Shareholder Newsletter

February 1, 2007 - Issue No. 38

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DEAR FELLOW SHAREHOLDERS:

LBIX MONTHLY NEWSLETTER

This Newsletter will be longer than most as I believe it necessary to better explain certain things and correct misconceptions that appear to have arisen, particularly since our last quarterly news release.

Before embarking down that path, however, I want to point out that Leading Brands has no legal or other obligation to issue these Newsletters.  We have done so in a responsible yet zealous effort to keep our shareholders apprised of ongoing developments that would not necessarily rise to the level of a news release.  To suggest that this is an attempt to "pump our stock" - as some have alleged – insults the intelligence of every honest and objective reader.  Indeed in past years, when we had a setback or change in course, we stood up and explained it fully in this venue when most other companies might have swept it under the rug.  When things are going well, as they are now, we tell you that too.  I challenge you to find another company that goes to these lengths to inform its shareholders.

When writing each newsletter we seek a balanced way to describe the events that have occurred over the preceding month and to give a flavor for what we are working on for the next.  If you somehow think that we are stupid or deceitful enough to provide misleading information here or otherwise, then I can't possibly comprehend why you own the shares of Leading Brands or acquired them in the first place.  I know that these and the comments that follow do not apply to the vast majority of our shareholders, who I am proud to say that I have come to know over the years and who are a sensible and reasonable lot.  It is unfortunately required for others who appear to have been misled by a handful of malevolent people.

In past generations, most children were told that if they have an opinion they should stand up, express it and deal with the consequences.  The "internet age" has spawned a new creature; one who lurks anonymously in the shadows and publicly posts what might loosely be called information, conjecture, allegations and opinions and then runs and hides only to surface again when the urge – or the opportunity for short term financial gain - moves them.  They often devolve to nothing more than childish and petulant name calling.  It's a lot like the person who is brave enough to scream at you over the telephone but too meek to even address you in person.  I believe that Tony Soprano once referred to them as "Telephone Heroes".

That doesn't mean that there are not others who try and use the venue of a message board or blog to legitimately convey or obtain information and insight to or from well intentioned commentators and observers; but those are not the ones I focus on here.

I have no time for "Internet Heroes".  I have all the time in the World for shareholders who have a legitimate issue to raise, identify themselves honestly by name and ask thoughtful and pertinent questions.  I believe that those who actually know me and who have taken that approach appreciate the resulting dynamic.  That doesn't mean that every question asked by everyone gets the answer that they want.  We do have competitive concerns and there are fair disclosure regulations to consider.  We will not deal with people who persistently push their own agendas, take delight in harassing management, who seem to want to run this business themselves, their way (despite being sadly unqualified) or who appear professional to your face but then attack or question you behind your back or constantly harp on minutiae.  It simply means that those who treat us with respect and as gentlemen will have that courtesy returned.  Those who do not, deserve the silence they receive in return.

So, this Newsletter is written to those of you who care to distinguish between the truth and a lie.  To those who are truly interested in our company's development, not in simply trying to manipulate our share price, frighten our shareholders or undermine our business.  To those who understand that stocks rise and fall.  To those who are proud enough in who they are to stand up and communicate with courtesy and civility.  Not to the nay sayers, the short sellers or competitors who want to try and undercut our success from their perch in the shadows.

Profitability/Cash Flow
It is our long-standing, clearly stated intention to invest our free cash flow behind the growth and development of our proprietary and licensed brands.  There is no secret in that.  In the nine month period ended November 30, 2006 Leading Brands generated cash flow from operations before slotting fees, promotions, discounts and marketing expenses of $5,245,000 US.  That is an amount equal to $0.32 US per share.  We in turn invested the great majority of that sum in our brands.  The result?  For TrueBlue®, 118% year over year sales growth!

Once you factor in that there are certain non-cash expenses that hit our income statement every quarter: depreciation, amortization, stock based compensation charges, etc., the result is that we may post a small accounting loss in a quarter or even a year.  That doesn't mean that we are not generating positive cash flow or squandering the company's money, hanging on by a thread, or don't know how to run the business.  It means that we are investing our resources where we are seeing the best returns.

In our Spring and Summer quarters, when warm weather pulls our products faster than we can or need spend behind them, we have generated positive accounting income.  When volumes naturally slow in the Fall and Winter, we continued to invest to raise brand awareness.  We could have reduced marketing and promotions in the cooler months, just to show a profit, but that would only result in us putting cash in the bank.  The return is better in the brands.

