L E K . C O ML.E.K. Consulting / Executive InsightsEXECUTIVE INSIGHTS VOLUME XV, ISSUE 12INSIGHTS @ WORKTMThe result is a ...
EXECUTIVE INSIGHTSL E K . C O MINSIGHTS @ WORKTMprofit and loss statements, while escalating R&D costs, signifi-cant devel...
EXECUTIVE INSIGHTSL E K . C O MINSIGHTS @ WORKTML.E.K. Consulting / Executive InsightsIn the past two years, both types of...
EXECUTIVE INSIGHTSL E K . C O MINSIGHTS @ WORKTMPage 4 L.E.K. Consulting / Executive Insights Volume XV, Issue 12How To Wi...
EXECUTIVE INSIGHTSL E K . C O MINSIGHTS @ WORKTML.E.K. Consulting / Executive Insights4. What capability gaps do you have?...
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You Are What They Eat: A Guide To Winning the ‘Nutraceuticals’ Market

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The U.S. nutraceutical market has experienced rapid growth over the past five years. Fueled by consumer demand, product innovation and low regulatory hurdles, the market is currently worth approximately $75 billion and is expected to grow at roughly 8% per year through 2018.

This fast-growing product segment is already blurring the traditional boundaries between food and pharma. Products as diverse as nutritional shakes for Alzheimer’s patients to vitamin drink mixes for children are lining the shelves at drugstore, specialty shops and even supermarkets.

Both traditional food and beverage and pharmaceutical companies see an opening to compete but high margins and low barrier-to-entry alone are not enough to capitalize on this rapidly growing opportunity.

In this new Executive Insights, L.E.K. Consulting proposes that winners in the food versus pharma battle for nutraceutical market share will be those companies that can most quickly and effectively harness the core strengths of both industries; these hybrid products, unsurprisingly, require the best of both worlds.

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You Are What They Eat: A Guide To Winning the ‘Nutraceuticals’ Market

