Nutrition Business Journal

Raw Material & Ingredient Supply VIII

Competition is fiercer than ever in the raw materials and ingredient supply (RMIS) segment of the nutrition industry. Yet along with heightened competition and increasing commoditization of core ingredients, RMIS companies reported a more stable and mature business environment than during the desolate years of 2000 to 2002. Today’s growth rates and margins are by comparison healthier, reflecting some recovery in the dietary supplement market in addition to new opportunities in foods and cosmeceuticals. John Waldron, president of Stratmark Services (Deerfield, Ill.), a marketing-consulting firm dedicated to raw material suppliers, reported seeing “modest growth across the board,” for a range of companies, a view echoed by NBJ data that indicated growth of 2% for the RMIS sector in U.S. supplement and functional food supply in 2005, with 2006 shaping up to be marginally better. Overall 52 of 79 companies responding to NBJ’s recent RMIS survey reported growth in 2005 and only 14 of the 52 reporting growth percentages in 2005 expected a lower growth rate in 2006.

What NBJ defines as the market for specialty raw materials and ingredients for supplements and functional foods amounted to $2.96 billion in U.S. sales in 2005, up 4.0% over 2004. This figure finally passes a similar figure from 1999, the last year of growth before market globalization and price pressures took hold, particularly in commoditity ingredients like vitamins and certain herbs. Growth in U.S. sales of supplement ingredients was 2.2% in 2005, only the second year of growth since 1999. U.S. sales of fortification ingredients for functional foods was up 12% to $560 million in 2005.

Raw Material Sales to Manufacturers
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The 4% growth in 2005 appears to have been a function of volume slightly over price as NBJ interviews indicate modest pricing gains in some areas, slowing declines in others and always a few dramatic fluctuations based on supply & demand imbalances that tend to arise in specific ingredients each year. NBJ survey respondents that offered pricing information reported a median of 1.5% gain in 2005 and a 2.6% gain in 2006. Outright declines were reported by 18% of respondents in 2005, 37% said prices were flat, leaving 45% reporting gains with 14% of the gainers actually reporting price gains of more than 10%. For 2006, declines moved up to 22%, but only 22% also reported flat pricing, leaving 56% reporting price gains with a quarter reporting gains of more than 10%.

The U.S. RMIS market corresponds to a global market of an estimated $9.13 billion and slightly higher and improved growth of 4.3% in 2005. (See table on page 4.) Ingredient supply is surely the most global part of the nutrition industry supply chain. Retail is clearly local, with only a few national and still fewer, albeit influential, multinational players. Manufacturing on the supplement side is mostly national with hardly any significant brands outside of multilevel marketing firms. Food manufacturing and branding is increasingly an international pursuit, even in the specialty product world of functional foods, although most launches are still very national, if not regional, in approach. At the base of the supply chain is where all the leaders are truly global and where all of today's ambitious suppliers and developers rightfully aspire to be.

Exceptions are the Rule
Any attempt to generalize about business conditions in raw material and ingredient supplys is checkered with exceptions. Suppliers’ fortunes remain closely tied to the dynamics of the product categories they serve, the channels in which their customers sell, and increasingly global demand and economic cycles. For example, in 2006 suppliers trading in commoditized specialty ingredients like glucosamine and chondroitin faced continuing downward price pressure traceable to mass market retailers (who got a lot of stick for being at the root of 2006’s tough conditions). A shortage of CoQ10 turned into overabundance and a precipitous price decline in 2006 as new capacity entered the market. Herbal suppliers, who are among the most impacted by Asian supply, nevertheless found bright spots in ‘superfruit’ extracts, natural botanical preservatives and a range of antioxidants. Suppliers of omega-3 fish oil, an ingredient that travels long distances, felt the impact of shipping costs on margins, but that didn’t stop new global competitors from entering the category, attracted by strong, consistent growth in consumer demand.

U.S. Nutrition Industry Supply Chain: 2005 in $mil
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While growth improved modestly, whatever part of the RMIS value chain you occupied, business conditions in 2006 were tougher than either 2005 or 2004 by many reports. The cost of fuel and starting materials and a more demanding customer and consumer challenged executives to run their operations more efficiently. Currency decline further complicated matters: “The weak dollar has played havoc with our margins in a price-sensitive market,” said one importer of European ingredients. Respondents to NBJ’s 2006 RMIS Survey cited, in descending order, pressure on margins, the high cost of clinical research, customer demand for more sophisticated ingredients, rising transportation costs, and general competitive pressures as the biggest challenges.

“Movement-wise we’re up slightly, but it’s a much more competitive environment,” said Dan Stauber, founder and CEO of Stauber Performance Ingredients Inc. (Fullerton, Calif.) now celebrating its 35th year. “Overall, profitability is hard for everyone.” Although slightly below forecast, Stauber Performance is anticipating a still-enviable 10-15% growth rate this year for revenues expected to surpass $60 million.

It’s the type of competition that drives companies to diversify their portfolios at a time when time-constrained customers are more likely to be reducing than adding to their supplier list. Although there are companies thriving on a single, stellar ingredient, most distributors and original manufacturers said they were expanding towards more complete one-stop shopping. Historically, Stauber Performance has not concentrated on herbs but this year started representing Indian botanicals by a primary grower and processor, Geni Herbs. It is also working on finalizing representation for a science-backed product in the immune category and is lining up an omega-3 supplier from New Zealand.

