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Industry Update

Industry Update Industry Update
Celadrin

With 2017 on the books, Vitamin Retailer (VR) looks at the state of the industry post Amazon-Whole Foods merger.

Participants:

• Daniel Fabricant, PhD, CEO/President, Natural Products Association (NPA), Washington, D.C., www.npainfo.org

• Michael McGuffin, President, American Herbal Products Association (AHPA), Washington, D.C., www.ahpa.org

• Mo Payette, CEO, Mother’s Market & Kitchen, Costa Mesa, CA

• Ramona Billingslea, Marketing Manager, Betsy’s Health Foods, Houston, TX

The year 2017 has come and gone, leaving members of the supplement industry to reflect on the rousing ride and excited to move forward to a rewarding future.

We asked experts—industry association leaders and retailers—about their thoughts on the past year’s most notable topics, including the ramifications of the Amazon-Whole Foods merger, supplement labels and claims, the growth of CBD, and other trends and topics to keep an eye on.

VR: It’s been almost five months (August 2017) since the Federal Trade Commission (FTC) approved the Amazon purchase of Whole Foods. What have you learned since then?

Fabricant: [There is] still much to learn, as all business[es] haven’t been integrated yet, but we do know that Amazon will look to the Whole Foods stores to mine data about the brick-and-mortar shopping experience the same way they have online to use those data points to shape the experience.

Payette: From what we have observed (aside from rumors of adding a possible “pharmacy” of sorts), it seems that Whole Foods may be less focused on supplements, body care and local products, with an emphasis on grocery, perishables, etc., therefore possibly providing an opportunity for independent/local chains to step in as a united front to jointly support these unique vendors.

They also seem to be working less closely with the many natural direct lines, and building partnerships with them as in the past. We are very close with our vendor community and hear much disappointment regarding that loss of personal touch, taking these products nationally for review. We have also observed more consistent pricing across the country versus regional/zone pricing.

Billingslea: Not unsurprisingly, we have noted how quickly Amazon has turned its emphasis toward promoting Whole Foods store brands, including increasing offerings of the 365 label online. The emphasis on private label has been further underscored by the announcement that Whole Foods will no longer allow sales reps from vitamin manufacturers to visit with its employees beginning in April 2018. To our understanding, Amazon will also be keeping its contract with UNFI, perhaps buying time to incorporate Whole Foods’ distribution needs with Amazon’s distribution prowess.

VR: Prior to the acquisition, Amazon had always been known for its quick service for a low price, while Whole Foods was more focused on consumer trust. How has that notion changed now that they’ve joined forces?

Payette: While it is still early to judge the magnitude of their partnership, we have heard from many people both within and outside of the industry that they are less focused on staffing the departments to adequately support customer service, which is evident when you visit the stores, and insisting on SKU rationalization throughout the stores—there are noticeably less SKUs and larger amounts of multiple facings already.

Fabricant: It’s still early, but I think you’ve seen some prices come down in Whole Foods, so I think their focus is to find those areas where those reputations can overlap in the best interest of the consumer.

Billingslea: Discussions that Amazon may incorporate self-serve kiosks at Whole Foods, along with the limits they are placing on manufacturer participation in their stores, seems to point toward a decrease in attention to customer service, which will only erode consumer trust.

Quick service at a low price does not often equate to high-quality, trustworthy products, especially when it comes to dietary supplements. Amazon will be making a very big mistake indeed if they assume that what they do well in marketing and distribution will automatically work for any product without first understanding the industry they are trying to take over.

VR: Some brick-and-mortar stores may say that this news has not greatly impacted their sales, as they can offer the education and a retailer-customer relationship that Amazon simply cannot. Do you agree? How will online retail sales be affected?

Billingslea: We do not choose to sell product online because what sets our brick-and-mortar store apart is the experience, knowledge and customer service that we just cannot provide online and still manage to compete on price.

Even before this acquisition, our stores have been impacted by Amazon in that brands we were promoting that did not strictly enforce a MAP (minimum advertised pricing) policy were ultimately costing us customers, who would buy from us the first time and then never return because they could purchase the same product so much cheaper online. Now, we are partnering with manufacturers who enforce a MAP policy with which we can stay competitive while offering our unique knowledge and customer-service oriented experience so that customers have no reason to go somewhere else for trusted supplement products.

