Inside This Issue - Opinion
As growth rate slows in vitamins, chains must stay committed
January 10th, 2011
by Kurt Jetta, TABS Group
A funny thing happened on the way to all of the category pundits (including my company, TABS Group) stating that the strong growth of vitamins (10% to 15% annual growth) was destined to continue for quite some time: It turns out consumers and retailers weren’t listening.
Indeed, vitamins was the one large HBC category that defied the soft economy and posted large, consistent year-over-year gains. In the two most recent months, however, category growth has slowed down to a fairly pedestrian 2% to 3% rate, and the predictions are for growth in the 2% range for the next 24 months, all other things being equal.
Let’s first of all review key insight into the structure of the causes of deceleration in this important category:
1. The lower growth rates are not isolated to a few key segments or types; they are evident across all segments. There is a structural change occurring across the entire category.
2. There has been negative momentum that now appears to be stabilizing. On a 52-week basis, VMS (vitamin, minerals and supplements) growth was 8%, but the subsequent growth has been 4%, 2% and 2% for the latest 24-week, 12-week and 4-week periods, respectively. These figures represent growth rates in food, drug and mass excluding Walmart (FDM-x).
3. The deceleration had actually been occurring in the non-FDM-x channels quite a bit earlier. We were tracking actual category declines in some of the major retailers and flat sales in the vitamin specialty channel (e.g. Vitamin Shoppe and GNC) while the category in FDM-x was still exploding.
4. Mass market retailers, particularly Target Corp. and food retailers, stopped expanding the category assortment and SKU count several months ago and that was a significant — but secondary factor — in the lower growth rates. The VMS category has always been a category that exhibits what we call high SKU elasticity. That is, for each percentage expansion in category SKU count, unit sales respond at almost the exact same rate. For example, in food we consistently saw 8% gains in SKU count accompanied by 7% to 8% gains in unit sales.
5. VMS incurred a disproportionate cost as a result of the SKU rationalization initiatives at major retailers in the past six months. While VMS was not, for the most part, cut, a SKU-reduction environment certainly was not conducive to SKU expansion. As has been mentioned in previous issues of MMR, any category that was expanded in a major drug chain was almost always one that had little or no presence previously (beer in Walgreens, for instance).
6. The bulk of the weaker performance is consumer-driven. We call this measure organic growth, meaning sales gains in the absence of pricing or SKU changes. Organic growth for VMS was 4% for the last 24 weeks, but only 2% for the latest 12 weeks.
7. As noted earlier, the deceleration is widespread across almost all types, but it is particularly prominent in three types that fueled much of the previous growth: Fish oil, co-enzyme Q10 (Co-Q10) and probiotics. Probiotic organic growth now is basically flat at a meager 1%. We would expect that this type will start to decline once manufacturers and retailers pull back support due to this flattening out.
8. While we can’t quite label this a general trend, there is evidence that retailer actions are causing some of the consumer-driven declines. Most notably, they are cutting back branded selection at the expense of private label, and they are pulling back, or at the least, not increasing their price promotion support.
9. There is strong consumer evidence that the heaviest users in the category prefer a wide selection in brands. In fact, TABS Group research shows that heavy users are twice as likely as other users to agree that “I like to shop at retailers with many brands to choose from.” We also know from our consumer research that drug stores were very successful in growing their share among the heaviest category users (three or more types purchased per year). A reduction in branded selection, then, would be felt most against this very important consumer base.
10. With respect to promotional support, there appears to be a sense that specific brands can sustain only a certain level of promotional activity. In actuality, if a retailer is promoting [Pharmavite Inc.’s] Nature Made or Nature’s Bounty 26 times per year they can and should increase that to 30 or more times.
Certainly we see brands in ice cream, cosmetics and carbonated beverages promoted three out of every four weeks, and there is no reason that the top vitamin brands cannot be promoted at that level, as well.
In summary, we are recommending that retailers and manufacturers start to moderate their expectations on category growth rates for VMS to a range of 2% to 6% per year.
Additionally, the high end of that range can only be achieved if retailers make a commitment to expand SKU counts, particularly for branded items, while increasing the depth and frequency of their price promotions — assuming manufacturers will continue to help fund these promotions.
If they fail to make this commitment, then retailers will be lucky to achieve 2% growth in VMS, and it will be relegated to all the other lethargic growth rates we see for just about every other HBC category.
KURT JETTA is the founder and president of TABS Group (www.tabsgroup.com), which provides data analysis services to consumer packaged goods (CPG) manufacturers, retailers and financial firms.