“Successful suppliers must have a portfolio of products for a growing list of specific applications in dietary supplements and functional foods,” said Dave Eckert, vice president, Cognis Nutrition & Health. “It’s no longer one-size-fits-all. We are seeing increased demand for a far greater range of product forms than ever before—including GM and non-GM, powder, oils—you name it.” Cognis entered the brain health category this year by acquiring the omega-3 fish oil company Napro Pharma. Cognis reported a strong year, with global business up 5% due largely to its functional food business in Europe and Tonalin CLA and Vegapure plant sterol sales in the United States.

After “robust” double-digit growth, good volumes and strong profitability in 2003 through 2005, 2006 was slower for Maypro Industries Inc. (Purchase, N.Y.), although the company managed to maintain its margins and profitability, according to director of business development Dan Lifton. The primary challenge for Maypro, which has regional offices in Japan and China, came from its exposure to CoQ10 and arthritis products. Maypro saw continuing strong demand in the U.S. for CoQ10 but lower prices in late 2005 in 2006 following a period of high pricing. Glucosamine and chondroitin faced further commoditization; like other suppliers Lifton said a critical pressure point for joint health ingredients was mass-market retailers like Wal-Mart squeezing big volume supplement manufacturers, who in turn tightened the screws on contract manufacturers and suppliers.

However, subtracting these categories from the equation, Maypro reported several bright spots. “We expanded our sports nutrition portfolio and have seen nice demand for various amino acid products,” notably arginine and Japanese L-glutamine, said Lifton. Also doing well in the sports category were creatine and NADH, according to Sales Manager Casey Robinson, who noted that hyaluronic acid has continued to perform well in joint health, as has curcumin (turmeric extract) in the botanicals category. The company also reported a significant amount of business with pet food manufacturers, notably in glycine and taurine, in addition to Champex, a proprietary mushroom extract that reduces breath and body odors.

Standing Out From the Crowd
While the going is tough, the tough have gotten going by investing in more value-added services, quality assurance, patents, science and branding to differentiate them from the price-driven competition and help protect marketshare and margins. As a result, from the once-anonymous ranks of the raw materials business, more companies are stepping forward to show off distinct identities. Such investments are starting to pay off despite the price-driven nature of the marketplace, said executives, although rewards can be slow to materialize. Asked if the high road to quality is earning them business, the answer is a qualified yes—that is, with those customers that value quality.

Global Nutrition Supply Market, 2001-2005 in $mil
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“It’s harder to do busines but more interesting than it’s been before because you feel your extra effort is what’s opening doors and moving you through gateways,” said Nicki Jacobs, vice president of technical and regulatory affairs for B&D Nutritional Ingredients (Vista, Calif.), a supplier specializing in antioxidants. “If you’ve gone to the trouble to have information available and provide everything customers need, you can make progress.”

B&D represents only branded and patented products and works closely with its principals. Jacobs reported “modest, controlled growth” for the value-added distributor in 2006 and less price-pressure than in 2003-4, although competition was brought to bear in some categories. “We don’t mind competing against legitimate competitors; we do mind competing against junk,” said Jacobs.

Customers’ Addiction to Lowest Prices is Hard to Break
Unfortunately, junk is what there still seems to be plenty of. “Everyone preaches quality, but let’s face it, this is a price-driven market and it’s all about price,” said Larry Kolb, president of U.S. operations at TSI Health Sciences (Missoula, Mon.). Kolb reported that TSI grew internationally this year but saw flatness in its U.S. business.

TSI has invested in quality systems more than most, said Kolb, and “it’s paying off with a growing number of customers that are tired of adulterants, rejections, etc... But the focus on price continues to be the norm, and that’s been a tough battle.” In this, its 10th anniversary year, TSI Health Sciences changed its name from Technical Sourcing International to reflect its move towards in-house ingredient production. “TSI has transformed into a fully integrated manufacturing company and we’ve de-emphasized sourcing activities,” said Kolb.

Companies Pursue a Higher Percentage of Branded Sales
Moving up the value chain is one way to create distance from generic suppliers; branding is another, and ingredient brands have proliferated in the RMIS sector. Shifting a greater proportion of business to brands—either your own or your principals’—is a strategy being vigorously pursued. B&D Nutritional’s approach is to serve as an exclusive sales and marketing organization for original manufacturers such as ADM, Kemin and Vitatene, offering some technical or scientific advantage for branded, proprietary ingredients. “We’re a focused, technical sales force,” said Jacobs. “We’re an arm, not just a freewheeling distributor; we’re developing an entire section of business for our principals.”

Stauber estimated that 65-70% of his company’s business is tied to selling branded products for its primary partners. In his view, it’s a stable model, and going forward he intends only pursuing categories where the company can have direct ties with manufacturers. Topselling items for Stauber are minerals, amino acids, green products (spirulina, chlorella, barley juice, kelp), excipients, joint products, acidophilus and vitamins.

Brands represent roughly 70% of TSI’s business, with PEAK ATP and Ostivone faring well from among its portfolio of branded ingredients and new brands like Promilin primed for growth, according to Kolb. Global botanicals supplier Indena said its top branded ingredients accounted for 70-80% of sales.

NBJ survey respondents reported quite a spread. Of 56 respondents reporting actual percentages, 48% said that 50% or more were branded ingredients and 23% said 100%. Still, 16 of 56 or 28% reported selling no branded ingredients.

