Adam Ismail03.01.10
Last year was marked by economic uncertainty—a situation that does not typically help the capital markets. In the beginning of 2009, it looked as if the economic world would all but collapse. However, the economy transitioned in the middle of the year to a full-blown recovery. Unfortunately, the year ended with everyone wondering if the economy was headed for ruin once again.
Throughout it all, there was talk that the nutraceuticals industry might be recession-proof. But history tells us that no industry is recession-proof in the long-term. From a capital markets perspective, this is important, because if the economy takes another turn for the worse, there may be a short window for nutraceutical companies to pursue IPOs, mergers or acquisitions.
First, let’s take a look at some of the signs that the industry might not be fully recession-proof. If a recession prompts consumers to spend less money, then, in theory, recession-proof industries will not see increased price sensitivity.
In analyzing sales data for supplements selling more than $50,000 annually in the mainstream retail channels, the results are interesting. In terms of the highest growth products—those growing more than 100% per year—there is a very clear relationship between the price of a supplement and its likelihood of experiencing high growth in the recession of 2008-2009. No product priced more than $30 per unit managed to double its sales, and the more expensive products were, the less likely they were to have doubled their sales.
We have established that rapid growth is sensitive to price, but does that mean high priced supplements are also more likely to decline? It appears so. The lower the price of the supplement in 2009, the less likely it was to have declining growth. Therefore, it appears consumers are more attracted to the lower cost supplements. If the industry was fully recession-proof, would this be the case?
Lastly, it’s also worth looking at the risk of failure and its sensitivity to price. Higher priced supplements are more likely to decline, but are they also more likely to be pulled from the market or can they weather a recession better because of their higher margins? It turns out that you are actually more likely to fail if your supplement is priced low. This seems contradictory to previous data, but taken in context it could mean that fewer players survive with lower margins and that there is actually natural consolidation from competition going on at the low end of the market.
Various publications have reported on how fast private label brands have been growing in the past year. Private label brands are now establishing their own identities that the consumer may trust even more than a standard discount branded supplement.
So if you take all of this data together, it appears the U.S. supplement industry is not recession-proof, but instead may be recession-sensitive. This is important because if unemployment continues to grow and the housing market continues its decline, supplement companies should be planning for lower revenue growth scenarios. All of the data presented here does not mean the industry is in decline, but it can serve as proxy data to predict whether or not the industry will be affected if the recession continues. If a company is looking for investment or to try to sell itself, the window for good valuations might be closing. If a company has access to cash and is seeking acquisitions, a window may be opening to get solid businesses for lower valuations. Keep an eye on unemployment and the housing markets—both are key indicators of whether consumers can afford to pay their debt and spend their way out of recession!