Health Strategy Spotlight: Case Study: Delavau, LLC

June 1, 2005

Case Study: Delavau, LLC

Business Description: Delavau, LLC is privately-held company based in Philadelphia, PA, which manufactures a wide range of consumer products for the nutritional, functional food and OTC pharmaceutical industries.

Theme: Delavau is continuing to invest in developing proprietary technologies, and it approaches its customers with new products and ideas to improve existing offerings. As a result, the company seems to be evolving into much more than a contract manufacturer.

Background: Delavau has a 150-year history of servicing companies, with success predicated on its ability to not only provide manufacturing services, but also by finding ways to help its customers grow their businesses. Best known for providing vitamins, minerals, herbals and nutritional supplements, the company recently entered the over-the-counter (OTC) pharmaceutical and functional food ingredient business. This requires more intense solid matrix knowledge and technology. Delavau has a stellar list of market leading customers, but it continues to reach out to new target companies, particularly in functional foods it believes can benefit from its products and technologies. The company recognizes that strategically its customers want more from a smaller number of suppliers, and it has executed against this by developing differentiating technology. Essentially it has become more of a “one stop” shop and an R&D extension for its customers. Beyond manufacturing, it helps customers with formulation development and optimization, marketing efforts, such as new product launches, and innovative product solutions. As a measure of its commitment to technical innovation, it has developed and applied for five new patents with over 860 claims. Such technologies have been leveraged to proactively provide solutions to the market, such as tablet size reduction for both chewable and non-chewable products.

Situation Assessment: The nutrition industry supply chain continues to become more complex. New ingredients, technology, products, competition and other elements have led to more difficult decision-making for several marketers. One way to combat this dynamic is to form innovative partnerships with suppliers. While there are over 150 contract manufacturing competitors vying for powder, capsule and tablet work in the U.S., Delavau competes only against a few key players, with the competency to service large clients. The leading finished goods brands have fairly rigid expectations and requirements for their supply partners and their focus is very much on getting help in growing their businesses in areas like new products, product enhancements and process improvements. An interesting dynamic in the area where Delavau competes is the supply hierarchy. Due to its capabilities and integrated offerings, it can do work directly for a major brands, key private label producers or competitors. For Delavau this has created solid but complex and multidimensional relationships with a variety of players. Depending on the situation, Delavau acts as customer, supplier and competitor to the same company. Since it deals with the large brands, many of its customers are direct competitors, so it must balance growing its own business with the needs of its customers. Also, its new technologies become much more valuable to a customer when they have levels of exclusivity attached to it—this is one of the challenges the company faces going forward.

Opportunities: Delavau is focused only on large customers that can leverage and value its capabilities. It allows the smaller brands to be served by other contract manufacturers, where the focus is much more on a basic supply relationship. To that end, Delavau is seeking growth through several avenues: (1) Delivering to current customers; (2) bringing new ideas and improvements to existing customers; and (3) seeking new customers. It is currently headed toward the relatively small group of strong brands that want to improve their market position through better products.

Lessons Learned: (1) Delavau recognizes that its key to success is based on proactively generating solutions. It will miss opportunities if it waits for customers to ask for help, so it must focus on identifying opportunities for its customers and simultaneously bringing them a solution. (2) Delavau’s “solutions focus” requires targeting the correct list of customers. Discipline is needed to concentrate where it has an edge, while passing on opportunities where its skill set isn’t maximized. (3) The retail market continues to experience downward pressure on prices and resistance to price raises. Most customers want improvements, but not at additional costs. In the service industry, strong financial performance is made by having efficient operations and implementing plans to continually lower costs, not just charging high prices. (4) Because of its range of capabilities and complex relationships, extra care must be taken in understanding the sensitivities of Delavau’s customers. Difficult decisions must be made in effectively strategizing its customer base, access to technologies and company growth.