On the nutraceutical battlefield for these new customers are not only pure-play companies but also food and pharma companies that are making significant investments to capitalize on this opportunity. For both food and pharm companies, winning the nutraceuticals market will require building on their relevant expertise while enhancing capabilities outside of their traditional comfort zone.
Food companies will need to exploit their merchandising experience while developing scientific and regulatory expertise. Pharmaceutical companies will need to establish brand presence and credibility while leveraging their scientific and regulatory advantages. Broadly put, the winners in the food versus pharma battle for nutraceutical market share will be the companies that can most quickly and effectively harness the core strengths of both industries; these hybrid products, unsurprisingly, require the best of both worlds.
Food & Pharma Seek New Elixirs
Over the past five years, nutraceutical market growth has been fueled by high consumer demand, product innovation and relatively low barriers to entry. Products as diverse as nutritional shakes for Alzheimer’s patients to vitamin drink mixes for kids retail at specialty shops, drug stores and even supermarkets.
Currently worth around $75 billion, the market grew at approximately 7% annually between 2007-2012, and is expected to grow at roughly 8% per year through 2018, with most of that growth in the U.S., Europe and Japan.
For major food and beverage companies, rising commodity prices have increased costs, while the growing acceptance among consumers of “private labels”(such as generic supermarket brands) has eroded market power and increased the pressure on prices—a recipe for compressed margins. For pharmaceuticals, the ongoing expiration of patents for several blockbuster drugs is leaving gaping holes in their profit and loss statements, while escalating R&D costs, significant development risk, and a string of high profile failures have resulted in a shortage of new blockbusters in the pipeline to fill the gap.
In the past two years, both types of companies have started to stake out positions in the form of M&A activity, as Big Food and Big Pharma attempt to purchase an entry ticket to the nutraceuticals market by acquiring pure-play nutraceutical companies. On the food and beverage side, large players such as Nestlé, Coca Cola and Danone have been particularly active. Nestle has expanded into the adjacent infant nutrition and medical foods segments. Coke recently invested in protein beverage maker Core Power. Danone’s opening maneuvers included the 2011 acquisitions of Britain-based Complan Foods, makers of powdered energy drinks and meal replacements, and Medical Nutrition, which produces medical food to treat malnutrition.
Pharma companies have also made significant acquisitions, including Reckitt Benckiser’s $1.4 billion purchase of Schiff Nutrition’s vitamin supplements, drink mix and nutrition bar business, and Pfizer’s 2012 bid for the Emergen-C vitamin supplement brand. Even personal care products companies are beginning to invest significantly, further validating the segment’s potential. In March of 2012, Proctor and Gamble bought New Chapter’s vitamins and probiotic business, and in August that same year Church and Dwight acquired New Jersey-based Avid Health for its gummy vitamin products.
How to Win
Will food or pharma “win” the nutraceutical segment? Both food and pharma will be challenged to exploit their own natural advantages and close inherent gaps in their existing business models. As they move forward, L.E.K. has identified four universal strategic questions that companies in both industries must answer if they wish to succeed.
1. Where do you play? Which disease areas have dietary factors that contribute to disease risk and progression, and which of these are underserved by current medical approaches?
2. What is your business model? Who are the stakeholders who are likely to drive adoption and use of the nutraceuticals (consumers, physicians, others)? What channel is best able to activate that adoption?
3. How do you promote? How can you drive adoption by developing scientific evidence, leveraging communication ecosystems (patient message boards, social media, etc.), and aligning financial incentives?
4. What capability gaps do you have? How do you acquire the capabilities to succeed?
The graphic below summarizes the important implications for food and pharma companies, as well as prevalent nutraceutical companies and financial sponsors (investors in nutraceutical companies) as they attempt to answer these questions. The nutraceuticals market is booming and successful entrance into this market will not be an entirely comfortable process for either food or pharma; each industry will need to learn the strengths of the other. Companies that can do that quickly and most effectively will win.
L.E.K. Consulting provides a comprehensive range of capabilities around the globe, including Strategy, Mergers & Acquisitions, Operations and Marketing & Sales. For more information: www.lek.com