Health and Wellness Industry Report (Vitamins and Supplements)
The vitamin and supplement (V&S) industry has been known as a large and profitable industry for years.[1] The industry can be broken into five major subcategories and their shares; Vitamins/minerals (38%), Herbal (18%), Protein (15%), Weight loss (10%) and Specialty and sports (10%). The industry has grown to an annual revenue total of USD 30.6B, a steady 52% increase over the course of the last decade. IBISWorld is projecting a steady growth, similar to the last few years, and 3.2% annually. Major consumers of V&S have historically been amateur to elite athletes and bodybuilders, but the demographics are shifting. The positive growth is being pushed by key drivers such as increases in the Healthy eating index, disposable income, aging population, and online sales. The industry is highly fragmented, with no players dominating across market segmentations, making it a prime candidate for M&A in the near future. Largely a laissez faire industry, it has struggled with to regulatory consistency, ultimately resulting in product recall and subsequent consumer distrust. There will be almost guaranteed increases in regulatory scrutiny. The industry is growing and is expected to continue to do so, with expectations of larger players acquiring established brands.[1]
Industry Trends
The Vitamin and Supplement industry includes companies that make consumer goods that can be purchased without a prescription. The industry has continued to grow rapidly over the past five years, benefiting from increased demand from a growing health-conscious consumer base and an aging population.[1] The recent increase in health care expenses have also encouraged consumers to purchase relatively inexpensive dietary supplements to help prevent or alleviate common health complications. Growing disposable income levels and an increasing interest in natural treatments, holistic healthcare and active lifestyles have also boosted demand for industry products. Furthermore, demand from the industry’s core customer base, which includes recreational athletes and fitness enthusiasts, has remained strong during the five-year period.[1]
The most powerful of the drivers being a more health conscious consumer, measured by the Healthy Eating Index (HEI).[2] Current reports have shown a statistically significant increase, of 6% in healthy eating in populations above 21[3], with expectations of a modest but steady prolonged increase in the next five years. As Americans become more aware of balanced nutrition and preventative health, they are more likely to purchase multivitamins and other industry supplements to assist their diets and help prevent future negative health conditions, vitamins being a USD 11B segment of the industry. Today, 70 percent of Americans use the internet to get health information and to help make decisions throughout all parts of the health journey (pre-diagnosis, diagnosis and treatment).[4] This more aware consumer prefers preventative measures over treatment, leading them to vitamin supplementation as a more “hard science” as to take care of their health.
In 2014, Nestle CEO Paul Bulcke, said the firm’s nutrition, health and wellness business is core to their long-term success, commenting on the their strategy, “It is linked with an aging population, it is linked with consumers that are more aware of the nutritional dimensions in their lives.”[5] Much has been made of the way that the aging of baby boomers will transform the U.S. economy. Their sheer numbers will shift spending in healthcare and realign markets, creating considerable new opportunities. The phenomenon is already visible in the V&S business, where purchases have grown by 6% annually from 2007-2012, much of this coming from eye, bone and joint supplements. As of 2012, consumers 65 and older accounted for 36 percent of U.S. V&S sales, a trend that is expected to continue for the foreseeable future.
The wave of health consciousness, coupled with the convenience of online shopping, and boosted demand from a healthier aging community has already lead to growth. As a result, the industry’s contribution to the economy, as measured by industry value added (IVA), is forecast to grow an annualized 12.8% over the 10 years from 2011 to 2021. During the same period, GDP is projected to rise at an annualized rate of 2.1%.[6]
Since the initial capital investments for an online-only startup supplement brand are so low and the demand for vitamins through online and traditional retailers has grown in the past five years, the number of new entrants has increased rapidly and is likely to continue doing so in the coming years. In the past, downstream consumers mainly purchased vitamins and minerals from multi-level marketers or specialty health stores and mass merchandisers. While these physical retail stores remain popular, a rapidly growing share of consumers are turning to online retailers to purchase dietary supplements and other health products. This shift to more widely accepted online purchasing, has made it easier for new brands to enter the market and gain a customer base. The rapid rise in acceptance of buying vitamins and supplements from websites further demonstrates a growing market.
Opportunities/Transactions
For an investment bank, the near future will hold a plethora of opportunities on both buy and sell side. Within the last three years, we have seen pure play companies get acquired and large companies deepen or broaden their category presence, such as Procter & Gamble’s purchase of New Chapter, the Carlyle Group’s purchase of NBTY (Nature’s Bounty), and Pfizer’s purchase of Alacer. Both pharmaceutical companies and consumer packaged goods (CPG) makers have publicly committed to expand their consumer health division, suggesting that the acquisition trend in the space will continue.[7] Non-traditional players are also beginning to explore the category as a possible source of incremental growth.