  1. 1. L E K . C O ML.E.K. Consulting / Executive InsightsEXECUTIVE INSIGHTS VOLUME XV, ISSUE 12INSIGHTS @ WORKTMThe result is a large, fast-growing product category that isalready challenging the traditional boundaries of food andpharma. Unlikely partnerships are being formed, and significantinvestment is being made by food, pharma and existing playersto capitalize on this rapidly growing opportunity. Winning thenutraceuticals market will require food and pharma compa-nies to adopt strategies that build on their relevant expertisewhile enhancing capabilities outside of their traditional comfortzone. Food companies will need to exploit their merchandisingexperience while developing scientific and regulatory expertise.Pharmaceutical companies will need to establish brand presenceand credibility while leveraging their scientific and regulatoryadvantages. Broadly put, the winners in the food versus pharmabattle for nutraceutical market share will be the companies thatcan most quickly and effectively harness the core strengths ofboth industries; these hybrid products, unsurprisingly, requirethe best of both worlds.Food and Pharma Seek New ElixirsOver the past five years, the U.S. nutraceutical market has expe-rienced robust growth fueled by high consumer demand, prod-uct innovation and relatively low regulatory hurdles. Productsas diverse as nutritional shakes for Alzheimer’s patients to vita-min drink mixes for kids have begun to fill shelves at specialtyshops, drug stores and even supermarkets. Currently worthYou Are What They Eat: A Guide To Winning the ‘Nutraceuticals’ Market was written by Ian Tzeng, Managing Director in L.E.K.’s Life Sciences Practice andAlex Evans, Managing Director at L.E.K. Consulting.Facing an aging population and increasing rates of chronicdiseases such as hypertension and diabetes, healthcare in NorthAmerica and Europe is shifting its emphasis from intervention toprevention. A growing number of consumers are taking notice;their changing behavior will have profound implications forboth pharmaceutical and food companies. For many Americansand Europeans, the prescription pad no longer casts the spell ofrestorative promise it once did, and they are seeking proactivehealth solutions to avoid negative pharmaceutical interventions.Wellness initiatives are also empowering consumers to seekhealthier food options, and view nutrition as key to managingtheir health.One battlefield for these new customers is a range of prod-ucts that have come to be known as “nutraceuticals.” Broadlydefined, nutraceuticals are foods or nutritional supplementsthat promise medical or health benefits; they exist in the middleof the food-drug spectrum between health foods on one endand traditional prescription drugs on the other, and encom-pass functional foods, nutritional supplements and medicalfoods (see Figure 1). Traditional food and beverage companiesare attracted to nutraceuticals’ comparatively high margins.Pharmaceutical companies are enticed by the significantly lowerR&D and regulatory burdens of nutraceuticals compared totheir prescription and over-the-counter products. Both see anopportunity to compete.You Are What They Eat: A Guide To Winning the‘Nutraceuticals’ Market
  2. 2. EXECUTIVE INSIGHTSL E K . C O MINSIGHTS @ WORKTMprofit and loss statements, while escalating R&D costs, signifi-cant development risk, and a string of high profile failures hasleft a dearth of new blockbusters in the pipeline to fill the gap.Given the top line and margin pressures in the food andpharma sectors, major players in each camp are eyeing thenutraceutical segment as a potential new engine for growth.Food companies see nutraceuticals as opportunities to growrevenue, as the products spread their reach into new aisles ofstores, and expand margins given nutraceuticals’ higher pricepoints (without much added unit cost) compared to traditionalfood and beverage products. Pharma companies view thenutraceutical segment as an opportunity to grow their productbase by leveraging scientific credibility while avoiding the costlypre-approval process of the Food and Drug Administration(FDA) and other regulatory bodies in Europe and Japan.Page 2 L.E.K. Consulting / Executive Insights Volume XV, Issue 12EXECUTIVE INSIGHTSaround $75 billion, the market grew at around 7% annuallybetween 2007-2012, and is expected to grow at roughly 8%a year through 2018, with most of that growth in the U.S.,Europe and Japan.1Those growth results would make any food or pharma execu-tive blush; most of their segments will likely struggle to pushthe needle beyond a nominal growth rate of around 3-4% peryear in the immediate future. For major food and beveragecompanies, rising commodity prices have increased costs, whilethe growing acceptance among consumers of ‘private labels’(such as generic supermarket brands) has eroded market powerand increased the pressure on prices—a recipe for compressedmargins. For pharmaceuticals, the ongoing expiration of patentsfor several blockbuster drugs is leaving gaping holes in their1Source: Global Industry Analysts, British Food Journal, PwC, Transparency Market Research, L.E.K. analysis.Figure 1Traditional Food and Beverage Health SpectrumSource: L.E.K. ConsultingFood-like Drug-likeSub-segment Everyday Food Organic FoodBetter-for-youFoodFunctionalFoodsNutritionalSupplementsMedicalFoodsOTC/PrescriptionMedicinesExampleRepresentativeCompanies• Campbells• DiGiorno• Kraft• Organic Valley• ApplegateFarms• SimplyOrganic• Silk Soy Milk(Dean Foods)• Chaboni• Udis GlutenFree Foods• Activia(Dannon)• Yo-Plus(Yoplait)• Nutrite• NBTY• Pharmavite• NestléHealthCareNutrition• Accera• Medrition• Pfizer• Novartis• Merck& Co.RegulationFunctionalBenefits/ClaimScience-basedTaste-drivenMedicalSupervisionNutraceuticalsMoreMoreMoreMoreLessLessLessLessLessMore
  3. 3. EXECUTIVE INSIGHTSL E K . C O MINSIGHTS @ WORKTML.E.K. Consulting / Executive InsightsIn the past two years, both types of companies have started tostake out positions. The opening moves have taken the form ofM&A activity, as Big Food and Big Pharma attempt to purchasean entry ticket to the market by acquiring pure-play nutraceuti­cal companies. On the food side, large players such as Nestléand Danone have been particularly active, as evidenced byNestlé’s recent $11.8 billion acquisition of Pfizer Infant Nutri-tion, which makes breast milk replacement formula, and its2013 purchase of medical-food maker Pamlab. Danone’sopening gambits included the 2011 acquisitions of Britain-based Complan Foods, makers of powdered energy drinksand meal replacements, and Medical Nutrition, whichproduces medical food to treat malnutrition.Pharma companies have also made significant acquisitions,including Reckitt Benckiser’s $1.4 billion purchase of SchiffNutrition’s vitamin supplements, drink mix and nutrition barbusiness, and Pfizer’s 2012 bid for the Emergen-C