RecessionaryOpportunities

A bad economy seems to be good for supplements, and to a lesser extent functional foods.

ByAdam Ismail

Negative economic news aside, I’ve decided to focus this month’s column on the positive and where the opportunities lie.

The good news for the nutraceuticals industry is that the current recession seems to have pushed consumers to buy more supplements. This is happening for two reasons: self-medication and increased interest in prevention, both to avoid doctor visits and expensive healthcare bills. An early April New York Times article highlighted this trend. It featured a consumer with a cold, who typically would have driven to her physician for diagnosis and treatment. But because she had lost her job and no longer had health insurance, she was buying echinacea in the hopes that it would get her over the cold faster. In addition, instead of spending more than $50 per month on prescriptions, she had managed to switch to supplements for her chronic conditions and was paying only 12% of the cost of the prescriptions.

These types of stories are more common than you think in today’s market. In fact, retail chains across the board have noticed new consumers seeking out supplements. Vitamin Shoppe, for example, reported that new customer traffic is up 20% in the last six months and is outperforming previous recessions. Supplements, particularly fish oils and multivitamins, are showing up in endcap displays in large retail chains like Wal-Mart, Costco, Sam’s Club, Walgreen’s and others as a means to attract new customers.

Interestingly, consumers are not acting the same way when it comes to functional foods. A recent study carried out by Multi-Sponsor Surveys found that 80% of consumers had cut their food spending. As a result, a majority felt they were eating less healthy. Nearly all functional foods are premium-priced, so when consumers cut back on food spending, functional food sales can naturally be expected to stall.

The way to succeed in functional foods in this economy is to focus on key health benefits, giving consumers alternative healthcare options. The success of the Activia brand is a great example of this. The digestive health benefits are clear from the advertising, and the product is seen as solving a problem for its target consumers, where the alternatives can result in much higher healthcare costs.

While hard data on dietary supplement performance are scarce, sometimes a good indicator is the stock market. But here the evidence is actually surprising. By and large, publicly traded supplement stocks are actually at similar levels to where they traded in the middle of November when the steep market crash stopped. During that same period, the S&P 500 has grown 10%, so supplement stocks are actually underperforming the market, even though it is supposed to be a bright spot. Out of a general basket of supplement companies, including NBTY, Schiff, Nutraceutical Corp, Reliv, Nutrition 21 and Usana Health Sciences, only one had a positive return, and even that did not outperform the S&P. In this case, it seems, the market may not know all.

Actually, this may mean that there are good buying opportunities in supplement stocks (focus on the positive, remember?). The price-to-earnings ratios of these companies are at historic lows, indicating that they may be undervalued if they can continue to keep pace with the rest of the industry. So if things actually are as positive as they appear to be with the supplement industry, then a longer recession may continue to benefit supplement companies and may actually make these stocks even more attractive, particularly if the changes that are happening in consumer behavior are sustained after the economy recovers.