July 12, 2022
From record inflation to supply chain challenges and higher borrowing costs, the nutritional supplements industry is not invulnerable to the macroeconomic forces facing a nation increasingly pessimistic about the economy.
Many senior-level executives and advisors, including those who have managed some of the sector’s most prominent brands, agreed the economy is either in a recession already or likely headed for one.
“In my opinion, some segments of the economy are already in recession, but the way the term is applied, we need two consecutive quarters of economic activity readings for GDP (gross domestic product) to make that judgment,” said Mark LeDoux, chairman and CEO of Natural Alternatives International Inc. (NAI), a contract manufacturer of nutritional supplements founded in 1980 and with FY21 revenues of $178.5 million. “From what I have seen in the industry and the economy in general, I think we are already in one.”
In a June 17 email to Natural Products Insider, LeDoux cited preliminary data from the Federal Reserve Bank of Atlanta showing no growth in GDP estimated for the quarter ending June 30. The prognosis has gotten worse since his email: As of Jul 8, the Federal Reserve Bank of Atlanta estimated real GDP growth of negative 1.2% in the second quarter.
The odds of the U.S. economy falling into recession by 2023 are greater than 50%, TD Securities predicted, CNBC reported Monday. Beth Lambert, CEO of Herbalist & Alchemist, a manufacturer and distributor of herbal supplements, said in an email last month that the country is heading into a recession if fuel prices and interest rates increase further.
Less discretionary income
Fears of a recession lead to the inevitable question for the natural products industry. How will a softening economy, including ghastly inflation, affect consumer demand following a pandemic when supplement sales shattered records?
“The much higher cost of energy, fuel and labor are using up much of the discretionary income of consumers,” NOW Health Group CEO Jim Emme said in an email. “Many are pressured to make the choice of spending more on food and gasoline, with less money left in their budgets for other consumer items, such as natural products. We are seeing some sales demand pressured downward as inflationary cost increases for basic needs go up.”
On the other hand, Emme cited “some sustained demand for many products that became popular during the peak periods of the Covid-19 pandemic.” He said opportunities remain for “quality brands” who “have the key sources of ingredient supplies at hand.”
Lambert said it appears consumers continue to be focused on their health.
“The question in a recession will be how much they are willing to pay for their supplements,” she said. “They will demand quality for their money.”
Meanwhile, ingredients suppliers, brands and contract manufacturers are feeling the effects of inflation and other macroeconomic forces. B&D Nutritional Ingredients CEO Bill Van Dyke said he’s been spending time chatting with business owners, CEOs and other executives within his customer base.
“I am once again hearing words I have not heard in years. These are ‘slower payments,’ ‘bankruptcy,’ and the need for capital,” he shared in an email.
Thanks to increased prices charged by his suppliers, Van Dyke said his company had no choice but to raise prices. B&D Nutritional Ingredients increased the price of most of its ingredients by 5% to 12% for 2022.
Everyone is “struggling with inflation,” he said in a follow-up interview.
Cal Bewicke is CEO of Ethical Naturals Inc., a supplier of botanicals and supplement ingredients. While he said it’s difficult to say whether the country is headed for a recession, he concluded “there’s no doubt that we’re heading into an inflationary spiral.”
As an example, he cited the costs to ship a 20-foot container from China to the West Coast ($8,500) and East Coast ($10,500). Those shipping costs are up from $2,000 on the West Coast and $2,500 on the East Coast prior to Covid, Bewicke shared in an email.
Costs are increasing for all materials the industry uses, such as bottles, capsules and equipment, he added.
“We work closely with our suppliers and customers to minimize the effects of these supply increases, but in time they will appear as rising costs for consumers,” Bewicke said. “With inflation going on in every sector of the economy, from food to gas prices, there’s no doubt that people will have less to spend on discretionary items such as supplements.”
John Grubb of Summit Venture Management advises entrepreneurs and equity investors on business and brand growth initiatives. Over the last quarter century of his career, he has focused on the food and beverage and nutritional products industries, and his company has worked with such heavyweights as Bayer, Campbell’s Soup Company and Nestlé.
In an interview in June, Grubb cited signs that larger firms are pulling back on investments in innovation and “being more cautious with hiring, even doing scenario planning about layoffs.”
The “occasional reference to a future recession” has escalated “to something around a consensus in no time, in just about the time that the [stock] market has been giving back all the gains,” he added.