Maypro is pursuing a strategy of emphasizing higher-margin, proprietary ingredients. “That’s one of our objectives,” said Lifton. “If we select ingredients carefully and invest in them, that’s a good model.” Lifton estimated branded products currently represent 10-20% of business, but added: “We’d love to get to 50%.” Among Maypro’s best-performing proprietary ingredients are an AHCC mushroom extract for which it is the exclusive U.S. agent, although it is also sold as a finished product by Maypro’s sister company QOL. (In Japan, AHCC is associated with a $200 million retail market—mostly mints, beverages and dietary supplements, according to Maypro.). “That [AHCC] business is growing well, and we are continuing to invest in promotion and advertising and working with manufacturers to do research on the product—that has helped maintain growth of that business,” said Lifton. “Our takeaway is, if you’ve got a really good product that works and has research on it, it does bear fruit but it takes time to build recognition among customers.”

The newest addition to Maypro’s proprietary stable is Cogni-Q for cognitive health in partnership with a Korean manufacturer; in the pipeline is a hemp extract in partnership with a Chinese company. Next year it plans to introduce Oligonol, a lychee-based product for anti-aging and cognitive health, made with a proprietary extraction process for greater availability. According to NBJ’s RMIS survey, 53 out of 84 respondents or 63% rated the ability to offer trademarked or branded ingredients as important (20%), very important (24%) or extremely important (19%) compared to 31 who rated it as not important or only somewhat important. Waldron counted 800 branded nutritional ingredients in the U.S., up from 150 six or seven years ago, although some are hardly fully functioning as brands. “There’s a lot of naming going on but not much branding,” he said. “Brands aren’t brands until consumers say they are brands.” Waldron pointed to Kemin, Martek, Lycored and The Wright Group as companies that have done a good job in this respect. Size is important when deciding whether or not to embark on the expensive proposition of building a brand, Waldron noted. “At a couple of million in sales it’s probably not worth it. But hit the $20-40 million range, and suppliers should think about creating consumer pull and not spend all their money trying to push it through the channel.”

Leading Vitamin Raw Material Supply Companies
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Investment in Science
Raw material companies are also investing more in science. When asked about business challenges, the high cost of conducting clinical research to support claims was rated as significant or highly significant in its impact by 71% of respondents (the highest ranked challenge); 19 said it had a moderate impact (21%) and only 7 said no impact. Although clearly a challenge from a cost perspective, the response indicated research investment was somewhat widespread—good news for those who believe science is key to survival. However, Waldron is of the opinion that “companies in general overspend on science and underspend on marketing. You need science to tell a good story, but there’s no limit to the amount of science somebody will demand if they’re not paying for it,” he said. “A lot of scientific spending on products with no proprietary positioning is probably not a good business.”

For Polyphenolics (Madera, Calif.), a division of Constellation Wines U.S. and maker of the MegaNatural line of grape extracts, 2006 was a transitional year towards a more value-added, clinically based business model at a time when generic grape seed extracts have been under pressure from Chinese imports. The flagship product for this transition was MegaNatural-BP, a patent- pending, trademarked grape seed extract which was associated with a drop in blood pressure to the normal level in patients with metabolic syndrome, according to a clinical study conducted by researchers at U.C. Davis and released in March this year. Patients receiving either 150 mg. or 300 mg. of Mega- Natural-BP both saw a drop in blood pressure compared to placebo, and the higher dosage group also had reduced serum oxidized LDL cholesterol levels. The study was published in abstract form to protect competitive details, but full publication is anticipated in late 2007. A second placebo-controlled human clinical study will look at MegaNatural-BP’s benefits for pre-hypertension patients.

Is science generating sales? “I see it paying off,” said Ronald Martin, vice president of sales and marketing for Polyphenolics. Since it was introduced earlier this year, one Polyphenolics customer has launched a supplement with MegaNatural-BP and five more are expected to launch consumer products by April 2007. Several other customers are in the wings. To help communicate the health message to consumers, medical journalist Robert E. Kowalski, the author of the best-selling The 8-Week Cholesterol Cure and a new volume on blood pressure, has been recruited by Polyphenolics’ public relations program for MegaNatural-BP.

Sales Holding Steady in More Favorable Channels and Niches
Several companies reported that massmarket retailers seeking low prices were responsible for eroding margins. Conversely, companies supplying natural retail, MLM and practitioner brands reported avoiding some of the fluctuations that plague companies linked to the mass market or customers who jump on the latest fad ingredient.

RMIS Survey Respondents Rate Today’s Challenges
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Bio-Botanica Inc. (Hauppage, N.Y.), a bulk manufacturer and private labeler that makes customized botanical extracts, grew 17% last year and continued that trajectory albeit at a slightly slower rate in 2006, according to Vice President of Sales Mark Sysler. Helping to propel Bio-Botanica’s sales are proprietary blends of natural preservatives under the Biopein, Neopein and Suprapein brands for the personal care industry, featuring herbs like oregano, thyme, rosemary, peppermint and goldenseal. “I get emails about natural preservatives every single day,” said Sysler, who estimated that cosmetics and personal care represent at least 25% of Bio-Botanica’s business.

Asked about the competitive environment, Sysler said, “Our biggest pressure always comes from the extracts out of China.” However, even if Asian prices are hard to beat, by making its own extracts he believes Bio-Botanica can offer certain advantages, such as ease of site inspections and greater speed and flexibility in custom manufacturing. “We can deliver an extract in three weeks from scratch” compared to several weeks for product shipped from overseas, he said. Also, Bio-Botanica has developed strength in liquid form botanical extracts—not yet a big category for Chinese suppliers.

