Source: LOHAS Weekly Newsletter
Published: Sunday, November 01, 1998

For some time now the natural products industry has been center stage in the public mind. It is a cliché by now that, driven by rising health care costs and broad availability of information on alternative care, 80 million aging baby boomers are taking a more active role in managing their health.

However, it is no mere cliché that mass-market retailers and manufacturers are adjusting their product mixes to capitalize on this shift in consumer demand. This change in focus holds serious implications for the traditional natural products value chain.

Mass-market brand names such as Centrum and One-a-Day are positioned to be the greatest beneficiaries of the trend. Natural products manufacturers, who suffer from weak brand awareness, could see their growth horizons shrink in a hurry. The root of this problem lies, I believe, in the “push through” distribution model natural products manufacturers have used to bring their products to market.

A hard-core group of natural products consumers drove demand for new items, and the many small, independent retailers scattered around the country were quick to supply the demand. Manufacturers needed only to bring out their next new item and “push” it through the distribution channel to reach these dedicated consumers. The attraction of this model is its relative low cost, attributable to consumer advertising being secondary in importance compared to the lesser cost of obtaining distribution.

This method fostered a line extension mentality among natural products manufacturers, as opposed to a “single-product” approach, as with a product such as Ovaltine.

The shortcoming of this method becomes apparent when aggressive retailers such as vitamin chain stores, mail-order companies and mass-merchants offer deep discounts. With weak brand awareness and anemic co-op advertising programs, manufacturers have little power to tame these retailers’ discount impulses. The result is a dangerous retail price imbalance. Without the incentive for retailers of a compelling national co-op ad program to help tame these retailers’ discount impulses, manufacturers can do little to prevent a retail-price imbalance.

Independent natural products retailers rightly ask how they can be expected to compete against these low-overhead, low-service retailers. Consumers demand price parity for the same item sold in different retail outlets. Retailers can justify to their customers a 5% or 10% price premium based on value-added service and selection, but not 25% every day.

The shame of all this is that a natural remedy for, say, bone and joint health need not sell at $19.95 instead of $29.95, when the comparable prescription drug costs $90. By not addressing this problem, manufacturers needlessly run the risk of destabilizing the independents at a critical moment in their business life.

Manufacturers can exert more influence on retail price parity in two ways.

First, they need to allocate a larger portion of their promotional dollars to consumer and co-op advertising to “pull” the product through to the consumer. This will raise brand awareness and reward retailers who participate in the manufacturers’ programs by bringing more consumers into their stores.

Second, manufacturers must hold back a portion of the distribution margin from retailers to whom they sell direct. The best manufacturers are careful to limit their distribution allowance to retailers. Celestial Seasonings (CTEA) comes to mind as a manufacturer that does a good job with this. Price disparity on the teas between retail outlets is negligible.

The importance of correcting the price imbalance cannot be overstated. Independent retailers that carry the higher overhead of a trained staff and complete selection need price-parity protection.

Manufacturers who support independent retailers will benefit in three ways.

First, independents will get the margin relief they need to remain profitable and stay in business. Independents still account for more than 50% of total volume, and manufacturers would be wise to secure this revenue stream.

Second, manufacturers will have a hedge against the private-label movement in the super-naturals. The drive for cost efficiency at these publicly traded companies is in full swing and will increasingly affect manufacturers.

Third, manufacturers will support the segment best suited to make the case for quality to the consumer. Who will tell the quality story when the mass market enters the natural segment full force? Selling into the mass market without strong brand identity is a recipe for oblivion.

Jay Jacobowitz is president of Retail Insights, a consulting service for natural products retailers, in Brattleboro, VT. For information, call 802.254.8600, email info@retail-insights.com, or visit www.retail-insights.com.