State of the Industry: Consolidations and Consolations

September 7, 2008

The era of belt-tightening has begun. According to a February 2008 survey from AC Nielsen (New York City), consumer confidence is dropping in 21 out of 48 markets around the world. Just slightly more than one-third of shoppers think the next 12 months are a good time to buy something they want or need. And more and more consumers are reporting that they have no spare cash left after paying for basic expenses.

The era of belt-tightening has begun. According to a February 2008 survey from AC Nielsen (New York City), consumer confidence is dropping in 21 out of 48 markets around the world. Just slightly more than one-third of shoppers think the next 12 months are a good time to buy something they want or need. And more and more consumers are reporting that they have no spare cash left after paying for basic expenses.

Despite these pervasive fears about the economy, however, health remains a key source of anxiety for shoppers. The survey found that 37% of consumers consider it their biggest or second biggest concern. Other recent data, such as NPD Group Inc.’s (Rosemont, IL) National Eating Trends survey, support that assessment.

NPD’s latest survey results show that more than 70% of Americans are eating reduced-fat foods, and more than 50% are eating whole-grain, low-calorie, or fortified items. NPD also notes that even among consumers who are feeling an economic pinch, the desire for healthy eating remains the most significant influence on food choices, beating out the desire to save money.

“Today, consumers appear to be making healthier food choices,” says NPD vice president Harry Balzer.

Calculations

Two kinds of products that reflect consumer attempts to eat healthier are functional foods and dietary supplements. In the United States, the market for functional foods increased by 42% between 2002 and 2007 when adjusted for inflation, according to a May 2008 report by Mintel (London). Moreover, new functional food launches rose tenfold during the same period.

Dietary supplements are also on the rebound. While items targeting cognitive, immune, and digestive health remain perennial best sellers, herbs also are becoming hot again, with sales in mainstream U.S. channels exceeding $267 million in 2007, according to Information Resources Inc. (IRI; Chicago). The jump in herb sales represents a 7.6% increase over 2006.

One area seeing particularly strong growth is the private-label segment. According to a June 2008 AC Nielsen analysis, U.S. supermarket sales of private-label consumer packaged goods (CPG) grew by 9% over the past 12 months to $50 billion, grabbing a 17.3% share of the market. The Nielsen analysis credits the dynamic growth of private-label CPGs to rising commodity prices, rather than higher sales volume. However, the analysis also singles out the natural and organic categories as growth opportunities, noting that private-label CPGs now account for 17.4% of all organic sales.

Category2007 Sales (in Billions)Growth vs. 2006
Functional and fortified foods and beverages$38.612%
Vitamins, minerals, and herbs$21.77%
Organic foods and beverages$1925%
Natural foods and beverages$14.14%
Natural and organic personal care$7.829%
Natural and organic general merchandise$1.521%

Data courtesy of the Natural Marketing Institute.

Furthermore, new data from the Natural Marketing Institute (NMI; Harleysville, PA) also highlight the strong consumer demand for natural products (see table I). In 2007, American consumers snapped up nearly $103 billion worth of CPGs with a health and wellness theme-a 15% jump from 2006.

“Functional and fortified foods and beverages continue to comprise the largest segment within the health and wellness category,” says NMI president Maryellen Molyneaux. “They represent one-third of all industry sales and are up 12% versus 2006.”

Consolidations

The turbulent economy is bad news for most consumers and many manufacturers. But the bear market is also good news for companies seeking to buy struggling food and supplement operations.

For instance, in June, NBTY (Bohemia, NY) purchased Leiner Health Products (Carson, CA) for $371 million, defeating a bid by rival Perrigo (Allegan, MI). And last year, two large Indian companies took advantage of the cheap dollar to make some high-profile purchases: Avesthagen (Bangalore, India) bought Renaissance Herbs (Chatsworth, CA) and Plethico Pharmaceuticals (Mumbai, India) bought Natrol (Chatsworth, CA). Moreover, in June, Plethico noted that in the near future, it plans to buy an additional supplement company in the United States and another one in Brazil, budgeting a total of $150 for the two transactions.

Even trade associations are hopping onto the consoldiation bandwagon. In June, the Dietary Supplement Education Alliance (DSEA; Sarasota, FL) merged into the tax-exempt Natural Products Foundation (Washington, DC).

“The Natural Products Foundation is an amazing group of industry stakeholders,” says DSEA founder and Natural Products Foundation board member Elliott Balbert. “Given the apparent collaboration of our efforts, it made sense for both groups to establish a formal affiliation. The quality and scope of the foundation’s programs, especially with the addition of programs DSEA pioneered, are well worth the continued support of our industry.”

Consolations

Even with the grim economic forecast, there have been some positive developments. Several companies announced record earnings in 2008.

One example of a silver lining among the cloudy economic tidings is Alticor’s (Ada, MI) Nutrilite brand, which reported on June 24 that it had reaped a record $3.1 billion in sales during the past 12 months. Alticor markets more than 200 kinds of Nutrilite supplements in more than 50 countries through its growing network of Amway and Quixtar distributors.

“This is quite an accomplishment for the Nutrilite brand and the many thousands of Amway and Quixtar independent business owners (IBOs),” says Alticor president Doug DeVos. “Nutrilite has become a recognized brand globally and is on track for continued growth in the years ahead as our IBOs continue to make deeper inroads with our health-conscious consumers.”

DSM (Heerland, The Netherlands) also had a banner year, enjoying an 18% increase in nutritional product sales. Net sales for DSM’s nutrition business reached E652 million in 2008, compared with E553 in 2007. DSM reported a “strong increase” in sales volumes for its nutritional products division, crediting higher growth and market share as well as a “more balanced” supply and demand situation.

Some companies that specialize in secific types of ingredients are also seeing better numbers. Reflecting the rising demand for botanical sales, Draco Natural Products (San Jose, CA) reported a 23% increase in first quarter sales for 2008 compared with the same period in 2007. Draco president Jerry Wu sees intense consumer interest in organic botanical extracts as a key reason for growth.

“The organic segment has grown to more than $15 billion, while more than 40% of Americans now use some form of organic products,” Wu says. “Plus, the health industry as a whole is moving towards organic ingredients in their product formulations.”

Given the current economic climate, consumers and manufacturers understandably feel edgy. However, the positive experiences of companies like Alticor, DSM, and Draco, as well as the encouraging market research from sources as diverse as AC Nielsen, NPD, Mintel, IRI, and NMI suggest that there is reason for optimism in 2009 and beyond.