Bio-Botanica services three segments of the natural products industry: bulk extracts in liquid and powder form for the supplement industry; botanical extracts for the cosmetic industry; and its private label sister company Natures Answer for the health food store segment. It does private label in all three segments as well. “That’s maybe why we haven’t seen the extremes—because we’re not terribly reliant on the mass market,” said Sysler.

Within the natural retail channel the organic supplement niche is enjoying favorable dynamics. Despite the disruption of moving its headquarters from California to Utah this year, Western Herbs, a small supplier of primarily organic and wildcrafted herbs, grew 13-18%, estimated Randy Giboney, founder and president of the 11-year-old company. Demand for organically grown herbs is “extremely high,” said Giboney, driven by supplement manufacturers serving natural retail stores. The company’s niche positioning has helped protect it from price erosion—as has its growing ability to purchase in larger volumes.

Western Herbs sources its raw materials in North America, focusing mostly on traditional Western herbs or those adopted in Western cultures, like ginkgo—proof that a sustainable business is still possible without sourcing from Asia. Bulk product represents 40% of Western Herbs’ business and private label 60%. “I’m seeking sustainable growth… you can get into trouble growing too fast or not at all,” said Giboney.

The goal of sustainable growth must resonate with mass market suppliers contending with retailer demand for lower prices. Although mass-market accounts are seen as a holy grail, big-volume manufacturers may not be the ideal customers. “Everyone wants to do business with the giants, but that’s not where the profits are,” said Waldron, who divides RMIS customers into three types: mass market brand manufacturers—mega accounts that offer volume but demand lower prices; small companies that pay well but “eat you up” on service; and the ‘sweet spot’—medium size companies that are big enough to order substantial volumes but relatively self sufficient in technical and marketing support.

RMIS Starts to Rationalize In Face of Consolidation and Globalization
The RMIS and contract manufacturing sectors saw consolidation heat up in 2005-6 (see article on p.15), driven by globalization, product diversification and the desire for greater exposure to the higher-margin health and wellness business. “There’s more than anyone realizes,” said Stauber, surmising that the reported deals might be just the tip of the iceberg.

Leading Specialty Supplement Companies
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“Some of the weaker players are shaking out and bigger companies are coming to the fore,” said Waldron. “It’s getting more rational. In some categories there are more companies selling products than buying them. I guess I see that coming to an end.” Multinational companies are prominent consolidators, but the interest in globalizing business consisted of more than merely transactions. To mention a few initiatives: Sabinsa opened offices in Germany and Malaysia this year. TSI Health established a sales and marketing office in the U.K.; and in September Fortitech Asia Pacific created a position to focus on locating new opportunities for its premix business throughout the People’s Republic of China.

Maypro currently does 60-70% of its business in the United States. At the heart of an investment this year from Marubeni America Corp. is the desire to strengthen its global positioning and diversify ingredients. Marubeni is one of Japan’s five major trading companies, and “while the Maypro deal was small by Marubeni standards, it was high profile in the sense that a number of Japanese firms have decided to expand into the health and nutrition arena.... When a company like that makes a move everyone watches,” said Lifton. For Maypro, the partnership will leverage Marubeni’s’s presence in the food industry in Japan and China—notably in Japan’s attractive functional beverage category.

According to Kolb, whose business is half U.S., half international, success isn’t pegged to being global—but it doesn’t hurt. “For TSI, servicing the global market helps us diversify and service more customers that appreciate our quality systems. If we were to rely solely on the U.S. market, I’m not sure we would survive with our investments.” TSI systems are being approved by agencies like Australia’s Therapeutic Goods Administration, the United States Pharmacopeia and the Japanese Ministry of Health, and the company operates to ICH Q7A guidelines. “I see the international regulatory environment intensifying every year, while the U.S. environment degrades. The U.S. will have a tremendous challenge if and when the regulatory environment does in fact tighten, and companies positioned to service global GMPs will win here,” said Kolb. Both consolidation and globalization should prove healthy for an ingredient industry that has historically lacked the resources to grow and innovate, he concluded: “I see the large, global companies providing value to the trade.”

What Lies Ahead
As competitive as the RMIS business has become, faith in the fundamentals of the nutrition industry remains strong if expanding capacity is anything to go by. Carotech is investing $40 million in a new plant to increase production of Tocomin tocotrienol and natural mixed carotene complexes. Kaneka expanded its CoQ10 capacity in Japan and by 100 metric tons in Texas. Chr. Hansen upgraded its culture plant in Milwaukee, increasing fermentation capacity by 35%. Pharmline expanded its processing facility to 90,000 square feet. And Cognis unveiled a 20 million euro facility in Germany, reinforcing its position in plant sterol esters and Tonalin CLA. These are just a few examples.

Functional food is a growing market for suppliers, and personal care is coming on line fast. Suppliers ranked demand for functional food ingredients almost as high as supplements in terms of their contribution to growth, but personal care and organic sourcing still lag a host of issues (see page 8). Several suppliers predicted strong demand for weight management ingredients. “We believe weight management will continue to be a primary focus, and we are not alone,” said Cognis’s Eckert. Recently, Cognis and WILD Flavors co-sponsored a webcast in which 165 leaders in functional foods responded to a live poll. When asked what is “The next health platform our company is targeting with new products,” 39% of respondents indicated weight management. Healthy aging was cited by 21%, followed by heart health (14%), immunity (13%), cognitive function (8%), eye health (1%) and skin (1%).