Payette: It is true that brick and mortars can provide that interpersonal relationship along with education, but as some people will always want the personal experience, there is also a large growing population of customers who seek easy methods to buy online in order to save time and money.

Fabricant: When it comes to health and wellness, people will always want the brick-and-mortar experience if it is one that embodies a dialogue or relationship that shows the store owner/employees are thoughtful, knowledgeable and dedicated to living their principles.

When it comes to internet sales, that experience is driven by other factors (primarily price and convenience), so, it [is] a function of meeting those but also if there are other experiences that can be provided that may play a role as well.

VR: How will Amazon’s retail technology impact Whole Foods’ delivery options? Will smaller retailers begin to adapt delivery methods as well?

Fabricant: We will see how they adapt. The worst thing one can do in any business is do[ing] what you have always been doing forever without adapting or changing. I can remember one company in particular from the late 90s that was hailed as the best-run company (Lucent) and would be around forever. It is a recipe for extinction. The small retailers are essential, and there is a personal touch that is not realized with e-commerce. It will be how they adapt which determines their future.

Billingslea: As with most things, consumer demand will most likely determine whether or not smaller retailers also begin to adapt Amazon-inspired delivery methods. What will be really interesting will be seeing those smaller retailers who manage to think outside the box, coming up with unique delivery solutions for customers that fit the profile of their community and prove once again that shopping local most definitely has its advantages.

Payette: We know this is just the beginning, but it is obvious to expect a huge benefit for Whole Foods, from the Amazon technology world and delivery methods. It is imperative that we all stay up to date, nimble and prepared to work on efficiencies as well. More retailers are offering some manner of delivery service and it will continue to evolve.

VR: On September 26, 2017, the SNAP Vitamin and Mineral Improvement Act of 2017 (HR 3841) was introduced in Congress, which would allow for a multivitamin to be included under the Supplemental Nutrition Assistance Program (SNAP) benefits. This would amend the Food and Nutrition Act of 2008. Why do you believe there was such a delay in proposing this amendment?

Billingslea: Despite evidence to the contrary, most of this country still believes that Americans both need fewer nutrients in order to function and get more nutrition from the foods they eat than is actually the case. In addition, by admitting that supplemental vitamins and minerals are of real benefit, the powers that be give the nutrition industry a validation that is against the main thrust of other, more powerful lobbyists in D.C.

Payette: [This is an example of a] typical bureaucratic complication for a simple objective—getting basic nutritional supplements to those in need.

Fabricant: NPA pushed to have multivitamins as part of the WIC (women, infants and children) food package program. Dave Brat is the sponsor for that bill and we are working on adding more cosponsors to the bill.

VR: In a September 2017 ruling, Judge Louis Stanton of the U.S. District Court in the Southern District of New York dismissed the Federal Trade Commission and the New York Attorney General’s complaint against Wisconsin-based Quincy Bioscience, the makers of Prevagen. The federal court complaint alleged that the defendants enticed consumers to spend anywhere from $24 to $68 for bottles of 30 supplement pills by touting the product’s active ingredient—a protein derived from jellyfish—to improve memory and reduce memory problems associated with aging. How has that decision impacted the supplement industry?

Payette: [This is] an example of the importance of lab and third party testing, due diligence and clinicals to support label claims. As retailers, we must expect this from any potential company we may carry.

Fabricant: It is major from the standpoint of substantiation. This is the first victory for the industry to allow secondary endpoints from studies where subgroup analysis can be taken into account. It is hard to conduct studies on normal, healthy volunteer populations and obtain statistical significance for the primary endpoint over the entire sample size. Subgroup analyses can be used and this should make companies that invest in science happier about their pending investment in substantiation of claims with human clinical trials.

Billingslea: Even though complaints such as this are dismissed, they make everybody more cautious by reminding us that despite our laws, the nutrition supplement industry often seems to be operating on government sufferance. Still, we owe it to consumers to be diligent in properly labeling product[s] and in policing those who abuse the privilege of helping consumers achieve their best health. We need to eliminate companies that make disease claims or put ingredients in products that are illegal or not on the label to decrease the likelihood that legitimate companies have to go through the legal costs such as Prevagen faced even though they are staying within the boundaries of the law.