At a certain point, a brand reaches an 'inflection point' where the accumulated investment in marketing and listings pays off faster than one can reasonably spend behind it.  During my tenure at Leading Brands I have personally experienced that phenomenon twice now.  It can come on quite quickly with single serve, 'new age' products and a bit more slowly in more durable, premium brands.  We are not yet there with TrueBlue®, a brand that is barely two years old now.  Continual improvement in per store sell through, introduction of new flavors and brand extensions and a growing listing base are the things that hasten that time.

Product Pricing
I want to assure all shareholders that I have taken Economics 100.  I understand the theoretical interaction of the supply and demand curves, as I have been assured that many of you do as well.  We all seem to appreciate that lower prices usually mean higher sales volume.  I want to underscore the word "usually".

The pricing of any product is a complex issue.  Would Mercedes® sell more S Class sedans if they were $20,000 each?  Maybe, but they might not result in as much gross revenue and certainly wouldn't generate as much contribution.  I also trust that the brand would be worth decidedly less as a result.  How many of you believe that buying premium gasoline is actually giving you some benefit over regular?  How many of you are dubious about it but buy it anyway just to be safe?  Which of you pump premium gas into your SUV without much compunction?  Would people buy more Red Bull® if it was $0.50 a can versus $1.99?  Would RedBull® have even become a successful brand if it was priced that way?  Is a Rolex® really worth more than a Breitling®?

TrueBlue® is a premium brand.  It is not primarily apple juice. It is not cranberry or grape juice. It is first and foremost blueberry juice.  In fact, each 64oz bottle contains the juice from one pound, or 16 oz, of blueberries.  The next time that you are in your grocery store, take a look at the price of a small basket of blueberries in the produce aisle.  I'd bet that the price ranges from $3.99 to $5.99 per basket.  That basket is probably 4 oz in size.  It takes 4 of those baskets to make a 64 oz bottle of TrueBlue®.

Compare the price of that 64 oz bottle of TrueBlue® against that of a vente special latte at your local Starbucks®, or a 16 oz bottle of POM Wonderful®. Compare TrueBlue® to the price of other blueberry products out there - not the ones that are 90% apple juice either. Look at what it costs you to buy your favorite luxury magazine at the newsstand these days.  Are there cheaper products in the juice aisle?  Certainly.  Are there cheaper cups of coffee?   Sure there are.  Are there any better blueberry juice brands on the market?  Emphatically no.

What we as a company will continue to do is to improve the publics' awareness of the benefits of blueberries and get them to discover the great taste of TrueBlue®.  It's no more complicated than that.  You can buy all the cranberry juice that you want at $2.99 a bottle or 2 for $4.00 on discount, but I challenge you to get your kids to drink it.  When you have a few spare moments, just try to intelligently recite the health benefits of apple juice to anyone.

We have created a premium brand with TrueBlue®.  Premium brands have more value than generic, price driven brands.  We intend to protect that position jealously.  If you only buy TrueBlue® for its price, you will never buy it for any other reason.  We are better to spend the difference on sampling people to get them hooked than to try and suck them in by an artificially low every day price point.

To the consumer, pricing issues are further complicated by the pricing strategies employed by retailers.  They generally fall into two categories: (i) "High/Low" and (ii) "EDLP" or Every Day Low Price.  You can probably picture which of your local grocery chains fall into which scheme.  High/Low retailers show a front line High price for a product and then rely on price and volume discounting to deliver a corresponding Low.  (P.S. There must be a 'high' for there to be a 'low'.)  EDLP retailers try to maintain a generally lower every day price than the High/Low competitor.  The EDLP chains also have a tendency to work off lower profit margins themselves, which in turn allows the average price of the product to be reduced further on the shelf.

With larger chains, this process can become even more convoluted by the imposition of regional pricing strategies.  Some areas of the country may be more affluent or the cost of doing business there more expensive. That region may price the product higher than other areas of the same chain.  Some chains may not have perfect control over all their stores or regions and all price changes may not make their way to all stores.  Adding to the confusion, some chain banners are not even all owned by the same parent corporations.  Albertson's® is a recent example of this.

Some brands that we compete against have no pricing power.  They have been allowed to evolve to the point where they are simple commodities.  After 70 years of selling a not-so-good-tasting product with few health benefits, cranberry juice has become one of those.  Private label cranberry juice tastes the same as the name brands.  It has the same ingredients. It's a lot like the 'Cola Wars' of the 1990s.  Who was the winner there?  Not one or the other of the major soft drink companies.  Certainly not private label CSDs.  Energy drinks were; selling at 4 times the price per ounce.  Loss of pricing power creates long term, serious problems.  It is not something that we strive to emulate.

