February 17, 2017
As the world goes digital, a select few companies seem to harvest the majority of the spoils. There’s Facebook, maybe Twitter, and a gallery of afterthoughts in social media. In Asia, there’s Alibaba for e-commerce. Inside the U.S., it’s increasingly all about Amazon, and dietary supplements are proving subject to that particular mega presence more than most industries.
Slice Intelligence, using data mined off a popular shopping app from its partner Slice Technologies, shows the extent of the damage. From a September 2016 article titled “Online vitamin sales are growing faster than the rest of e-commerce,” we learn the following: 77% of supplement sales now move through Amazon for the 4 million shoppers using the Slice app with millennial women leading the charge. More niche players’ online struggle for relevance outside Amazon’s mighty orbit, with Vitacost the only name to command any meaningful share. According to Slice research, GNC—perhaps too closely associated with its brick-and-mortar storefronts—barely cracks the top five for that remaining 23% of sales.
Even as Amazon casts this shadow over the industry, companies are moving more and more product online. Says Slice: “[Our data] shows the vitamin and supplement category is growing fast, with sales having increased by 40% in the last year. Online vitamin and supplement purchases are increasing at such a quick rate that the category is moving 12% faster than the e-commerce average itself.”
A double-edged sword, then. Amazon drives sales, but amasses more and more power as the conduit for those sales, and creates more and more reputational risk for the industry as an easy home for bad actors. Given this state of affairs in U.S. e-commerce, NBJ wondered what online sales of supplements look like across the globe. A few key insights follow.
Bracing for Brexit
As the 28 nations that make up the European Union bid adieu to the United Kingdom, how might supplements fare through the transition? John Venardos of Venardos & Associates LLC, a consultancy with deep expertise in global markets informed by his time at both Herbalife and Bodybuilding.com, sees both uncertainty and opportunity. “Historically, England has been fairly liberal in terms of commercializing and regulating food supplements. Now with Brexit, there are many new considerations. Does the U.K. need to create new food safety or standards agencies? How do they staff them? Do they change laws around notification and registration? Do they still remain harmonized with the EU on upper limits, on permitted vitamins and minerals and botanical sourcing? Or do they create it all anew?”
In a time so receptive to total resets and so sympathetic to protectionist impulses, moments like Brexit bring established norms back into question. Think of sports nutrition and the way EU ban lists might clash with local ban lists. Experts point to the leading trade associations involved here, including CRN UK, HFMA (Health Food Manufacturers’ Association), Food Supplements Europe, and IADSA (International Alliance of Dietary/Food Supplement Associations), to set the industry’s tone here.
Specific to online sales, the EU has “distance selling” regulations with local language requirements for websites. The intent is to arm consumers with the descriptions in their native language to fully understand product marketing and claims online, but, with English as a universal secondary language across the world, many products exist online without any website or label adjustment. The Internet does have borders. They’re just not always well guarded. Any company planning to sell across those borders faces uncertainty. Given lower penetration rates in the EU for Internet sales, especially in Eastern Europe, that uncertainty and the Brexit tumult could easily inhibit success online for U.S. brands.
Venardos remembers when Herbalife first entered Venezuela as an example of the way currency and repatriation of moneys can affect global sales online. Venezuela was the fastest-growing market in South America, until Chavez showed up. In quick succession, the Chavez government introduced restrictions on imports, restrictions on the repatriation of profits, requirements to manufacture in-country. It’s interesting to note that, despite investment by major brands in building local presence, online somewhat skirts this risk. Think of China, where vibrant markets for direct sales to consumers online in a “personal consignment” model have taken hold, and think of how Paypal happens in an instant, a glorious few seconds with little repatriation risk.
But the U.S. dollar remains strong globally, and, no matter how fast the cyber transaction, this inhibits sales of U.S. products in local currencies, even as most developing markets remain hungry for the U.S. quality seal of approval on products like supplements and cosmetics. Says Mark LeDoux, chairman and CEO of Natural Alternatives International: “Other markets are driven by demographics and economics. With the significant rise in the value of the U.S. currency, there is some inherent disadvantage in selling these goods into economies which have suffered currency devaluations. At the present time there is a real problem in getting currencies out of many markets in South America and Eastern Europe, and when combined with fairly blatant market protectionism favoring local producers, the sledding there is particularly difficult.”
Going online doesn’t suddenly change that dynamic.
All eyes on China
Most experts in the global supplement game point to China straight-off as the story du jour in online sales, and for good reason. NBJ has covered the confusing waters of China’s free-trade zones before, but the situation requires an almost daily diet of updates to stay current. It’s easy to miss something like the single-day sales record announced by Tmall, Alibaba’s B2C platform, in November 2016 of US$17.8 billion. It’s impossible to overstate how important that is for the industry’s global online trade. Supplements are the second-largest sales category on Tmall’s cross-border site out of Hong Kong.
