Nutritional Products Online Sales to Reach $1.6 Billion by 2003

NEW YORK—Sales of nutritional products via the Internet will increase to more than $1.6 billion by 2003, according to a 93-page report on nutritional products e-tailing released in mid-November by Salomon Smith Barney analysts Gregory Badishkanian and Holly Becker.

“The Internet is a powerful means of distributing natural products, particularly vitamins, minerals and supplements (VMS),” Badishkanian and Becker write. “Our proprietary study indicates that nutritional products sales will increase to more than $1.6 billion in 2003 from $34 million in 1998.”

The increase amounts to a 117% compound annual growth rate (CAGR).

Based on Salomon Smith Barney and Jupiter Communi-cations estimates, the number of online households is projected to increase to 59.4 million in 2003 from 28.5 million in 1998, a 20% CAGR. In other words, online penetration of households should reach 55.7% by 2003.

Badishkanian and Becker suggest that consumer- and technology-related trends should spur greater Internet usage and that consumer trends in particular, including the often-referred-to aging baby boomers and intensified mainstream media coverage of natural products, should fuel natural products sales growth. Additionally, they believe that natural products are well-suited to be sold via the Net relative to other categories because of the greater product selection and information that can be offered online.

Specifically, the report states that drivers of online natural products sales include:

n Selection: Online VMS sellers can efficiently maintain a wide selection of brands and vendors, but few currently do so. Notable exceptions, the report states, are VitaminShoppe.com and MotherNature.com.

n Repeat Usage: VMS products are sold over and over to the same customer.

n Low Spoilage and Efficient Shipping: VMS products aren’t easily spoiled or broken, and because of their light weight and small size, delivery costs as a percentage of total sales are relatively low.

n Increased VMS Internet Advertising: Because of the hundreds of millions of dollars invested in VMS e-tailers that will be available for online and off-line marketing, potential advertising could boost the online natural products distribution channel.

n Information/Education: Websites provide more detailed information about nutritional supplements products and health-related issues than do retail stores.

n Conversion of Catalog Users: Unlike prices printed in a

catalog, online prices can be updated at any time. As a result, “consumers may perceive the Internet as a source to search for better deals.”

n Mass Customization: Websites provide more interactive features and are more personalized than other channels. Therefore, they are able to give more personalized consultation.

n Community Interaction: Natural products consumers like to share their experiences and learn from the experiences of others. Traditional retail stores don’t provide a forum for this type of interaction but the Internet does.

n Privacy: Purchasing health-related products over the Net offers more privacy than purchasing them in the bricks-and-mortar stores.

n Demographic Trends: According to Forrester Research and Salomon Smith Barney estimates, the average online shopper earns $55,000/year vs. $35,000/year for the average U.S. consumer.

n The Touch Element: “We do not believe it is important for the customer to be able to pick the product off the shelf in order to be satisfied with the purchase.”

n Pricing: Nutritional products sold online are typically lower-priced than those sold in stores.

However, Badishkanian and Becker also write that despite the anticipated tremendous

growth of nutritional products e-tail sales, only a few industry players will succeed online.

“We have identified what we believe to be several key success factors, including access to capital, strong brand image, quality content, access to nutritional products users, management expertise, procurement and fulfillment capability, and leading market-share position,” they write.

Unlike the online book-sales sector, where, according to the analysts, Amazon.com dominates, the online nutritional products industry will have three to five leading sites including Drugstore.com, MotherNature.com, Healthshop.com and PlanetRx.com, they write.

The analysts also suggest that in a contest between bricks-and-mortar and Net-only e-tail sites, neither will come out on top.

They define hybrids as pure-play companies, based on percentage of sales generated from Internet sales, but with access to key bricks-and-mortar advantages via strategic alliances.

“As pure-play nutritional products sellers position themselves to go public, we believe they will be eager to form strategic relationships with leading nutritional products bricks-and-mortar operators,” Badishkanian and Becker write. “Given the scarcity of available leading bricks-and-mortar nutritional products operators, we anticipate near-term strategic relationships will create value for Wild Oats (OATS) and NBTY (NBTY) shareholders.”

For more information on “Surfing the Internet Is Good for Your Health!” contact Gregory Badishkanian, 212.816.2720, or Holly Becker, 212.816.0222.