As an aside, I believe that you are going to see the price of other juice brands start to come up to TrueBlue®.  In the main, they will ultimately fail to stay there, but that is of little consequence to us. Tropicana® just announced a 12.5% price increase due to the recent freeze of the California crop. Ocean Spray's® broad price discounting has slowed of late.  Their tactics are simply not sustainable in the long run and it is a game that, regardless of its seeming appeal to consumers, we are not going to play.

Will we promote our product on temporary sales?  Sure we will.  Will we cannibalize the brand by making it another 'me-too' price product?  Not on your life.  If that is what you think is the best consumer product strategy, I can happily give you a list of companies that you might otherwise prefer to invest in.

The Store Shelf
I am officially sick and tired of hearing that some Internet Hero wrote that he walked into his local grocery store, saw that TrueBlue® was fully stocked and concluded that the product wasn't moving.  The other self-induced panic scenario usually arises when someone sees a flavor of TrueBlue® missing from the aisle where he/she was sure it had been just a week before.  Yet another is when someone finds one flavor was on sale when the others were not.  That – according to them – must mean that the flavor obviously isn't selling or is about to be de-listed.

It's not that extra 'eyes in the market' aren't helpful to us as management.  We actually appreciate getting constructive feedback as we obviously can't be everywhere, all the time.  It is the wild and rash conclusions that are reached and the sometime outright hysteria that erupts from spotty, isolated observations that is disturbing.   When I've had some of the postings/commentaries sent to me I can in most instances readily conclude one of two things: first, that the person has actually visited the store and has encountered an easily explainable, normal condition or second, that the person making the statement has never even been in a grocery store, no less actually stared at TrueBlue® on the shelf, and has fabricated the event, likely as a scare tactic.

Let's examine several possible scenarios and practical answers:

1. TrueBlue® shelf space is full: Is the brand not selling, or could it be that the clerk has just re-stocked the shelf?
    
2. TrueBlue® is not on the shelf at all: Could it be that it has sold out faster than the store's order cycle contemplated and rather than leave the space empty the clerk has pushed other product in its place?  Did the observer simply miss the product on a crowded shelf or visit the wrong aisle?
    
3. A particular flavor of TrueBlue® is not on the shelf any more: Could that flavor have sold faster than the others?  Did the clerk improperly fill the order last time so that flavor was accidentally missed?  Is it possible that certain flavors sell better in some areas due to ethnic preferences and other demographic factors affecting a particular store location?
    
4. One flavor is price discounted and the others are not: Could it be that the store ordered too much of that flavor for any number of reasons, has a resulting imbalance of stock and now wants to move it through?  Could it be that Leading Brands has found that in that particular market a certain flavor not listed sells better than another that is and wants to replace it quicker so has agreed to discount to accelerate that process?
    
5. The store manager has some bland, less than enthusiastic comment about the brand: Could it be that in a store stocking tens of thousands of individual brands that the manager doesn't have a perfect grasp on exactly what is selling how fast?  Could it be that the demographics of that store location are less favorable for TrueBlue® than most others?  Is it possible that the store manager was busy and was just blowing you off?

The supply chain from brand owners to the store shelf can sometimes be more complex than you might imagine.  Smaller chains and regions of some larger ones sometimes employ a third party wholesaler to manage their store replenishment function.  The brand owner secures the listing at the grocery chain and then has to duplicate that process with the specified wholesaler.  The wholesaler then orders a certain amount of product from the brand owner, ships it to the stores and awaits re-orders.  If the brand is pulled from the store faster than the store or wholesaler anticipated there is a time gap when either the wholesaler or the store might be out of stock.  That process can repeat itself until the order flow becomes more predictable.  The customer may see a stock out as a result.  There is little that we as the brand owner can do to remedy that situation but it is a sign of the success of the brand, not otherwise.  It is just not a perfect World.

There are countless other scenarios and equally reasonable explanations.  The fact is that isolated examples like these - even if reliably reported and not fabricated by a short seller or competitor trying to hurt the company - are of little help to truly understanding the health of a brand.  They are more often misleading than not.  The simple truth is that sell through of TrueBlue® continues to increase.

