Are we at the start of a major wave of consolidation in the nutraceuticals industry? A number of the largest companies in the industry have been actively buying attractive brands and businesses. Many of these acquisitions have been on the ingredient side of the industry, and clearly we are seeing a race for greater scale in this sector. However, the dynamics of the consumer side are different and it remains to be seen if some key acquisitions will kick off a wave of consolidation.
Companies from all industries have held record levels of cash on their balance sheets for the past few years, and as the economic recovery looks like it is gaining steam there is pressure from shareholders to put that cash to use. Schiff used its cash to buy up brands in fragmented categories that had high growth, like probiotics and immunity. Its private equity backers believed it had proven with MegaRed that it could take mid-level brands into leading positions in fragmented categories and were willing to invest in that expertise. This of course made Schiff an attractive target itself. Bayer Healthcare looked poised to acquire the company for $1.2 billion before Reckitt Benckiser stepped in with a $1.4 billion offer.
Other large companies have been buying in the dietary supplement space too, including Procter & Gamble (P&G), Church & Dwight and Wyeth in recent years. Like Schiff, these companies see similar opportunities in dietary supplements. They tend to be brand-marketing powerhouses, seeing a category that is still fragmented and has only a couple of leading brands. P&G already had a small probiotic brand, Align, when it acquired New Chapter. However, buying into a new consumer products category for its business is not that attractive with a single mid-sized acquisition. P&G will likely be courting other brands that can help augment the portfolio it is building. The same holds true for Church & Dwight, which makes brands like Arm & Hammer and OxiClean. Its acquisition of Avid Health was more or less unrelated to its core business, so expect it to buy more than just the one company.
So if you are a small- or mid-sized dietary supplement manufacturer, this should be leading to some serious strategic discussions within your organization. First, these large companies have the ability to change the way the game is played. They bring with them significant operational and branding expertise. As the industry continues to wrestle with Good Manufacturing Practice (GMP) compliance, these companies have very sophisticated manufacturing operations from the chemical and pharmaceutical industries that help make GMP compliance easy for them. In addition, brand loyalty in the supplement space does not really compare to other consumer product categories, so brand powerhouses coming into the category could lead to smaller companies being pushed off retail shelves if they don’t build brand equity.
It is possible for supplement companies to survive alone, but they should consider whether or not they can compete with large companies in a more consolidated industry. This may require merging with a few other companies to gain some scale, investing more in brand-building, or even bringing more manufacturing in-house and under your own control. Alternatively, it could also mean that a company’s brands may work best under new owners who have more capital and a larger footprint. There are certainly a number of supplement companies with sales in the $30-100 million range that could be good parents for smaller brands with high growth potential. In Europe, we are already starting to see some of this consolidation where the market is more fragmented regionally. Companies like Axellus and Walmark have been buying mid-sized brands in countries that strengthen their overall European footprint.
It remains to be seen whether the recent investments by big consumer products companies will lead to a wave of consolidation in the industry. However, it is clear these companies have the power and skills to change the dietary supplement business, and the brands that need to prepare the most are small- and mid-sized companies. Ultimately, this will just be another chapter in the evolution of this industry.
Editor’s note: This is Adam Ismail’s last column for Nutraceuticals World. As a trusted expert in the field, his insights and opinions are held in the highest regard. We thank him for his valuable contributions.
Adam Ismail is the executive director of the Global Organization for EPA and DHA Omega-3s (GOED), Salt Lake City, UT. He previously worked in business development, mergers and acquisitions, and business strategy at Cargill Health & Food Technologies, Health Strategy Consulting and Health Business Partners. He can be reached at firstname.lastname@example.org.