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Trends and themes emerge in supplements deals

Thinkstock - serrgod supplement bottle labels
Nutraceutical businesses with a strong omnichannel strategy and a young, loyal customer base may be appealing targets for acquisition.

The consumer staples sector has undergone tremendous change over the last 20 years and the changes only seem to have accelerated over the last five years. We see the impact of a fundamental shift in consumer behavior everywhere from the growth of club stores to the acquisition of Whole Foods by Amazon in 2017. The retail sector is under pressure from online competition and shifting consumer preferences, and the producers of these products are also under pressure to lower prices, increase innovation and create growth.

Acquisition (or inorganic growth) is one method employed by established and cash-rich companies to adapt to this changing marketplace. Clorox and Nestle made major acquisition announcements over the last six months in the VMS/nutraceutical space. In our last piece for New Hope Network, we spoke about the VMS sector’s desirable demographic profile, and we think Clorox and Nestle were drawn to the growth of their targets and their favorable customer profiles. We would not be surprised to see similar acquisitions in the coming months and years. And while all deals are unique, we see trends and themes that could be of interest to growing businesses in the space. 

Online and “omnichannel.” The most interesting consumers, in our view, are young advocates. Such consumers spend time reading about nutrition and fitness online and evangelizing with their findings, becoming important de facto ambassadors for certain brands and products. Online sales of nutraceuticals have grown to approximately 16 percent of the market in 2016, from below 10 percent in the mid-2000s, according to Nutraceuticals World, and we expect this shift to continue. The online channel (including social media) appears to be the best way to catch and engage these brand advocates. It is our belief that these younger users will lead the natural products adoption arc and increase supplement use with age, and this makes companies with strong followings online especially appealing to bigger acquirors.

Businesses that cultivate relationships with their hardcore customers and create “evangelists” are interesting to companies whose main consumer loyalties come from generational inheritance and broad advertising. According to a company presentation, Clorox generated over 80 percent of its revenue from No. 1 or No. 2 brands in their respective categories. In certain categories, the company has maintained its No. 1 share position for decades. Yet, the company’s shareholders desire growth, not just strong share positioning. We believe that the company’s move into nutraceuticals with the purchase of Renew Life in 2016 and Nutranext in March of 2018 partly reflects its desire to build new sources of younger customers and penetrate channels where it can interact with those customers. 

Acquirers are eyeing younger demos. The dynamic in nutraceuticals contrasts with many other industries where purchasing often declines with age (think sneakers), and young customers must constantly be replaced with new ones in order to keep sales strong. In this industry, we see the opportunity for brands to educate and enroll consumers, then retain those customers for many years. Smart acquirers, therefore, are looking to tap trends in younger consumer groups and ride the wave with them. Growth-stage brands would be well-advised to leverage opportunities to build appropriate customer audiences, as doing so may only enhance enterprise value as those companies add scale.

Bakley Smith is a vice president leading the VMS/nutraceuticals vertical at Green Circle Capital, a leading boutique investment bank focused on health and wellness companies. He is a chartered financial analyst with over 17 years of experience in covering consumer-facing businesses.

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