Alex Evans, Manny Picciola & Ian Tzeng, Managing Directors, L.E.K. Consulting04.01.14
Nutraceuticals are increasingly becoming power plays for both Big Food and Big Pharma companies. Driving this phenomenon is the draw of capturing a growing number of consumers who are seeking proactive health solutions to avoid negative pharmaceutical interventions. Wellness initiatives are empowering consumers to seek healthier food options and to view nutrition as key to managing their health.
An aging population and increasing rates of chronic diseases such as hypertension and diabetes are shifting healthcare in North America and Europe from intervention to prevention. This changing consumer behavior has profound implications for food and pharmaceutical companies hoping to capture share of a growing market and diversify their existing businesses.
A Market on the Rise
Over the past five years, the U.S. nutraceutical market has experienced vigorous growth fueled by high consumer demand, product innovation and comparatively low regulatory hurdles. Supplements ranging from probiotics for colon health to olive oil supplements that stimulate bone-producing cells in humans are filling shelves at specialty shops, drug stores and supermarkets. Currently worth $75 billion, according to our analysis, the market grew at around 7% annually from 2007 to 2012, and is expected to grow approximately 8% per year through 2018, with most of that growth in the U.S., Europe and Japan.
Nutraceuticals’ comparatively higher price points are attractive to food companies looking to grow revenue and spread their products to new aisles of stores. Food companies’ expertise in nutrition, taste profile, consumer marketing and relationships with the channel make this expansion an easier pill to swallow.
Pharmaceutical companies are enticed by the significantly lower R&D and regulatory burdens of nutraceuticals compared to their prescription and over-the-counter products. In addition, the ongoing expiration of patents for several blockbuster drugs is leaving gaping holes in their profit and loss statements, while escalating R&D costs, significant development risk and a string of high profile failures has left a shortage of new drugs in the pipeline to fill this gap. Pharmaceutical companies view the segment as an opportunity to grow their product base by leveraging scientific credibility, expertise in clinical research and channel to physicians in the nutraceuticals battle.
Attractive margins have major players from both sides looking at this segment as an engine for growth and acquisition. In 2013, Post jumped into the segment by acquiring Premier Nutrition for $180 million in August and Dymatize for $380 million in December. Pharma companies have also made significant acquisitions, including Reckitt Benckiser’s $1.4 million purchase of Schiff Nutrition’s vitamin supplements, drink mix and nutrition bar business, and Pfizer’s 2012 acquisition of the Emergen-C vitamin supplement brand. In addition, existing nutraceutical providers are consolidating power in this channel. Omega Protein acquired Wisconsin Specialty Protein in February 2013 to increase its breadth in the dietary supplement aisle.
The Challenge
Success in the nutraceutical market is certainly not guaranteed, even for deep-pocketed food or pharmaceutical companies. The market is fraught with challenges for new entrants such as “boom-bust” product lifecycles, fragmented/diverse channels, regulatory uncertainty and extreme product diversity to name a few.
Even basic choices in terms of what broad market segment (premium vs. value) to serve are challenging. As we have seen in other consumer product and service categories, the “hourglass effect” is alive and well in the nutraceutical market.
Thinking about vitamins/minerals/supplements specifically, the bottom of the hourglass is led by FDMC retail giants such as Wal-mart (Spring Valley), Costco (Kirkland Signature) and CVS (CVS brand) with their extremely price competitive offers. At the top, established brands and players such as Jarrow Formulas, Herbalife and Standard Process command a premium and are leaders in their respective channels through their brands’ perceived quality and distribution capabilities. Broadline brands (e.g, Nature’s Bounty) that provide a balance of quality and value are caught in the middle of the hourglass, squeezed from above and below and typically need to resort to aggressive price promotion/buy one, get one offers that drive sales but limit profits.
In fact, Nestle, an early and aggressive Big Food entrant in the nutraceutical space, has recently been a net seller of nutraceutical assets like PowerBar that lie in the middle of the hourglass, instead preferring to focus on the more defensible medical foods sub-segment of the market.
How to Succeed
For the food or pharmaceutical company considering entering the nutraceutical space, we recommend a “first principles” approach to address the opportunity and manage challenges.
1. Set a clear objective. Why do we want to enter the market?
Buy growth
Increase share of wallet with current consumer segments
Access new consumer segments
Access new channels
Increase scale/negotiating power with existing customers
2. Identify clear target customer and positioning. Who do we want to serve?
Premium (top of hourglass) vs. value (bottom of hourglass) segments
Health conditions/need states
Existing customers vs. new customers
3. Differentiate the offer. How are we going to stand out in an already crowded market?
Strength of science
Novel form factor/convenience
Other innovations
4. Tailor M&A program to strategy. Who can help us meet our objectives faster than we can internally?
5. Avoid the common pitfalls. How do we avoid the “$100 million write-off” of a nutraceutical acquisition?
Don’t stifle innovation. Many innovations in this category might not pass the traditional performance hurdles of Big Food/Big Pharma finance departments, so a more flexible approach is needed
Don’t dilute the brand. Leverage distribution, but carefully consider how to best leverage existing promotional vehicles
Organize for success. Strongly consider maintaining as a separate business unit.