Sysler concurred that the next two years will see growth in weight loss ingredients in addition to materials that provide cardiovascular benefits, high ORAC antioxidants and cholesterol management. “Over the next five years, I think the baby boomers will grow the demand for supplements again with joint pain management and cardio benefit leading the way.”

Asked to ponder the future of the ingredients business, Victor Ferrari, COO of Horphag, forecast the development of incremental functionality of ingredients and a much higher level of requests for quality, in addition to more requests for co-marketing information and research. In the long run he predicted a narrowing down of products as some fail to meet the demand for efficacy and quality.

So as tough as the new century has been on nutrition industry suppliers and as competitive as 2006 has been for many, the future looks better than the recent past. “We’re at the beginning of a new golden age for this industry,” said Waldron, pointing to the still positive trends in demographics, disposable income, rising health care costs and more. “I think this business is going to get better and better... and it will spread more into food, beverages, cosmeceuticals, etc.” Better and better it may be, but also more challenging and suppliers will be well served to choose their battles carefully.

RMIS Survey Results 2006
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NBJ Category Analysis
NBJ’s Raw Materials Report 2007 will address individual ingredients in more detail in terms of numbers, but here we update NBJ readers on trends and statistics in a few of the major categories.

Vitamin raw materials represented a $800-million business in U.S. sales in 2005, according to NBJ research. In 2006, the category was characterized by ongoing price competition from China, with rising energy and raw material costs magnifying the challenges faced by U.S. and European suppliers. DSM Nutritional Products and BASF both increased vitamin prices in 2006. Most major European vitamin makers have investments and plants in China or India, and an estimated 70-80% of global vitamin raw materials are now manufactured in Asia.

According to Waldron, who was formerly a senior executive with Takeda, vitamin manufacturing in the West has gone through three transitions: the pharmaceutical era when drug companies like Roche, Glaxo, Takeda, Pfizer and Merck dominated the business; the era of the big integrated chemical companies (BASF, Rhone Poulenc); and today when vitamins and other nutritional ingredients have been embraced by agrichemical companies like ADM, Cargill and Tate & Lyle. Waldron reasoned that for a drug company, vitamin C for $4 per kilo is not very compelling. “But if you’re an agri-chemical company making dextrose for 10 cents per kilo you tend to look up to something that costs $4 per kilo.”

The price of bulk vitamin C reached record lows in 2005 and early 2006 but has since stabilized at a lower level, recuperating by 5-10% in the last few months, suppliers reported. To seek better margins within the price-pressured category, DSM is diversifying into value-added ingredients and is considering a new branding initiative.

Stauber predicted more price pressure in B2, B6, folic acid and D calcium pantothenate. Maypro’s Robinson and others also reported shortages in B vitamins and prices six to seven times higher in B1, B2 and B6—for reasons unclear but possibly due to Chinese factories “dabbling in different markets.” One in-country supplier reported that the Chinese government is cracking down on environmental pollution and has vitamin B, caffeine and xylitol manufacturers in its sights. Closures have been reported.

Vitamin E is recovering from negative media that ambushed the category in 2004, but still has a long way to go. As the d-alpha tocopherol form of E declined, “immediately we saw mixed tocopherols come up,” said Jacobs of B&D Nutritional, which represents ADM’s Novatol brand tocopherols and Decanox brand mixed tocopherols. Unfortunately, higher-dose E supplements like 1,000 IU appear to have lost shelf space permanently in the mass market, she observed.

Wildcrafting and Cultivation in the U.S. Herbal Business
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Boring no more, accumulating science on vitamin D, including not just strong bones but reduced risk of cancer and diabetes and increased muscle strength, will likely boost consumer demand for this vitamin. Newsweek topped off the year with an article in December by Meir Stampfer of Harvard referring to vitamin D’s role in disease prevention and to the general agreement among nutritionists that the recommended intake of 400 IU per day should be raised to 1,000 IU. Only a few manufacturers had vitamin D 1,000 IU products, including Nature Made, Solgar, Carlson Laboratories, Now Foods and Country Life, but many others have added them.

U.S. herbal & botanical raw material sales were flat in 2005 at sales of $390 million. Although lacking in overall growth, some suppliers reported their best performance in recent memory. Indena reported over 10% growth in 2005, the first strong positive for several years, driven by its quality-oriented core customers and proprietary ingredients. BI Nutraceuticals attributed its double-digit gain to greater exposure to functional foods and custom blends, among other factors.

Energy drinks remain one of the biggest influences in the herb and vitamin categories with no softening yet of demand for tea extracts, guarana, Bs, Cs, amino acids, taurine, ginseng and more, observed Maypro’s Robinson and others. Bio-Botanica, which makes a liquid product, reported continuing brisk growth rates in green tea extracts—not only for supplements but also for the personal care industry. “We don’t see green tea slowing. Customers are still only just bringing green tea to their customer base,” said Sysler. Maypro’s Lifton anticipated growing consumer awareness in the wake of Snapple’s advertising of bottled Green Tea with EGCG. Green tea extract is a core category for Maypro: “It’s accelerating now, and we expect it to continue,” he said.

