Running head: THE HEALTH FOOD SUPPLEMENT INDUSTRY

The Health Food Supplement Industry
Jack Welch Management Institute

Managerial Economics 515
August 3, 2014 Abstract
The health food supplement industry has grown substantially in the last four years. Since 2010, the economic growth in the US has caused consumers to become more heath conscious. These consumers are willing and happy to spend over $90 per trip to their vendor to buy vitamins, mineral and supplements. These highly valued customers have created a $28.4 billion in profits in 2012. This market segments is primarily adults and are purchased primarily by women. Many vendors such as Advocare, Plexus, Beachbody and Herbalife, have all seen an increase in their profits during this health movement. The Health Food Supplement Industry
The health food supplement industry has grown substantially in the last four years. In 2011, the US market was the leading country four purchasing nutrients and supplements in the world (Wood 2011). In 2010, the nutrition and dietary supplements market reached $28.4 billion, which was a $3 billion increase over 2009. It was reported that the growth was due to the ending of the recession, the increase of employment levels and an increase in chronic diseases. This industry receives a seven percent annual gain, which is approximately $2 billion increase in sales every year (Buckley 2012). The vitamins, minerals, and supplements segment has generated substantial incremental sales and has an allegiance of high value shoppers. In 2012, $11.5 billion in sales revenue was generated which was a 6.5% increase from 2011. According to the Council for Vitamins, Minerals and Supplement Products, 71% of US consumers reported that the economy had no effect on their household’s purchasing habits of dietary supplements. “Of the 29% of consumers whose buying behavior was impacted, many used tactics such as reducing purchase frequency, purchasing during promotions and buying less expensive brands to enable on going purchases” (Buckley 2012). “Sixty-eight percent of American adults take nutritional or dietary supplements, according to CNR’s 2012 annual survey. Consumption is higher among women than men, and follows fairly distinct age-related patterns characterized by high population penetration among children, lowest usage among teens and young adults, followed by usage that increases steadily with the advancing age” (Buckley 2012). The different segments of this market are users of vitamins and dietary supplements, herbal supplements, herbal supplements, sports nutrition and probiotics. Of the five, sports nutrition has been the most profitable. “Rising incomes, baby boomers, changing lifestyles, an increased focus on health, high incidences of diseases are some of the factors that are driving the demand for nutrients and supplements” (Wood 2011). Those that purchase health supplements are repeat purchasers, with a repeat purchase rate of 81%; this makes them a highly valued consumer segment. Their average spending cost each time they make a purchase is $96 (Buckley 2012). This market is considered perfect competition; currently the vendors have a large number of buyers and sellers that each have a non-controlling market share that are filled with homogenous products that can easily be substituted for one another (Hirschey 2009). Some of the current market leaders are Advocare, Herbalife, Beachbody and Plexus. Each of these vendors supply customer’s with a vitamin mix of supplements that promise an increase in energy, metabolism and weight loss. Everyone in this industry has access to cost information and so the companies are considered price takers and have the ability to earn a normal profit over time (JWMI515 L 2, W5).
Currently this market is experiencing supply-side economies of scale. All of the vendors are producing larger volumes and enjoy lower costs per unit because they can spread their fixed costs over mover units and employ more efficient technology (Porter 2008). Currently the these larger supplement companies provide two options; a consumer can purchase the products every 30-45 days that will include shakes, pills and a meal plan. Or the consumer can become a distributor and receive an instant discount of 35-50%. With this option the consumer, now distributor must pay a monthly distributor fee but receive a marketing coach, team coach and a free website.
Sales for the health supplements are expected to reach $15.5 billion by 2017 if it continues with its annual growth rate of six percent per year (Buckley 2012). For those businesses that are utilizing at home distributors and the internet to sell their products, this figure will likely be higher because they do not have additional overhead cost. The potential extrants in this industry that pose a credible threat are Advocare, Plexus, Beachbody, and Herbalife. These brands have thousands of testimonies that support their supplement products that increase the degree of competition. Currently the market has a minimum efficient scare that is large in relation to overall industry output. Yet, because these companies are functioning like a pyramid this will continue because they will soon have just as many distributors as they have buyers. These vendors have a long run firm supply chain, they are able to cover all necessary costs of production and earn a profit sufficient to provide an adequate return rate (Hirschey 2009). The fixed costs for businesses such as this are cost of materials, factories, shipping, materials, websites, print communication and salaries of executives. Costs that are variable are commissions to their sales teams and cost of advertising. This industry definitely will have diminishing returns to factor because the more people they employ to sell their product, the less their product will sell over time. They will eventually have more distributors and have flooded the market (Hirschey 2009).