VR: The U.S. Food and Drug Administration (FDA) issued a proposed rule that would extend the compliance dates for the Nutrition Facts and Supplement Facts label final rule and the Serving Size final rule from July 26, 2018, to January 1, 2020, for manufacturers with $10 million or more in annual food sales. Manufacturers with less than $10 million in annual food sales would receive an extra year to comply, until January 1, 2021. Although no official ruling has been made yet, would this extension be helping the industry? Why or why not?

Fabricant: I think the question is whether the final rule is unnecessary and burdensome. First, the empirical data FDA used does not support some of their reasons for the changes they made. Second, ask the firms that manufactured dietary fibers for the industry if it is hurtful to them. FDA came up with a Citizen Petition (CP) process for the vast majority of dietary fibers that they used to accept on nutrition and supplement facts labels. Now those same companies must invest in two RCTs [randomized control trial] to demonstrate that their synthetic, non-digestible carbohydrate has a beneficial effect in humans (i.e. decreased transit time in the gastrointestinal tract). I think we already showed that with the discovery of osmosis two centuries ago. This is regulatory overreach, and how do small businesses compete with these new requirements? NPA has set out to show the Small Business Administration as well as other agencies through formal comments that this rule is harmful to small business. NPA submitted a CP to prevent it going into effect for three years. We were able to get an 18-month stay in it at the moment. While we know some firms are changing their labels, this fight is an important one. We are not giving it up. When has FDA provided an accurate economic impact analysis in these rules and guidance documents? That is the question we should be asking.

Billingslea: It seems to me that extending the compliance dates for improved labels only ultimately hurts consumers, who will be in the dark for that much longer. Only by educating consumers on how to look for warning signs like high carbs and hydrogenated fats, for example, can we help them make the best choices for their health. Delaying labels that more accurately reflect what constitutes a healthy serving does not seem like a win-win.

Payette: It will help to not alienate smaller lines that may require more time to come up with the money to pay for the testing, label changes, etc. that will be required to execute these changes.

VR: What are the biggest supplement industry problems we need to address right now?

Billingslea: From a brick-and-mortar retailer perspective, our biggest challenge in the industry is manufacturers who de-value their products by allowing online e-tailers to sell their products at rock-bottom prices no brick-and-mortar can compete with. What will happen when the brick-and-mortar stores no longer tout these too-cheap-online products to consumers?

We have decided to compete with this reality by partnering with manufacturers who have and enforce a MAP policy that allows us the opportunity to stay competitive. We are also promoting our store brand, which we really love.

Another big challenge to the supplement industry is the increasing amount of information we are all being exposed to daily. How do consumers determine which information is correct? How do supplement manufacturers and retailers make sure their messages get heard?

As healthy living becomes more and more popular, avoiding knock-off products or products based on bad science will become more and more challenging. Also, keeping ingredients that are legally dietary supplements as supplements instead of allowing them to be usurped by the pharmaceutical industry (which would only increase the price, as we have seen already with ingredients such as fish oils) will continue to be a problem.

Payette: The disadvantage of brick-and-mortar retailers to online price gouging. Enforcing MAPs and holding companies accountable to know who is selling their products online and for how much.

VR: What trends and types of products are going to gain popularity in 2018?

Fabricant: Memory support, longevity and sports nutrition.

Billingslea: The brain-gut connection seems to be gaining traction, coupled with memory and longevity concerns. More products that help America get its digestion on track will surely continue to gain traction in 2018. As health care costs continue to skyrocket, supplements that support overall health and well being will also become increasingly important to our industry. Payette: Plant based, gluten free and paleo will continue to grow, along with super foods, keto-inspired products, clean products with fewer ingredients, products with a purpose that tell a unique story/eco-friendly, etc.

VR: Looking back on 2017, what were the biggest industry surprises and why?

Billingslea: For our store, the biggest industry surprise was just how much effect Amazon’s low pricing and quick delivery was having on our return customer numbers. Now that we have re-worked our product mix, we are seeing an increase in our customer retention again.

Payette: The Whole Foods/Amazon event, the growing of organic/gluten free/non-GMO (genetically modified organism) products across conventional markets and their lowering of prices in response to Whole Foods/Amazon. Additionally, it is always a surprise to see which larger more conventional companies are acquiring independent natural brands as well as startups—the pace is noticeably increasing.