vitaminsupplement brand. Even personal care products companiesare beginning to invest significantly, further validating thesegment’s potential. In March of 2012, Proctor and Gamblebought New Chapter’s vitamins and probiotic business, andin August that same year Church and Dwight acquired NewJersey-based Avid Health for its gummy vitamin products.The game is afoot. While we are still in the early innings, webelieve consolidation will continue and perhaps intensify giventhat the fundamental growth drivers of the nutraceutical seg-ment will persist, as will the growth challenges facing bothfood and pharma companies. The most promising pure-playswill continue to be attractive acquisition targets for bigger play-ers. Forecasting a precise pattern of consolidation is an inexactscience, but we can make an educated guess by looking at ma-jor food and pharma companies’ brand portfolios, and identify-ing where nutraceuticals might fill gaps for certain conditionsand health problems. As Figure 2 and Figure 3 indicate, thereare still significant gaps in the condition-specific offerings ofboth food companies and pharma companies. It’s highly likelythat ongoing consolidation will be targeted at filling in theseportfolios.Source: L.E.K. ConsultingFunctional Food Medical FoodFigure 2Food Company BrandsParentCompaniesGeneralBrandsCondition-Specific BrandsGeneralHealthImmunityChildrensHealthSports/EnergyBrain/MentalAcuityCardio/HeartHealthJoint/BoneHealthGI HealthWeightLoss/MetabolicDisease/DiabetesOtherExampleRepre-sentativeCompaniesRegulationFunctionalBenefits/Claim
  4. 4. EXECUTIVE INSIGHTSL E K . C O MINSIGHTS @ WORKTMPage 4 L.E.K. Consulting / Executive Insights Volume XV, Issue 12How To WinWill food or pharma “win” the nutraceutical segment? Foodcompanies have an advantage in functional foods giventheir marketing and brand expertise, established distributionnetworks and their ability to compete on taste. No industry isbetter at identifying, stimulating and feeding consumer demandthan Big Food. Yet they have little regulatory experience orexpertise with scientifically driven products. In contrast, pharmacompanies may be better positioned in some nutritional supple-ment categories due to their scientific resources, manufacturingcapabilities and regulatory expertise. In a race to innovate new,scientifically supported nutraceuticals, Big Pharma clearly has ahead start.Both food and pharma, then, will face their own challenges,and exploit their own natural advantages, as they chase thenutraceutical segment. As they move forward, we have identi-fied four universal strategic questions that companies in bothindustries must answer if they wish to succeed.1. Where do you play? Which disease areas have dietary fac-tors that contribute to disease risk and progression, and whichof these are underserved by current medical approaches?2. What is your business model? Who are the stakeholderswho are likely to drive adoption and use of the nutraceuticals(consumers?, physicians?, others?)? What model is best able toactivate that adoption?3. How do you promote? How can you drive adoption bydeveloping scientific evidence, leveraging communicationecosystems (patient message boards, social media, etc.), andaligning financial incentives?Source: L.E.K. ConsultingFunctional Food Supplement Medical FoodFigure 3Pharma Company BrandsParentCompaniesGeneralBrandsCondition-Specific BrandsGeneralHealthImmunityChildrensHealthSports/EnergyBrain/MentalAcuityCardio/HeartHealthJoint/BoneHealthGI HealthWeightLoss/MetabolicDisease/DiabetesOtherExampleRepre-sentativeCompaniesRegulationFunctionalBenefits/ClaimFigure 3
  5. 5. EXECUTIVE INSIGHTSL E K . C O MINSIGHTS @ WORKTML.E.K. Consulting / Executive Insights4. What capability gaps do you have? How do you acquirethe capabilities to succeed?In Figure 4, we summarize the important implications forfood and pharma companies, as well as endemic nutraceuticalcompanies and financial sponsors (investors in nutraceuticalcompanies) as they attempt to answer these questions.It would be understandable if pharmaceutical and food andbeverage executives felt macro trends were against them; intheir core segments, they are. But nutraceuticals is a boomingnew market. Successful entrance into this market will not bean entirely comfortable process for either food or pharma;each industry will need to learn the strengths of the other. Thecompany that can do that quickly and most effectively will win.Key ImplicationsFood• Must form relationships with new channel partners- Medical practitioner- Direct-to-consumer- Health/natural stores• Must establish scientific credibility through productbenefit testing and enhanced R&DPharma• Science alone is not sufficient to win in nutraceuticalcategories- For products closer to foods (shakes, powders,etc.), must develop products that can competeon taste- Must expand presence in consumer food outlets- Re-engineer marketing and branding to be moreconsumer-facingEndemicNutraceutical• Opportunities to sell to food or pharma will likelycontinue• New product innovations are key (e.g. flavors,benefits, therapeutic areas)FinancialSponsor• Multiple exit options for portfolio holdings• Entering nutraceutical segments may be risky –opportunities for large exits or sudden competitionfrom new conglomerate entrantFigure 4L.E.K. Consulting is a registered trademark of L.E.K. Consulting LLC. All other products and brands mentioned in this document are properties of their respectiveowners.© 2013 L.E.K. Consulting LLCL.E.K. Consulting is a global managementconsulting firm that uses deep industryexpertise and analytical rigor to helpclients solve their most critical businessproblems. Founded 30 years ago, L.E.K.employs more than 1,000 professionals in22 offices across Europe, the Americas andAsia-Pacific. L.E.K. advises and supportsglobal companies that are leaders in theirindustries – including the largest privateand public sector organizations, privateequity firms and emerging entrepreneurialbusinesses. L.E.K. helps business leadersconsistently make better decisions, deliverimproved business performance and creategreater shareholder returns.For further information contact:Los Angeles1100 Glendon Avenue21st FloorLos Angeles, CA 90024Telephone: 310.209.9800Facsimile: 310.209.9125Boston75 State Street19th FloorBoston, MA 02109Telephone: 617.951.9500Facsimile: 617.951.9392ChicagoOne North Wacker Drive39th FloorChicago, IL 60606Telephone: 312.913.6400Facsimile: 312.782.4583New York1133 Sixth Avenue29th FloorNew York, NY 10036Telephone: 646.652.1900Facsimile: 212.582.8505San Francisco100 Pine StreetSuite 2000San Francisco, CA 94111Telephone: 415.676.5500Facsimile: 415.627.9071InternationalOffices:AucklandBangkokBeijingChennaiLondonMelbourneMilanMumbaiMunichNew DelhiParisSeoulShanghaiSingaporeSydneyTokyoWroclawINSIGHTS @ WORKTM

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