Supplement Industry Mirage: Low Barriers to Entry
The supplement industry is incredibly competitive with high levels of market saturation and very low switching costs to the consumer. Those market dynamics severely restrict the probability of success, yet countless entrepreneurs each year still rush towards the supplement industry.
Why? Low Barriers to Entry.
A major allure of the supplement industry is that startup costs are fairly low…or at least that’s the conventional thinking propagated throughout the market.
Here’s my PSA for any (current or aspiring) supplement industry entrepreneur:
The often-cited low barriers to entry within the supplement industry are starting to disappear, as the cost of starting a brand, growing a brand, and sustaining brand equity have increased substantially in the last few years.
This article will focus on several major themes of change:
Customer Acquisition
Pricing
Inventory Management
Capitalization
Corporate Communications
While these might seem like distinct business concentrations, they are more interconnected than ever. The quicker you learn to adapt/evolve, the more likely you’ll limit your business continuity risk…
Customer Acquisition
Why have customer acquisition (both B2B and B2C) costs been rising?
More Marketing Channels to Make Content For
More Competition Across All Sales Channels
Low Brand Loyalty Leading to Higher Churn Rates
Experiential Marketing Being Unavailable Until Recently
Apple iOS Privacy Changes Zapped Marketing Arbitrage
What does this all mean?
You must re-evaluate your acquisition strategy
You must go back to the basics
You must seek marketing efficiency through retention
Pricing
It’s no secret that inflation is at a level not seen in more than four decades. While most of the media attention has been focused on the how the American consumer is paying more, the Producer Price Index (PPI) is at the highest levels since the Bureau of Labor Statistics changed the name from Wholesale Price Index in 1978. For those unfamiliar with the PPI, it measures the average changes in prices received by domestic producers for their output.
Why is this creating havoc on yesteryear’s low barriers to entry?
Simply put, supplement brands sell physical products. We aren’t talking about services or something like software, so a supplement brand needs to purchase physical inventory. When inflation is happening on the supply side, it costs a supplement brand owner more money to buy that same quantity of inventory. That was obvious, right?
The additional challenge that’s been happening lately is that supplement brand owners are getting hit with huge inflationary costs out of nowhere. There is no “slack left in the supply chain” and that leaves little warning or grace period anymore. What happens when you receive a transportation bill that’s double its normal rate? What happens when the main ingredient in your top-selling product triples in pricing?
What does this all mean?
You must improve your operating cash flow position
You must understand your brand equity before raising B2B and B2C prices
Capitalization
The supplement industry has been notoriously undercapitalized throughout its history. In my opinion this happens because…
marketing companies that sell XYZ supplements (which is most of the industry) often don’t place enough importance on hiring a qualified CFO
most supplement brands are run like “lifestyle businesses” and not legitimate business entities. This hurts the ability to explore outside funding instruments
products naturally have higher margins and growth can be adequately fed by free cash flows
investors have been shy get aggressive in the supplement industry because brand lifecycles have been shorter, negative media coverage of the space creates risk, and exit opportunities have been minimal compared to the functional food/beverage side
less frequency of outside capital raises makes for less tribal knowledge that could be helpful throughout the entire industry
In this current environment, being undercapitalized is likely one of the biggest disadvantages in business. Having a proper capitalization strategy is no longer “nice to have” but a “must have” for all supplement brands. A larger safety net of cash is needed, as every part of the value chain has become more erratically cost intensive. Supplement brands should consider both conventional and nontraditional ways to create more financial buffering.
Inventory Management
I’ve already mentioned that inventory costs have gone way up, but what happens when your manufacturing lead times are extended as well?
For decades, just-in-time has been the dominate inventory management strategy within the supplement industry. It makes sense, as businesses want to try and match their level of inventory to consumer demand as closely as possible. In an efficient supply chain period, manufacturers can meet slight fluctuations in demand, and theoretically create a situation where brands can sell more while reducing inventory carrying costs. That was the goldilocks era, and we may get back to that again one day, but supplement brands need to deploy a different way of thinking today.
Supplement brands need to focus on streamlining their product portfolio. After a SKU rationalization and prioritization process is complete, supplement brands need to evolve just-in-time to just-in-case. This inventory management shift will build up the “right” inventory and allow for a greater margin of error. This will keep digital and physical shelves stocked during the heightened demand period within almost all of the supplement categories.
To get more efficient, companies also need to consider a technology overhaul. This will be costly upfront but should pay dividends back by prying open the black box of demand forecasting through analytical tools.
Corporate Communications
This is not your typical “more money needed” heightened barrier to entry, but it’s just as important to recognize its impact. With more time at home to think about what they put in their carts; consumers have elevated their collective expectations that all brands must effectively communicate why they exist. It’s no longer just about offering tasty supplements, consumers are more conscious about a brand’s corporate citizenship.
Where does the ingredients come from?
Where does the packaging wind up?
What are the societal stances of the brand?
Is there diversified leadership?
Does the brand champion any social or charitable causes?
It’s not enough that supplement brands are being corporate citizens, they need to communicate everything clearly in today’s noisy market. That means spending resources on corporate marketing and storytelling that usually would be allocated to product marketing.
Final Thoughts
The supplement industry is entering a new era…one that will likely have higher barriers to entry. For supplement brands to prosper in the 2020s, they must embrace this new way of doing business or face higher business continuity risk going forward.