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Anyone managing a business that produces health ingredients can take heart from the fact that if they are finding it tough to grow sales and profits as fast as they would like (or even make any profit at all), then so is everyone else. Companies large and small alike find it hard to make money in health ingredients – and ten years or more from first sale to break-even isn’t unusual.
The challenge, of course, is to get shareholders and CEOs to grasp that this is the reality. Wherever they look they’ll see websites, trade magazines and poorly-researched reports forecasting massive growth in health ingredients.
One of our favourite examples of this false forecasting was for lutein, a compound extracted from marigold flowers which has eye health benefits. Look back seven-eight years and you’ll find no shortage of predictions that lutein was set to be a massive growth area. No-one could ever explain why it would be so big, of course, and those same forecasters are today keeping pretty quiet about their misplaced optimism. Lutein has made fair inroads into dietary supplements, but it’s still a very small ingredient – and in food and beverage it has failed to make any headway.
Recently Swedish probiotic specialist Probi, a twelve person science-based business with a suite of patents and hundreds of clinical studies under its belt, announced its second-quarter results. It showed that the company – whose probiotic is the active ingredient in Pro Viva juice, one of Europe’s most successful functional beverages – was generating profits and set to do so for the rest of the year. But it has take Probi ten years to get to that point. If a company associated with an ultra-successful brand like Pro Viva takes that long to get to profitability, then how could anyone else hope to do better?
Most companies can’t wait that long. Tate & Lyle, a major sugar producer, last week announced that it was pulling out of production of astaxanthin, a nutrient used in fish feed and also a powerful antioxidant for which there’d been high hopes in the nutraceutical market, with one forecast putting growth at 15% a year.
Tate & Lyle’s foray into astaxanthin had lasted four years and was generating over $6 million/€4.5 million in operating losses. In addition to the company’s up-front $30 million/€22 million investment in setting up production there will be a multi-million euro cost for closing the plant. Rising costs and declining market selling prices killed the business.
The decline of market prices is common across all health ingredients – even those where there’s little Chinese competition to drive pricing down. Health ingredients are little more than undifferentiated commodities – Tate & Lyle’s business wasn’t protected by its patents or by its “unique technology” – and there’s over-supply in every area.
What’s more, most health ingredients are intended for use foods and beverages, and as everyone knows, price competition in finished consumer foods is intense and this reflects back into the prices that companies will pay for ingredients.
Competition can even see your sales go into reverse, long after you’ve established your market. This has been the recent experience of Benecol, which saw sales of its cholesterol-lowering plant stanol esters fall 20% in the first half of this year. If that can happen to the number two player operating in an established market with major branded goods companies as clients, it can happen to anyone.
If anyone still needed to be convinced of just how tough the world of functional ingredients is, or of the elusiveness of profits, then they need just to look beyond the hype to what is actually happening in the market-place.
In each market only two or three companies will generate significant business and the remainder will be ultra-niche players. There will, of course, be plenty of ultra-niche opportunities – and the best thing most companies can do, if they can’t invest enough to be number one or two in the market, is to re-write their business plans to reflect this reality.
If you can make good profits at $5 million in sales then you’ve got a business worth having. But if your business projection is for sales to be much above that any time in the first ten years after your first commercial sale, you might just need to give yourself a reality check. It would be better than running after mirages.
Julian Mellentin
Julian.mellentin@new-nutrition.com
