In or out: the great divide

The nutraceutical industry is growing, with high consumer demand for dietary supplements and functional foods. However, in today’s highly regulated environment, business models are changing and many brand owners are looking to outsource key aspects of product development. Paul Altaffer of RFI Ingredients and John Altenburg of Vit-Best explain how contract manufacturing models are evolving and what this means for nutraceutical companies large and small.

Food and beverage manufacturing has never been an industry especially reliant on outsourcing. Despite a general drift in this direction, delegating your product development to a third party remains a relatively niche pursuit. According to research conducted by Rabobank, contract manufacturing will represent just 6% of Europe’s processed food and beverage market by 2020, up from 3% in 2012.

This stands in sharp contrast to many other industries, in which contract manufacturing is near ubiquitous. In fact, some years ago, Dartmouth business professor James Quinn described outsourcing as ‘one of the greatest organisational and industry shifts of the century’, making food and beverage something of an anomaly.

Still, if food manufacturers in general prefer to keep things in-house, one segment has fully embraced the shift, and that is the growing business of nutraceuticals. A portmanteau of the words ‘nutrition’ and ‘pharmaceuticals’, nutraceuticals perhaps edge closer to the pharma side of the equation when it comes to manufacturing practices.

Cast a wide net

Faced with rigorous quality standards and increased regulatory scrutiny, many companies are choosing to pass their manufacturing operations – and even in some cases their R&D – to experienced third party organisations. This stands to save them considerable amounts of money, creating economies of scale without the need for upfront investment. It also frees up time and resources to focus on their branding and market strategy.

“Contract manufacturers are able to offer the capacity to scale without capital investment as well as cost savings compared to many internal facilities. This combination has allowed many companies to concentrate their investments into marketing and other programs,” explains Paul Altaffer, chief innovation officer at RFI Ingredients.

John Altenburg, vice president of sales and client services at Vit-Best, adds that contract manufacturers can provide a flexibility that is rarely feasible in-house.

“They can make smaller batches, they’re more adaptable to a change in order quantities, and also have the means to be able to bring products to market faster than typically a large in-house consumer product company would,” he says. “They also understand what is required for clients in different countries.”

The cost crisis

It isn’t hard to see why nutraceuticals should follow a distinct set of manufacturing practices; after all, these are no ordinary food products. A blanket term, covering dietary supplements, herbal products, isolated nutrients, functional foods, and additives for animal feed, what all nutraceuticals have in common is that they blur the line between food and drugs.

Under Canadian law, a nutraceutical is defined as “a product isolated or purified from foods that is generally sold in medicinal forms not usually associated with food [and] is demonstrated to have a physiological benefit or provide protection against chronic disease.” In other jurisdictions, such as the USA or EU, the word has no legal meaning, and the rules depend on the precise nature of the foodstuff.

While nutraceuticals might defy easy categorisation, this does not mean they are subject to lower standards of quality control. In the USA, dietary supplements must abide by stringent FDA requirements, which ensure they are properly certified and tested.

These requirements, covered under the current good manufacturing practice (cGMP) guidance released in 2007, ask “that proper controls are in place for dietary supplements so that they are processed in a consistent manner, and meet quality standards.”

To minimise any disruption to small businesses, the rules were implemented over a three year period: while large companies needed to comply by June 2008, companies with under 500 employees had until June 2009 and those with fewer than 20 employees could wait till June 2010.

The implications were far-reaching. No longer could a small supplements manufacturer set up shop with a few pieces of equipment and an operating site – in order to remain compliant, they would need to ramp up their documentation, quality control and certification processes. For many, the costs were simply too high to shoulder in-house, and outsourcing became the only viable option.

“The major trends right now with contract manufacturing have to do with ensuring GMP and other regulatory compliance, confirming identity and supply chain transparency, as well as ensuring product safety,” says Altaffer. “Co-manufacturers who can partner with brand stakeholders to ensure quality, safety and innovation, will continue to experience growth in the industry.”

Of course, the regulatory environment hasn’t just affected brand owners. Contract manufacturers, which often bear the brunt of the regulations, have also been forced to up their game.

“The requirements for maintaining GMPs, identification, labelling and claims makes the relationship between the parties more important. Not all contract manufacturers are going to be fully prepared to meet these requirements and fully support their brand stakeholder customers,” continues Altaffer.