Threat of Substitute Products Threat of substitute is substantial. There are many groups that surface every year promising packaged seals for their products and change in lifestyle. Each offer shakes and vitamin supplements for with a 30-45 day supply for $150-$250. While each promises to be different, the only real difference is how a person’s body reacts to the supplement and the cost. With low switching cost, the competitor has the ability to enter the market and take customers from other competitors. A possible threat in this department is if one of the vendors was able to create a product that would help in additional ways that would appeal to a new premium market. For example, testimonies for Plexus Slim stated that the customer’s not only lost weight and had more energy, but their skin was more clear and their hair was thicker, healthier, and shiner than before. For any consumer that was on the fence about which company to go with, this could be a deciding factor because they offer more benefits that the others do not
Intensity of Competitive Rivalry in the Industry The competitors in this industry are numerous and are roughly equal in size and power. However the rivals in this market are committed to the business and have aspirations of leadership (Porter 2008). They are also competing for large commission checks, vacations and electronics. Price competition does occur between these vendors, while their average package is the same across the board, they will host 72 hour or 7 day promotional sign ups to compete against the other vendors. Because all of the vendors participate in this form of promotion, these companies have a zero-sum competition. A threat could be posed in this industry is if one of the vendors is able to significantly lower the cost and eliminate distributor fees. This could likely be detrimental to the other health vendors.
Threat of New Entrants There are many health care supplement businesses that only operate via the internet that pop up every year. Currently the most popular are Advocare, Plexus, Herbalife and Beachbody. Each of these vendors make their salesmen sign an agreement that states they will not talk negatively about the other, this makes it very easy for a customer to try the competitor. When you sign up for one of these vendors, you receive a coach. This coach will reach out to you via text or phone call two to three times per week. The fear of letting their coach down by going to a competitor may deter the consumer from leaving. Especially since the coach is usually a friend, family member or someone you know very well. New extrants also do not have to have a large amount of capital in order to enter the market; in return, they do not provide a barrier for entrance of new competitors. None of the salesmen for these products are locked into a contract nor do they have any form of noncompetitive agreement. There is nothing that would deter a salesmen or customer from going to the competitor. Since one of the primary resources for advertising is through social media, which is free, normal marketing and communication expenses do not exist. Currently these products are not being sold through large distributors like Wal-Mart or Walgreens. If a new vendor were to take the same approaches as the others and market their products in a large retail environment, it could be the end of some of the vendors.
The Power of Buyers The buyers have power in pricing and quality when it comes to these products. Since each of the companies promises the same results; weight loss, appetite suppressants, and an increase in metabolism, etc., consumers are not as loyal with a product as long as they see results. So if more consumers are purchasing from Plexus, Advocare is more likely to start a two week promotional deal at half the cost in order to compete. When speaking to a distributor, if a consumer expresses interest in buying yet you are not pleased with the price, the distributor is likely to send you a free supply or to make you a distributor in an effort to offer you a discount of 50% for your first purchase.
The Power of Suppliers The suppliers in this market do not hold too much power. Since there are endless resources for the same product, just with a different name or flavor, this market doesn’t have room to increase prices. Advocare has a shake/meal replacement called Spark, Plexus has Plexus 96, and Beachbody has Shakeology and Herbalife has Formula 1. All promising the same results, with the same flavors and cost. If a supplier were to increase their prices, the company could easily take their recipe to another company to retain their cost. Because these products are standardized and undifferentiated minus a few readily available ingredients, the vendors have the ability to play the companies against each other to obtain lower prices. The only change is see in this force is selling the products in stores. Beachbody has partnered with Starbucks to begin selling their healthy breakfast items. This provides the suppliers of Beachbody with more power than the other vendors. This will give them the power to create their own numbers to increase the amount of products that are created in order to sell them in retail stores. In conclusion, the health food supplement industry is growing and will make substantial profits over the next five to ten years. Those that are leading the way with innovative ideas and low cost will continue to dominate the market by retaining low overhead cost. These vendors will continue to do well during this current boost for the economy to become healthier. There is room for more vendors to penetrate the market, which will likely happen, in which the process of diseconomies of scales will begin, but these vendors will have at least five years to become innovative to avoid this from occurring or to slow down the process.

References
Advocare. Retrieved from: http://www.advocare.com/products/default.aspx
Beachbody. Retrieved from: http://www.beachbody.com/

Buckley, A. (2012). Vitamins, Minerals, and Supplements: The Retail Opportunity. Vestcom. Retrieved from: http://vestcom.com/VMS_Opportunity_Part_1
Hirschey, M. (2009). Managerial Economics, 12th Edition. Manson, OH. Cengage Learning.
Herbalife. Retrieved from: http://opportunity.herbalife.com/

JWMI 515. Week 5. Competitive Markets: Winning in the Marketplace.
Lecture 2.

Plexus. http://www.plexusworldwide.com/opportunity

Porter, M. (2008). The Five Competitive Forces That Shape Strategy. Harvard Business Review. Harvard Business School Publishing Corp.
Wood. L. (2011). Nutritional and Dietary Supplements Market in the US
Opportunities and Future Outlook. Business Wire. Retrieved from:
http://www.researchandmarkets.com/research/26195b/nutritional_and_di