Botanically derived natural preservatives for the personal care market were strong for Bio-Botanica. Globally, Naturex SA of France and the Slovenian firm Vitiva reported strong sales of rosemary extract spurred by demand for non-chemical preservatives. In the third quarter Naturex claimed to have grown its rosemary extract sales by 20% year to date compared to 2005. Naturex acquired U.S. botanicals supplier Pure World Inc. in 2005 for $37 million, virtually doubling its size. Earlier in 2006, Vitiva entered into a marketing arrangement with PL Thomas for the North American market. Market research company Global Information pegged the global food preservative market at $510 billion, according to news articles, indicating big potential for natural preservatives.

Sysler of Bio-Botanica noted that garlic is still a strong and consistent extract for the company, and he expected turmeric extracts to grow in light of recent research. Indeed, the science got more interesting for turmeric. UCLA/VA lab researchers found that curcumin, a chemical found in curry and turmeric, may help the immune system clear the brain of amyloid beta, which form the plaques found in Alzheimer’s disease. Sabinsa supplied the curcumin for the study, which was published in the Journal of Alzheimer’s Disease this October.

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Herbal products for symptoms related to menopause are led in the mass market by soy and soy isoflavones (72%), followed by black cohosh (20%). Although demographically the category is favored as more women enter menopause and seek alternatives to hormone replacement therapy, FDM supplement sales have been in decline. Consumer confusion about safety and efficacy, price competition, the withdrawal of some brands together with a significant decline in consumer advertising contributed. The condition-specific menopause category was estimated at $270 million in consumer sales in 2005. Interestingly, the size of the post-menopause market is six to eight times larger than the market for menopause, yet the category lacks a leading brand.

The 2005 market for saw palmetto, a wildcrafted native crop, was based on the 2004 harvest, which was one of the leanest in history because of hurricane damage in the Southeastern United States. Berry prices increased substantially, and extract prices almost doubled, according to Sid Hulse, vice president of sales and marketing for Valensa International (Eustis, Fla.). Undersuppply led to the importation of fake saw palmetto oil from China—not previously a serious problem. In response, U.S. saw palmetto producers launched a campaign to review Chinese imports. “It was determined that not even a single batch of so-called saw palmetto material sourced from China was... real saw palmetto,” said Hulse.

The saw palmetto berry crop returned to historical levels in 2005, and Chinese imports were reduced substantially this year. However, the 2004 shortage had another impact—early harvesting of green saw palmetto berries, observed Hulse. Concerned about weather damage, several producers started using earlyseason berries in their products. “It is well known that berry ripeness is the single most important determinant of the effectiveness of the final saw palmetto extract,” said Hulse, who observed that this practice seems to have grown substantially with the 2006 harvest. To protect the image of saw palmetto and ensure that subpar product does not reach the marketplace, in August 2006 Valensa started offering free testing to nutraceutical producers interested in ensuring the quality of the saw palmetto extract they use. The service has received a great deal of attention from industry organizations, buyers and consumers, said Hulse.

Hulse estimated the U.S. raw material market for saw palmetto extract at $15 million and for finished product at $150 million. Growth for Valensa in 2005 and 2006 was above GDP, said Hulse, and after the intense price competition of 2005 its saw palmetto business rebounded this year. Hulse also reported steady astaxanthin growth. Other Valensa products include Tresalbio ‘chia’ seed extract and extracts of valerian, cranberry seed, ginger and amaranth seed.

The aloe vera ingredient market is growing at a pace similar to the natural products industry as a whole, from 5-8%, estimated Peter Hafermann, president and CEO of leading supplier Aloecorp. More aloe vera farming and processing operations are coming on line, making prices more competitive. “While adulteration continues to be an issue in the industry, other companies are taking the high road; thus, a higher number of better-quality ingredients are being offered, which has put downward pressure on the price of premiumpositioned ingredients,” he said. Aloecorp’s new Hainan, China production facility is scheduled to come on line in the fourth quarter 2007, complementing its Texas and Mexican production facilities.

Marketsize is hard to pin down, but aloe raw materials probably represent a $25-40 million U.S. raw material market, driven by consumers’ desire for more natural alternatives to every day products, in addition to a growing body of science showing benefits for diabetes, kidney stones, ulcers/IBS/digestion, the immune system, detoxification and skin health, said Hafermann. What are Aloecorp’s goals? “Continue to invest in science, especially for promising areas such as diabetes,” said Hafermann, including properly characterizing the aloe and the dosage. Also, to bring the health benefits of aloe as an ingestible to the mainstream consumer and grow the category beyond the health food class of trade.

Suppliers were most consistently vocal about strong demand for ‘superfruit’ powders and extracts, with acai and pomegranate topping the list. “Pomegranate extracts are selling very well thanks to Pom Wonder and Pom Juice,” said Maypro’s Robinson. Noni extract also doing fairly well, he added. “We’re finding the market for antioxidants seems to be the category in herbal products that is going the strongest,” said Sysler, particularly fruit extracts like acai, mangosteen and pomegranate. In March, Bio-Botanica’s sister company Nature’s Answer introduced an ORAC Super 7 blend that includes six high ORAC value fruit extracts and green tea, which has been “extremely well received,” he said.

Joel Pettegrew is sales director for Quality Nutraceutical Production Labs, the sixyear- old sourcing and contract manufacturing arm of Biotics Research Corp. (Rosenberg, Texas), which makes supplements for the practitioner channel. Pettegrew reported good demand for fruit and vegetable powders, although the latter can be challenging to source since barley grass, wheatgrass and other sprouted grains are yearly crops and quality, availability and price vary. Larger suppliers are working out deals with farmers to guarantee consistency of supply, he said. Exotic fruit extracts are “blossoming very nicely,” notably pomegranate extract, mangosteen, cranberry and blueberry.

