a more modest $831.8 million in 2012. Sales are driven by a loyal core of gluten-free buyers, primarily those with celiac disease or non-celiac gluten sensitivity. This core group, representing 2.5% of U.S. households, will remain (due to the medical necessity) eating gluten free. As diagnosis rates continue to improve, the market for gluten-free specialty products will continue to grow. However, this community is finite in size. Eventually, the market for those with celiac disease and non-celiac gluten sensitivity will reach its maximum. Unlike the Atkins Diet, there won t be a collapse in gluten-free specialty product sales, although there will be flattening of sales in the future. Don t be concerned about so-called fad dieters, who may be avoiding gluten but aren t buying gluten-free specialty products. They aren t affecting gluten-free specialty product sales, up or down. These findings represent critical pieces of the gluten-free puzzle for businesses looking at entering or expanding their offerings in the gluten-free market. Although the market is niche, it s not without opportunity for those who understand the people truly buying glutenfree products and their market potential. Ardent Mills Ancient Grains Dietitians have warned that today s gluten-free foods can be higher in calories and lower in nutrients than their glutencontaining counterparts. Ardent Mills believes the future of gluten-free specialty products is in offering more nutritious products to meet the health needs of core consumers. Among our grain offerings is a wide range of Ancient Grains amaranth, millet, quinoa, sorghum, teff and buckwheat that are naturally gluten free, provide whole grain nutrition and fiber, and are available in a variety of forms, including custom multigrain blends, mixes and a gluten-free all-purpose 51% whole multigrain flour blend. We work with progressive companies to formulate with Ancient Grains to provide more nutritious choices for this market. About Ardent Mills Ardent Mills a new company, born from two industry pioneers: ConAgra Mills and Horizon Milling is a premier flour-milling company whose vision is to be the trusted partner in nurturing its customers, consumers and communities through innovative and nutritious grain-based solutions. Ardent Mills offers the industry s broadest range of flours, mixes, blends and specialty products, customized to meet your needs and backed by unrivaled technical support, customer service and the supply assurance of a coast-to-coast network of 40 community mills, along with bakery-mix and bakery facilities. To learn more about Ardent Mills, visit ardentmills.com. References 1. Packaged Facts (October 2012), Gluten-Free Foods and Beverages in the U.S., 4th Edition, p. 5. 2. Leahy, Bobbi, Sales Director, SPINS (October 2012), Gluten Free Products: Trend or Here to Stay?, Whole Grains on Every Plate Conference, San Antonio, TX. 3. Topper, Amanda, Food Analyst, Mintel International (September 2013), Gluten Free Foods Executive Summary, p.1. 4. Watson, Elaine (November 11, 2013), 5-10% of US Wheat-based Categories Will Be Gluten Free in 3-5 Years, Food Navigator-USA, http://www.foodnavigator-usa.com/markets/boulder-brands-5-10- of-us-wheat-based-categories-are-going-to-be-gluten-free-in-3-5-years. 5. Cureton, Pamela, RD, LDN, Clinical/Research Dietician, Center for Celiac Research, University of Maryland (October 2012), Gluten Intolerance and Celiac Disease, Whole Grains on Every Plate Conference, San Antonio, TX. 6. Strom, Stephanie (February 17, 2014), A Big Bet on Gluten-Free, New York Times, http://www.nytimes.com/2014/02/18/business/food-industry-wagers-big-on-gluten-free.html?ribbon-ad-idx=3&src =me&module=ribbon&version=origin&region=header&action=click&contentcollection=most%20emailed&pgtype=article. 7. Hartman Group (September 2012), Consumer Trend in Self-Diagnosis: The Gluten-Free Conundrum. 8. Watson, Elaine (October 15, 2013), Health/weight-conscious consumers are driving the gluten-free market, not celiac, says Mintel, Food Navigator-USA, http://www.foodnavigator-usa.com/markets/ Health-weight-conscious-consumers-are-driving-the-gluten-free-market-not-celiacs-says-Mintel. 9. Rettner, Rachael (March 11, 2013), Most People Shouldn t Eat Gluten Free, Scientific American, http://www.scientificamerican.com/article/most-people-shouldnt-eat-gluten-free/. KM0614 6 2014 Ardent Mills