CPG expansion into the V&S space will likely enhance overall category sophistication as these companies are more likely than traditional VMHS players to find new ways to innovate in both delivery and packaging. Large CPG companies will bring marketing expertise, category management best practices and deep consumer insights that will successfully align products with consumer trends and needs. This will further accelerate the awareness of the VMHS category among a wide range of consumers, contributing to additional sales.
The Carlyle Group’s purchase of one of the larger companies in the industry, NTBY, was done at a total valuation of 3.9B in 2010. Kohlberg Kravis Roberts has stepped in and is in talks currently to acquire NTBY by the end of this year at an undisclosed price. Another brand that was purchased years ago, Optimum Nutrition, was acquired for 350M in 2008 while reporting 180M in sales. In their most recent year, have reported 1.3B in sales[8]. Optimum, more well known for protein and sports nutritionals, is far from the largest brand in the industry. The industry is abounding with middle market sized deals to be had.
Risks
The Vitamin and Supplement Manufacturing industry is currently subject to a low, but rapidly increasing level of regulation from both government institutions and private trade associations. During the past five years, numerous high-profile product recalls, mislabeling claims and other scandals have reduced consumer confidence in the dietary supplement industry, in addition to raising concerns among key regulatory agencies like the Food and Drug Administration. Industry-specific regulation is expected to increase in 2018, which may present a potential threat to the industry through increased compliance costs and higher barriers to entry.[6]
Between 2004 and 2012, more than half of all Class 1 recalls by the FDA were dietary supplements. Sexual enhancement, bodybuilding and weight loss products were the top three problem categories.[6]
There has also been an increased focus in the last few years on potential FDA bans of certain vitamins and supplements that may be harmful, such as a form of vitamin B6 and certain energy supplements. An increasing number of clinical research trials are being done to test the efficacy and long-term health benefits of taking vitamins, some of which have suggested that large doses of certain vitamins may actually increase the risk of cardiac events in elderly people or those with heart disease. While tighter regulations will add a new measure of complexity for manufacturers, it will also provide an opportunity for the good actors to shape the market. Major players should proactively work with regulatory bodies to help set a more stringent bar for supplements. Such regulatory changes and industry-government cooperation will ultimately engender greater consumer confidence in the safety and efficacy of V&S products, thus benefiting the overall market.[6]
Currently, consumer confidence is mixed with 92% asking for more transparency from producers. There is a push against the current efficacy of supplement producers, with 35% of survey respondents stating their position as against supplements due to their reputation for “poor value and not delivering on expectations.”[9]
Conclusion
The vitamin and supplement industry is a growing and active market, not without its own unique pitfalls and challenges. Most of which, can be addressed only by sustained high quality performance. McKinsey and Company believes the growth will be directly tied to the quality of the players remaining in the market. [7] Historical and future trends and outlook look strong for the V&S market. With the high rate of fragmentation and emerging interest from larger Packaged Goods, Pharmaceutical or Private Equity firms looking to enter the market, the middle market M&A dealflow is more likely to be frequent and consistent in the coming years.
[1] Ibrahim Yucel, IbisWorld US IbisWorld US (2017), http://clients1.ibisworld.com.erl.lib.byu.edu/reports/us/industry/default.aspx?entid=490 (last visited Nov 14, 2017).
[2] Ellen Haas, The Healthy Eating Index (1995).
Methodology behind the HEI
[3] Healthy Eating Index (HEI), Center for Nutrition Policy and Promotion, http://www.cnpp.usda.gov/healthyeatingindex (last visited Nov 14, 2017).
[4] Susannah Fox & Maeve Duggan, Health Online 2013 Pew Research Center: Internet, Science & Tech (2013), http://www.pewinternet.org/2013/01/15/health-online-2013/ (last visited Nov 14, 2017).
[5] Will Chu, What’s driving supplement growth? Ageing, fitness & self-care nutraingredients.com (2016), https://www.nutraingredients.com/Article/2016/02/17/What-s-driving-supplement-growth-Ageing-fitness-self-care (last visited Nov 14, 2017).
[6] Ibrahim Yucel, IbisWorld US IbisWorld US (2017), http://clients1.ibisworld.com.erl.lib.byu.edu/reports/us/industry/default.aspx?entid=490 (last visited Nov 14, 2017).
[7] Warren Teichner and Megan Lesko, Cashing in on the booming market for dietary supplements McKinsey & Company, https://www.mckinsey.com/business-functions/marketing-and-sales/our-insights/cashing-in-on-the-booming-market-for-dietary-supplements (last visited Nov 15, 2017).
[8] Pitchbook (2017), https://my-pitchbook-com.erl.lib.byu.edu/profile/124621-12/company/profile#news (last visited Nov 15, 2017). Optimum Nutrition
[9] Statista Survey, What do you think could be said against consuming fitness nutrition products? , Statista, https://www-statista-com.erl.lib.byu.edu/statistics/639605/fitness-nutrition-considered-drawbacks-in-us/ (last visited Nov. 17, 2017).
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