Surprisingly no shortages in these newly popular superfruits were reported. Pettegrew said supply appears to be keeping pace with demand thanks to materials from Asia and producers in South America refining their capabilities to produce more and better extracts without raising prices. Standardized extracts of blueberry and cranberry are holding steady in the $60-70 per kilo range, with the newer ‘exotics’ trading at $70-80 per kilo, he observed.

However, there was a shortage of bilberry extract this year with prices rising to $350 per kilo compared to $200-240 earlier in the year. One supplier pointed to poor harvests, and another surmised that a major buyer had cornered Chinese supply.

Pressure on Joint Health Ingredients
Significant price pressure on glucosamine earlier in 2006 due to commoditization has eased in recent months, suppliers said. Price per-kilo hovered in the $7-9 range at the end of 2006, depending on the form of glucosamine, and as high as $15 for certain types. Suppliers described demand as still very strong in general and pricing as currently stable.

In general, the joint care basics have been commoditized, said John Turner, vice president of sales for Pacific Rainbow International Inc. (PRI, City of Industry, Calif.). Products on which the category was founded—chondroitin, glucosamine and MSM—now share the stage with newer introductions like hyaluronic acid, greenlipped mussel extract and new versions of collagen, to name a few. “It’s created dilution in the marketplace. As a category arthritis is huge and has a huge amount of supply—but myriad ingredients supply it,” said Turner.

According to Turner, “2004 and 2005 were great years” for the $50-million raw material supplier. But while PRI maintained unit volumes in 2006, dollar volume softened, reflecting declining prices for CoQ10 and the company’s signature product, chondroitin sulfate, as well as glucosamine, MSM and other joint health ingredients. PRI has three regional warehouses in the U.S. and owns 40% of Yantai Dongcheng Biochemicals Factory, the only chondroitin sulfate manufacturer in China that is GMP and ISO 9002 certified, according to PRI. This August the factory received certification from U.S. Pharmacopeia for its chondroitin sulfate sodium (bovine) product. “We are the only ones that have a factory in China which has received USP rating. Nevertheless, what sold for $100 per kilo last year is now at less than $50” per kilo, said Turner.

Approximately 85-90% of chondroitin is now sourced from China, with Cargill’s Regenasure and Bioiberica of Spain playing roles at the high end. Newer joint ingredients like Celadrin, for which PRI is the exclusive U.S. distributor, have picked up some slack in the joint health category. But generally ingredient life cycles are contracting, noted Turner. Celadrin “far exceeded expectations in year one” supported by advertising and promotion. Rates leveled off in year two, and “by years three or four you usually have a good idea of what demand is going to be” and whether an ingredient is going to gain acceptance in the mass market, said Turner. Celadrin seems to be gaining traction in the health food and mass market arena, he added.

Sterols in U.S. Lag Behind
Europe is well ahead of the U.S. in consumer understanding of the benefits of plant sterols. Its retail market for food with added sterols was around $650 million in 2005, according to New Nutrition News, which pegged ingredient sales at $150-180 million, with most of that going to Cognis, ADM and Raisio Benecol. In the U.S., retail sales of such products are only approaching $80 million, and the extent to which the U.S. consumer will warm up to sterol-containing foods remains to be seen. This year the category suffered a setback when General Mills discontinued Yoplait Healthy Heart, the first U.S. yogurt with plant sterols. Healthy Heart reached $17 million in sales in its first full year, according to IRI data cited by NNB. Sales of cholesterol-lowering spreads have also shrunk, and orange juice with sterols is flat. “The U.S. market for sterols might be just what it is now—an ultra-niche,” said NNB Editor Julian Melletin.

But sterols are backed by science and an FDA authorized health claim, and suppliers remain optimistic. Cognis, which claims to be the world’s largest supplier of natural plant sterols, predicted double-digit growth for its Vegapure brand due largely to consumers’ interest in battling heart disease. Cognis launched a branded strategy for Vegapure in February and said it is working with several companies on co-branding marketing support under the Heart Choice name. It expects a number of Heart Choice branded products to be launched next year. “We are learning from our European colleagues and are diligently working on duplicating their success in the U.S. market,” said Dave Eckert, vice president of Cognis Nutrition, who reported already seeing “great results both in functional foods and dietary supplements.”

While recognizing it’s early days for the U.S. market, P&G has also thrown its hat into the ring with Nutraphyl phytosterols and sterol esters.

Roller Coaster Ride for CoQ10
After Japan deregulated CoQ10 from drug use to foods in 2001, consumption skyrocketed contributing to a worldwide shortage and extreme price spikes. Since then, two things have turned undersupply into oversupply: new capacity coming on line in China, and cooling consumer demand in Japan due to confusion over dosages and disappointment over the results of CoQ10 in cosmetics—Japan’s biggest CoQ10 market. Whereas CoQ10 once traded at spot prices as high as $2,500-$3,000 per kilo, it is now in the $600 per kilo range, suppliers reported.

Two large Chinese manufacturers—ZMC and Hangzhou Zhongmeihuadong Pharmaceutical—have joined Japanese manufacturers Kaneka, Mitsubishi and Asahi in the market for naturally produced CoQ10. This year, Compound Solutions entered into an exclusive agreement with Hangzhou to distribute CoQ10 in North America and Europe.