L.E.K. Consulting is a global management consultancy that provides a comprehensive range of capabilities around the globe, including strategy, mergers and acquisitions, operations and marketing & sales. For more information: www.lek.com.
An aging population and increasing rates of chronic diseases such as hypertension and diabetes are shifting healthcare in North America and Europe from intervention to prevention. This changing consumer behavior has profound implications for food and pharmaceutical companies hoping to capture share of a growing market and diversify their existing businesses.
A Market on the Rise
Over the past five years, the U.S. nutraceutical market has experienced vigorous growth fueled by high consumer demand, product innovation and comparatively low regulatory hurdles. Supplements ranging from probiotics for colon health to olive oil supplements that stimulate bone-producing cells in humans are filling shelves at specialty shops, drug stores and supermarkets. Currently worth $75 billion, according to our analysis, the market grew at around 7% annually from 2007 to 2012, and is expected to grow approximately 8% per year through 2018, with most of that growth in the U.S., Europe and Japan.
Nutraceuticals’ comparatively higher price points are attractive to food companies looking to grow revenue and spread their products to new aisles of stores. Food companies’ expertise in nutrition, taste profile, consumer marketing and relationships with the channel make this expansion an easier pill to swallow.
Pharmaceutical companies are enticed by the significantly lower R&D and regulatory burdens of nutraceuticals compared to their prescription and over-the-counter products. In addition, the ongoing expiration of patents for several blockbuster drugs is leaving gaping holes in their profit and loss statements, while escalating R&D costs, significant development risk and a string of high profile failures has left a shortage of new drugs in the pipeline to fill this gap. Pharmaceutical companies view the segment as an opportunity to grow their product base by leveraging scientific credibility, expertise in clinical research and channel to physicians in the nutraceuticals battle.
Attractive margins have major players from both sides looking at this segment as an engine for growth and acquisition. In 2013, Post jumped into the segment by acquiring Premier Nutrition for $180 million in August and Dymatize for $380 million in December. Pharma companies have also made significant acquisitions, including Reckitt Benckiser’s $1.4 million purchase of Schiff Nutrition’s vitamin supplements, drink mix and nutrition bar business, and Pfizer’s 2012 acquisition of the Emergen-C vitamin supplement brand. In addition, existing nutraceutical providers are consolidating power in this channel. Omega Protein acquired Wisconsin Specialty Protein in February 2013 to increase its breadth in the dietary supplement aisle.
The Challenge
Success in the nutraceutical market is certainly not guaranteed, even for deep-pocketed food or pharmaceutical companies. The market is fraught with challenges for new entrants such as “boom-bust” product lifecycles, fragmented/diverse channels, regulatory uncertainty and extreme product diversity to name a few.
Even basic choices in terms of what broad market segment (premium vs. value) to serve are challenging. As we have seen in other consumer product and service categories, the “hourglass effect” is alive and well in the nutraceutical market.
Thinking about vitamins/minerals/supplements specifically, the bottom of the hourglass is led by FDMC retail giants such as Wal-mart (Spring Valley), Costco (Kirkland Signature) and CVS (CVS brand) with their extremely price competitive offers. At the top, established brands and players such as Jarrow Formulas, Herbalife and Standard Process command a premium and are leaders in their respective channels through their brands’ perceived quality and distribution capabilities. Broadline brands (e.g, Nature’s Bounty) that provide a balance of quality and value are caught in the middle of the hourglass, squeezed from above and below and typically need to resort to aggressive price promotion/buy one, get one offers that drive sales but limit profits.
In fact, Nestle, an early and aggressive Big Food entrant in the nutraceutical space, has recently been a net seller of nutraceutical assets like PowerBar that lie in the middle of the hourglass, instead preferring to focus on the more defensible medical foods sub-segment of the market.
How to Succeed
For the food or pharmaceutical company considering entering the nutraceutical space, we recommend a “first principles” approach to address the opportunity and manage challenges.
1. Set a clear objective. Why do we want to enter the market?
Buy growth
Increase share of wallet with current consumer segments
Access new consumer segments
Access new channels
Increase scale/negotiating power with existing customers
2. Identify clear target customer and positioning. Who do we want to serve?
Premium (top of hourglass) vs. value (bottom of hourglass) segments
Health conditions/need states
Existing customers vs. new customers
3. Differentiate the offer. How are we going to stand out in an already crowded market?
Strength of science
Novel form factor/convenience
Other innovations
4. Tailor M&A program to strategy. Who can help us meet our objectives faster than we can internally?
5. Avoid the common pitfalls. How do we avoid the “$100 million write-off” of a nutraceutical acquisition?
Don’t stifle innovation. Many innovations in this category might not pass the traditional performance hurdles of Big Food/Big Pharma finance departments, so a more flexible approach is needed
Don’t dilute the brand. Leverage distribution, but carefully consider how to best leverage existing promotional vehicles
Organize for success. Strongly consider maintaining as a separate business unit.
L.E.K. Consulting is a global management consultancy that provides a comprehensive range of capabilities around the globe, including strategy, mergers and acquisitions, operations and marketing & sales. For more information: www.lek.com.