VR: More than 170 million Americans take dietary supplements and the industry contributes $122 billion and more than 750,000 jobs to the economy. Supplements definitely have a seat at the dinner table. Is this message getting through in Washington to U.S. legislators and to state legislators, such as in New York State? What evidence do we have one way or the other that supplements also now have “a seat at the table” in D.C. and in Albany?

McGuffin: These numbers demonstrate that the industry is mainstream among consumers, but some lawmakers and regulators still seem behind on this.

Several myths and misconceptions about supplement safety, efficacy and regulation persist and industry critics frequently exploit these myths, making the supplement industry a target for regulators and negative media coverage.

The supplement industry continues to work diligently to debunk misconceptions by building relationships with lawmakers and regulators to ensure they have accurate information about this well-regulated class of goods.

VR: In 2017, we unfortunately lost a number of industry pioneers and health experts, including (but not limited to) Elwood Richard and Jack Challem, respectively. What messages do you have for the next generation of natural products industry leaders?

McGuffin: It is important to know the history of this industry to build on successes and avoid pitfalls that have hampered the industry in the past. The industry has grown and modernized significantly. At the same time, it manages to preserve the values that helped make it so successful. It is important that we don’t lose sight of the aspects of the industry that have helped it grow.

VR: The popularity of cannabidiol (CBD) oil products has been surging. The FDA does not seem to be a fan of CBD as an ingredient in supplements, salves, balms and other non-medical delivery forms, correct? With this murky landscape, where do you think we will, or should, net out on CBD?

Billingslea: We are approaching the CBD market with a cautiously optimistic attitude. We began carrying the products only in the last year or so, and even then, only one company. We are attempting to choose products whose companies have a stellar reputation and who refrain from making outrageous, non-DSHEA (Dietary Supplement Health Education Act of 1994) compliant claims. We have only recently added a second CBD company, this one concentrated even more on the full-spectrum plant cannabinoids rather than potent extracts.

That being said, we are more carrying these products for customer demand rather than promoting them to customers for use. Even though we are excited about the potential benefit for our own endocannabinoid system by utilizing phytocannabinoids, we are also aware that the legality of CBDs may come into question at some point. The closer we can stay with DSHEA guidelines in our choice of products like hemp, the more we protect our customers’ safety and our legitimacy as a company that cares for our customers.

Like the ongoing question of what will be defined as an old dietary ingredient as opposed to an NDI (new dietary ingredient), CBDs fall into the category of yet another area where our industry has to help others understand the differences between a supplement and a pharmaceutical. Just because supplements can make differences in people’s health does not mean they are thus a drug. Hopefully, common sense and not desire for wealth will win out in this next rights battle when it comes to defining what makes a supplement.

Payette: Education is key here, and it would benefit those scrutinizing this category to better understand how these products are naturally improving lives with plenty of credible clinical studies and educational documentaries available, and more being performed regularly to this point.

Natural foods stores are not trying to become dispensaries—they are trying to offer quality hemp extract/oil based products for general health support and aid a number of conditions.

Just looking at a few of the top exemplary brands, they have taken great care to ensure that their quality and potency are intact, and they follow proper GMPs (good manufacturing practices) as any reputable supplement brand should.

Fabricant: My concern with CBDs is similar to the one I have made public in the past about kratom. While CBDs might not have the same safety concerns as kratom, there is a path for these products to come to market. Companies should play by those rules, and shouldn’t try to circumvent them just because they are perceived to be difficult or expensive. In either case, companies ought to put together dossiers for a[n] NDI notification.

VR: Anything else you would like to add?

Payette: With the growing awareness surrounding the natural foods industry, it will undoubtedly be a turbulent ride, and the transition of Whole Foods and Amazon may set the pace for where our attention is focused as they try to stay a step ahead, and we strategize to set ourselves apart. And the challenge: while there is nothing that beats good ol’ fashioned customer service, the times are quickly evolving to a new level of automation that we need to respond to.

Billingslea: It’s so exciting to see America embrace healthier living, but also scary. Fake organics, misleading labels and counterfeit products all make real knowledge that much more important for those seeking healthy living. What an interesting time to be a part of the health foods industry, with opportunities to help consumers live better without being cheated by typical, mass market “shortcuts.” VR

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