Strategy Sketchbook: Persevering Today In Nutraceuticals

By Greg Kitzmiller | September 1, 2001

Nutraceuticals spin depends on the angle.

Persevering Today In Nutraceuticals

Nutraceuticals spin depends on the angle.

By Greg Kitzmiller

It was the best of times, it was the worst of times. That could be how to describe the nutraceuticals industry today, as one’s opinion of the market definitely depends on one’s perspective. Nutraceuticals has become a roller coaster ride, with mainstream companies jumping on and off the ride and the ups, downs and sharp turns taking some riders’ breath away. To recap, PepsiCo seems to be plowing headlong into functional beverages with several different ventures. McNeil acquired Viactiv and merged several—but not all—of its nutritionally-focused groups together. Some supplement makers are struggling, some are not and for some there seems to be light at the end of the tunnel. P&G and Wrigley’s are developing functional chewing gum. Altus Food has products in test market. GalaGen has laid off staff but still has great product potential.

On the macro front, there have been articles for nearly a year predicting an economic slowdown and we are starting to talk our economy into one. Many firms have battened the hatches and laid off employees in preparation. Yet, biotech is hot. Newspapers report that some of the richest men in the computer industry are investing heavily in biotech. Such firms as Interleukin Genetics have gained patents and focused on serious diseases with therapeutic and nutraceutical interventions (company press release, 8-1-01). Plant compounds remain hot. Forbes Medi-Tech had licensed its cholesterol lowering plant sterol-based ingredients for food products to Novartis (through Altus in the U.S.) and this summer licensed the ingredient to TwinLab for supplements (company press release, 7-31-01).

But what about the threatened economic downturn? A real economic downturn would mean higher unemployment, possibly inflation, and drops in consumer spending. If that happens, consumers are more likely to spend only on what they view as necessities. As many consumers choose healthier lifestyles their view of what they can and cannot give up will be important to track. Isn’t it more likely they would give up their Starbucks coffee and not their cholesterol reduction plan? At last glance, consumers had not decided to participate in this slowdown, as consumer spending was still strong. The Federal Reserve sees no sign of inflation. So we are living in a strange economy where the proverbial Chicken Little may be having an effect. It is hard to believe the sky is really falling.

This leads to two conclusions in the nutraceuticals industry. One, perseverance to a Darwinian extreme is likely to show which firms emerge as winners. Second, the way of doing business in nutraceuticals may require alliances.

We’ve all heard when times get tough, the tough get going. There is much evidence to suggest that when economic times get tough, most firms cut back on marketing spending and product development, but smart firms do exactly the opposite. Firms that do not cut back but continue to support their future with realistic products are shown to progress. Why would any firm back off if they’ve effectively communicated the benefits of calcium? There will be plenty of reason for effective products and effective communication of those products.

In terms of the second conclusion, what is the preferred method for proceeding in nutraceuticals? For the larger food and beverage firms, acquisition and relaunch have been a pattern, while for ingredient suppliers, alliances havebecome the strategy of choice. GalaGen’s alliances in the food industry have not provided results yet, but it has not yet finalized a deal in the supplement business. Since supplement firms tend to get to market faster and have more freedom to communicate perhaps that would have resulted in quicker revenue generation for GalaGen. Clearly Forbes Medi Tech has used alliances substantially. The key to new alliances is to carefully evaluate what each partner brings to the marriage.

There is certainly a combination of firms now involved in Altus Foods. The original partners were Novartis and Quaker. Presumably Novartis had the science while Quaker had the distribution and marketing. We must now add PepsiCo and Forbes Medi-Tech to the formula. PepsiCo is providing real cost savings and purchasing efficiencies by combining the snack, cereal and beverage business of Quaker with that of Pepsi. In addition, the company has become not only the world’s fifth largest food company but a convenience products giant. If it takes advantage of this with the new Quaker Take Heart brand, featuring Forbes’ Phytrol™, the company could get tremendous distribution in convenience outlets. The group certainly provides a powerful combination with the four firms involved.

As an aside, one purported value of strategic alliances ten years ago was to eliminate competition. Join together with a competitor and create a greater chance at monopoly. The auto industry tried this. We now have Daimler Chrysler with an alliance with Mitsubishi. Now no one is sure what either partner brought to that deal. Tom Peters in his book Liberation Management nearly 10 years ago (1992, Alfred Knopf, New York) pointed out that the consumer rarely benefited from the giants taking monopoly and eventually those giants choked on greed.

So the new value of alliances is synergy. This synergy requires that two plus two now equal five. Evaluating current and future partners means each partner must have a distinct competency that the other does not have. But there is one other important ingredient. Each partner must have the same enthusiasm for the new venture. It is of no value if fictional K-Enterprises has a new natural ingredient that reduces cholesterol and generates excitement from a business development manager at Big Corporation, but the CEO of Big Corporation sees other Big Corp Divisions as far more important. Some alliances we’ve ob­served almost seem to be in that situation.

Alliances mean equal enthusiasm, actual difference in needed competency and total commitment to proceed and prosper. Science with technology, plus money, plus distribution, plus branding ability, plus commitment (and a few other business plan ingredients) may equal success. And let’s not forget the Darwinian survival of the fittest. Perseverance, the ability to change with the market and the consumer, will do much to make success in this business.NW

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