The bottom line on China is that e-commerce has surfaced as a viable way to sell U.S. product into a huge consumer class willing to pay up for trusted supplements outside a chronically restrictive regulatory climate. Chinese consumers buy online at greater percentages than other countries, and they want foreign brands for many health products. With blue hat registration, an ordeal ($150k and three years per SKU) and a new notification system looking less and less attractive ($10k per SKU and you’ll still need the assistance of a local agent), cross-border e-commerce appeals as the best game in town, but not without risk.
NBJ asked Jeff Crowther, executive director of the US-China Health Products Association (USCHPA), to assess the pros and cons of selling online in China. For “free trade zones” where a bonded warehouse receives palettes, the pros include speed of delivery (3 to 5 days to a consumer’s doorstep) and a lower tax rate (11.9% on supplements). The cons, however, include inventory risks of product expiring in the warehouse, and pre-approval requirements dictated by the overseer of the trade zone. This presents obvious problems for hot-button categories like weight loss and bodybuilding, but also for some botanicals where the Chinese pharmacopeia differs markedly from European and U.S. standards.
For a “direct shipment” model, straight from a foreign company to a Chinese consumer, the pros are, first and foremost, the ability to sidestep Chinese regulations and oversight. The major cross-border platforms, like Alibaba or JD.com, partner with large Chinese logistics players (similar to FedEx in the U.S.) to avoid customs trouble. “Chinese consumers are leaning more toward this model,” says Crowther. “It cuts out the middlemen. They’ve found fake products in free-trade zones, and that’s been reported publicly, so this lets the consumer go direct to the company.” Direct also eliminates the inventory risk of working through a free-trade zone.
The cons there are increased delivery time, although that too has improved to 7 to10 days for most items, and the higher tax rate of a flat 15%. “Here’s a real life example of the efficiencies now baked into the supply chain in China,” says Peter Zambetti, director of global business development at Capsugel and chairman emeritus at IADSA. “I’ve got a friend in Shanghai. He likes Corona beer, so he goes on amazon.cn and orders a six-pack. It’s on his doorstep for $15 a week later. This has become so popular that it’s not going to stop.”
The cross-border e-commerce model became big business as “daigou” personal shoppers made good money buying abroad and carrying or mailing product back home. That model was ripe for evolution. Imagine a Chinese grad student in the U.S. bringing supplements back to her family, then moving that practice online through burgeoning C2C platforms at significant mark-ups. “Where there’s an opportunity, the Chinese are entrepreneurial and they’ll find a way,” says Zambetti. “It can become a legitimate challenge for companies to protect their brands when you start to see five different offers online at different prices.”
To wit: Experts showed NBJ evidence of this online with Dr. Mercola products. You can find saw palmetto from Mercola online for $25.97, and on Alihealth for $39.18. Purple Defense, a resveratrol product, lists online for $16.97 in the U.S., and $56.50 in China.
“This all stems back to trade,” says Crowther. “China’s trade policies with the rest of the world are so ridiculous. Alibaba is ingenious for figuring out a way around the policies, to bypass all that. Consumers want what they want.”
Consumers’ tastes and needs, however, don’t set policy. If cross-border e-commerce skirts government oversight, does that present real risk to brands selling into China? Yes and no. Take Australia, where companies embraced the daigou subculture for popular brands like Blackmores and Swisse and encouraged sales through that channel, rather than kick off a bunch of cease-and-desist letters. According to many NBJ sources, Australia brought nuance to China and reaped the rewards for it, until the government changed course and took supplements off approved product lists. Blackmores’ stock dropped 20% overnight. The company reported in August 2016 that an estimated $200 million of its total $717 million quarterly sales were tied to the daigou trade.
“We need to protect e-commerce before it gets abused,” says Zambetti. “China is such a big market, and it’s been so restrictive in the past. E-commerce is a way to get this done, but sooner or later, expired or adulterated product will cause a real problem and the government will have to do something about it. Right now, China is not even accepting blue hat applications, and they’re not up and running with notifications either. The industry is frozen there, or it’s online.”
Fickle government intervention be damned, however. Momentum matters. “It’s at such a point now, Alibaba is so big, that if China changes policy on supplements and decides to operate more like Hong Kong, most of these cross-border platforms would probably just shut down. That doesn’t mean internet sales would collapse. Tmall.hk just goes away, and tmall.com takes over. The supply shifts as needed. It moves to a different site.”
Online shopping gets easier every day for consumers—that Amazon drone will show up any minute—but for companies chasing those virtual shopping carts, the cash register can move suddenly, at any moment, or across any border.
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