In November Kaneka Corp., a Japanese supplier of CoQ10, added 100 metric tons to its existing 180 tons in Pasadena, Texas. “That extra 100 alone are more than any single competitor has in the global marketplace,” said Tom Schrier, national sales manager for Kaneka Nutrients L.P. “Supply is far outstripping demand at this point.”

According to Paul Yamaguchi of Paul Yamaguchi & Associates Inc. (Tarrytown, N.Y.), global CoQ10 production has doubled in three years and by 2007 will reach 300 metric tons globally, rising to 450 tons by 2009. Schrier estimated that the U.S. accounted for 190 metric tons of CoQ10 this year and will reach 230-240 metric tons next year. But while prices are down, there’s an upside to having more supply, said Schrier: “We now have extra capacity to support new growth and new markets for CoQ10.” In other words, with the ingredient now more available and trading at more affordable prices, Kaneka can take it into functional food, natural personal care, pet foods and beverages in the U.S.

“In Japan they’ve got CoQ10 in everything— drinks, gum, chocolate, toothpaste, yogurt and ice cream. What we can do is go show these products to U.S. manufacturers and say, this is what’s possible,” said Schrier. Besides new applications, other positive signs for CoQ10 are a trend among supplement customers to enlarge CoQ10 dosages (a clinical trial by Kaneka showed KanekaQ10 in healthy subjects was well tolerated in dosages up to 900 mg. per day). According to Schrier, Kaneka expects to quadruple the CoQ10 marketplace in North America in the next three to four years and believes the company’s 100% yeast fermentation process and clinical and safety studies will swing the market its way. Meanwhile Kaneka and others are keeping prices competitive to maintain share in the supplement category.

Fish oil: The two largest suppliers of omega-3 fish oil ingredients—Ocean Nutrition Canada (ONC) and EPAX—reported brisk growth in 2006. Consumer education through mass-market advertising surrounding omega-3 EPA/DHA ingredients in food products contributed to that growth, according to ONC, which focuses on the dietary supplement market with concentrated fish oil ingredients and on the human food ingredient market. Lori O’Connell, ONC’s marketing communications manager, described 2006 as “a very good year,” during which the company continued its trend of double-digit growth for sales exceeding $50 million.

Most of ONC’s volume and a good deal of growth are still on the supplement side. (IRI data cited by the company indicates FDM growth in omega-3 supplements of 106% in 2006.) ONC has also been opening up the functional food side of the market and saw 15 food applications commercialized using its patented Powder-loc microencapsulation technology: “You can expect significant market growth and distribution of major food brands on a global basis in 2007,” predicted O’Connell.

EPAX (Lysaker, Norway) announced global growth of 25% for its omega-3 products in 2005. Pharmline, the exclusive distributor in North America for EPAX brand omega-3 fish oil ingredients, reported its EPAX sales were up 50% this year compared to 2005. Contributing to growth was the brand’s focus on quality, purity and products backed with clinical studies,” said Greg Berthomieu, business development manager for Pharmline.

EPAX, which is the second largest producer after ONC, exited the commoditized (18/12 EPA-to-DHA) fish oil market a few years ago and focuses on concentrated fish oils for specific health applications. A placebo-controlled intervention study in patients with early stage Alzheimer’s disease is expected to boost interest in cognitive applications, although demand for all health conditions is good, observed Berthomieu. The EPAX study, which was published in the October issue of the Archives of Neurology, demonstrated that patients given an omega-3 concentrate high in DHA halted further memory decline.

This year more multinationals entered the omega-3 market. Cognis bought Norwegian omega-3 company Napro Pharma this summer; Degussa formed an alliance with krill company Neptune Technologies and Bioresources; and Puleva Biotech of Spain formed a partnership with The Wright Group for microencapsulation technology. On the non-fish oil side, Lonza acquired the algae-sourced DHA business of Nutrinova, a subsidiary of Celanese, at the end of 2005.

Competition, added capacity and the rising cost of raw materials and shipping have put pressure on supplier margins. In 2006, crude fish oil prices were significantly higher than in 2005 (which had been more or less in line with 2004), according to Jean-Francois Mittaine, director of market and trade issues at IFFO (International Fishmeal and Fish Oil Organization). Mittaine cited higher prices in line with the general price rise of all oils.

ONC described a 15% increase in crude fish oil prices at the source primarily because of fuel costs but also due to the devaluation of the U.S. dollar. “Both of these factors have put tremendous pressure on the margins of fish oil suppliers,” said O’Connell. “As old inventory is replenished with new crude oil at the higher prices, so it has forced suppliers to pass on these price increases to their business customers.”

There are also reports of price erosion, but this would most likely be occurring on the commoditized end of the fish oil ingredient spectrum. The cost of basic 18/12 fish oil used mostly in ‘general wellness’ supplements hovers around $3 a kilo in North America, while the more concentrated 30/20 ethyl ester blend costs four to five times more, according to Berthomieu, who noted that even this higherpriced blend is itself now being commoditized. For customized or highly specialized blends, prices can be as much as 20 times more than basic omega-3 oil per kilo.

With additional capacity coming on line globally and new players entering the market, some predict that omega-3 ingredient prices will tumble. But in Berthomieu’s view, the market potential for omega-3 fish oils, plus emerging new applications, notably in food, is strong enough to absorb new capacity. EPAX is planning to expand its production capacity.

Fish oil provides a good example of product cycles in nutriton RMIS: innovation, growth, specialized applications, branding and eventual commoditization. Managing a business across this product cycle is proving challenging indeed.