The Listing Cycle
Grocery and convenience chains review most categories in an annual cycle.  For juices, that is usually either in the late Fall, Winter or early Spring.  As I've said before, it takes on average 12 weeks from the time we obtain a new listing, finalize all the appropriate documentation and ship the product until it is ultimately placed on the store shelves.  As you will have noted, very few new listings are completed by us in the second and third fiscal quarters.  Most of that activity has just gotten under way now for 2007.

Plant Consolidation
In retrospect, it appears that I did a poor job of communicating the basis for the decision to consolidate our plants and the positive impact of that move. By the way, the decision to undertake the consolidation was made on the eve of the release, not held back and hidden from shareholders as some have suggested.  Regardless, it is a positive move for the company.

Without going through all the particulars again, the upshot is that we are moving our Vancouver bottling line, which sits in leased premises, to Edmonton, where we own the land and building.  All of our bottling business and customers will move to Edmonton with the line.  The net annual saving to the company from reduced overheads and efficiencies should be approximately $1,500,000 US, with no reduction in capacity.  That means that in each upcoming year an additional approximately $1,500,000 US should be available for us to spend behind our brands.  That benefit will be most significantly felt in the 3rd and 4th quarters of ensuing years.  I fail to understand why people put so much stock in our leaving a rented building.

Eastern Co-Packing
I recently commented that we had as yet not started bottling TrueBlue® in the East because we had been unable to assure ourselves that our prospective co-pack partners would properly protect our intellectual property.  Once again, some Internet Hero called me a liar and speculated that our reason for not proceeding faster was that slow TrueBlue® sales did not require us to produce outside our own plants.  My explanation - he or she claimed - was a false one.   Sorry, but wrong again.

Stock Based Compensation Expense
We want to be able to motivate managers to act like owners.  We do not have significant cash bonus plans because they are often difficult to assess in retrospect and can spawn behavior that does not advance the company's overall plan.  Historically that has meant issuing a meaningful number of stock options.  The Black Scholes model which is used to determine the financial statement impact of stock options is dependant on something that has little or no bearing on the company's performance: the volatility of the company's share price.  The more volatile, the greater the charge.  It is perhaps the most nonsensical model that one could imagine, but that is what we have to live with.

We are in the midst of assessing how we might find other means of motivating our people without recourse to stock options, but so far each suggestion has had a material drawback.  We have as yet not settled on any specific alternative but have slowed down the use of options until we do.  We have also been able to structure certain option grants so that the stock based compensation charge will reduce significantly in this and upcoming quarters.  Please stay tuned as we work through this complex issue.

Marketing
There are many ways to market.  We have found none better or more cost effective than a combination of sampling and Public Relations.  Periodic media campaigns are helpful to support those initiatives.  To give you a flavor of our many PR successes I refer you to the following link: http://www.trueblueberry.com/en/news/video.asp.  There you will find a segment from the nationally syndicated TV program Daily Buzz that airs weekday mornings in 141 US markets.  This TrueBlue® piece was televised just before Christmas 2006.  We will keep this link open until Sunday, February 4, 2007.

Finally…
No one more than me is disappointed by the unjustified drop in our share price, but we as management are doing no more or less, or anything different, now than when the price touched $7.00 US a share last Summer.  Frankly, the company's fortunes continue to improve each quarter.

It is difficult enough in this economy to find intelligent, dedicated and hard working professional managers who every day put the company's interests before their own. They do not deserve the type of irresponsible and baseless attacks that have been foisted upon them in the past couple of months by several people who I surmise wouldn't have the courage to even address them in person.  To the extent that you, as responsible shareholders, encourage or give voice to them, you undermine our legitimate efforts.  I would greatly appreciate if you would think twice about this in the future. 

Sincerely,
LEADING BRANDS, INC.

Per:

Ralph D. McRae
Chairman & CEO

Disclaimer:
Certain information contained in this press release includes forward-looking statements. Words such as “believe”, “expect,” “will,” or comparable terms, are intended to identify forward-looking statements concerning the Company’s expectations, beliefs, intentions, plans, objectives, future events or performance and other developments. All forward-looking statements included in this press release are based on information available to the Company on the date hereof. Such statements speak only as of the date hereof. Important factors that could cause actual results to differ materially from the Company’s estimations and projections are disclosed in the Company’s securities filings and include, but are not limited to, the following: general economic conditions, weather conditions, changing beverage consumption trends, pricing, availability of raw materials, economic uncertainties (including currency exchange rates), government regulation, managing and maintaining growth, the effect of adverse publicity, litigation, competition and other risk factors described from time to time in securities reports filed by Leading Brands, Inc.