As of Monday, July 11, the S&P 500 was down about 19% year to date.
Grubb described firms “on the survival bubble because they were burning cash in very interesting and innovative and promising ways.” The “spigot” of cash infusions available to such firms has been turned down, if not cut off entirely, he said, adding, “It’s a terrible time to be out scouting for money right now.”
In assessing business plans and balance sheets, financial institutions and investors have greater emphasis today on cash profits, LeDoux said. This comes at a time when the Federal Reserve is raising interest rates to cool inflation, increasing the costs of borrowing for consumers, homeowners and businesses.
“The great SPAC (special purpose acquisition company) and private equity experiments of prior years where companies were permitted to function while generating financial losses in low interest rate environments and quantitative easing times, have altered course abruptly,” he concluded. “In essence, companies are now pricing their services at a bare minimum to cover costs, and in most cases, to create actual cash profits. This is a significant departure from prior years.”
Steve Rosenman is CEO of Everwell Health Holdings LLC, a functional ingredients platform established in 2021 that acquired ingredients company Nutrition21 LLC. He was one of the founding executives of IVC (International Vitamin Corp.), a manufacturer of store brand and nutritional supplements that he said grew 15 times its revenue base of roughly $50 million over a period of 10 years.
Rosenman said he believes senior-level executives are trying to assess three areas in the current environment: “costs, continuity of supply and the consumer.” While he said his company is in a rapid growth phase, Rosenman anticipates most established firms are “going to put the brakes on” and streamline their organizations.
Commenting on small to mid-sized contract manufacturers, he said, “Some of them can really get hurt in this environment.”
Supply chain challenges
Rosenman said brands and contract manufacturers are becoming slower to make payments. That could stem from firms being unable to get products out the door due to ingredient shortages, some sources indicated.
“Many supplements are made up of several ingredients,” Van Dyke of B&D Nutritional Ingredients said. “If you are missing one, you simply cannot produce the product,” leading to “production challenges and inventory exacerbation.”
LeDoux cited persistent shortages in unique and commodity ingredients, partly related to policies in China, where many raw materials are sourced. He said these materials are “stuck in containers or waiting to be packaged for international transport.”
“Additionally, there are concerns that adverse weather in various growing regions, combined with the lack of adequate and reasonably priced fertilizers, are leading to a potential shortfall in staples for foods later this fall and into the winter,” he said.
Exacerbating supply chain challenges and contributing to the general malaise over the state of global affairs is a Russian-led war in Ukraine that began more than four months ago.
“The Ukraine conflict is directly impacting the supply of all things related to sunflower oil and seed, and that is an ongoing problem for the industry,” LeDoux said.
In addition to citing the war’s impact on such commodities as fertilizer and fuel, Grubb reflected, “The more that the EU comes to the aid of Ukraine, the more [Russian President Vladimir] Putin is going to reach into his arsenal. Right now, it’s like a bad World War II story where they’re bombing the crap out of everything. God forbid he would go nuclear.”
Greg Horn, managing director and head of the ingredients practice at William Hood & Company, an investment banking firm specializing in the health and wellness industry, acknowledged the current market is challenging for companies that are losing money, especially startups backed by venture capital.
“The more you need cash, the more vulnerable you are, period,” he concluded.
But he is among people interviewed for this article who said the industry has proven to be resilient during downturns in the economy. According to Horn’s biography, he served earlier in his career as CEO of health and wellness retailer GNC, which grew from $400 million to $1.5 billion over his 11 years in management.
“Supplements of today are far more effective than they were 30 years ago, and you can get a supplement that’s really helping calm your gut because it’s a more science-based probiotic, for example,” he said in an interview. “To the extent that these products are more effective, and people are getting a tangible benefit from them, they’re going to be harder to cut out of a budget.”
In challenging economic times, consumers have focused on their health to avoid expensive healthcare costs, and that’s benefited the dietary supplement industry, Horn said.
“I’ve seen multiple recessions in my 30-plus-year career,” he reflected, “and every single time, the underlying consumer demand has been what’s carried the category.”
Bewicke of Ethical Naturals said “core companies that anchor” the industry have become stronger in recent years, investing “the benefits of recent years’ growth into the structure and viability of our companies.”
“So, though sales levels may go up and down, I believe we’ll be able to continue to provide high quality products, and that there will be a core of consumers who will continue to use and benefit from those products,” he concluded.
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