Go all the way

RFI Ingredients doesn’t define itself as a contract manufacturer per se – in Altaffer’s words, it is “more of a full-service product development partner”. A specialty ingredients manufacturer based in New York, the company has clients in the food, functional food and dietary supplement industries, and develops products ranging from fermented black garlic to enzyme-supplemented ginseng.

Because the company is vertically integrated, it provides a direct bridge between its clients and its suppliers, and offers more than just manufacturing: its services span the gamut from product development and formulation right through to packing and delivery. This provides a valuable competitive advantage – brand owners can outsource the whole process, knowing they’re benefiting from RFI’s expertise at every step of the way.

Vit-Best, too, has a far-reaching proposition. Formerly Vitatech Nutrition Sciences Inc, the California-based company develops products across weight management, sports nutrition, alternative health maintenance and dietary supplementation. It offers full range packing services and product formulation, along with sophisticated analytical laboratory monitoring.

Having started life some 60 years ago, the company says it has ‘grown up with the industry’, accommodating new trends and practices as the market evolves.

“We’re a solution provider,” explains Altenburg. “Whether customers need speed to market, whether they need a formulation to be updated, whether they have unique manufacturing needs, or whether they need to export to certain regions within a short window, we can provide solutions to all these scenarios.”

Both companies are emblematic of an emerging trend. Nowadays, the classical outsourcing template, which was predicated around ingredients sourcing and manufacturing, no longer seems quite so fit for purpose. Increasingly, co-manufacturers prefer to define the relationship less as a straightforward transaction, and more as a strategic partnership.

“It’s no longer, ‘I have something and you can buy it from me;’ it’s ‘how do we work together to produce a quality product, at the same time providing some cost savings’?” says Altenburg. “How do we shorten the supply chain to make sure it’s finished on time, and how do both parties make a return on the investment?”

In a relationship of this kind, transparency is crucial. In this new climate of regulatory oversight, there is little to be gained from obscuring key details. In fact, certain contract manufacturers are going so far as to sacrifice proprietary technologies in a bid to ensure an open flow of information.

“You need to be open about what’s going into the product, how it’s manufactured and what the costing is of the material, because in many cases our customers do know that already,” continues Altenburg. “We work with them to ascertain where they need to be from a price point or quality perspective.”

“You should have the difficult conversations upfront and align expectations,” agrees Altaffer. “Brand stakeholders who are looking to outsource to some degree should make themselves very close to and familiar with their co-manufacturers.”

Within this new outsourcing paradigm, there is no such thing as a one-size-fits-all solution. Today’s nutraceutical brand owners have hugely varied needs, and each will be looking for something different from the contract manufacturing relationship.

Vit-Best, for instance, says its customers range from entrepreneurial companies focused on a specific niche market, to multi-outlet chains servicing a multi-layered customer base. This is perhaps representative of the nutraceutical industry in general, which is notable for its heterogeneity.

Transparent workings

Currently, the market is dominated by large multinational players, which are rapidly expanding their presence in the global functional food and nutraceuticals market. These are household names – CocaCola, Nestle, PepsiCo, Kellogg – which have nutraceutical segments as part of a far broader product offering.

Companies of this size may not need to outsource; their business models may revolve around enhancing their in-house capabilities or acquiring smaller, specialist businesses.

Nestle is a good example. In 2011, the Swiss food giant created two new entities – Nestle Health Science and the Nestle Institute of Health Sciences – with a view to “pioneer[ing] a new industry between food and pharma”. It said it planned to invest $510bn in pharmafoods over the decade ahead. A year later, the company announced the $11.9bn acquisition of Pfizer’s infant nutrition division, following a similar move by its French rival Danone to acquire the nutritional supplements manufacturer Complan UK.

The road to success

Beneath the major players, however, sit a growing number of small and medium-sized nutraceutical companies for which outsourcing is essential. Altenburg says the need is greatest when companies are first starting out.

“Much of the industry is built on entrepreneurship,” he explains. “New entrants in the marketplace will rely on outsourcing initially, simply because they don’t have the necessary expertise or infrastructure. So when there’s innovation coming in, and a lot of young companies are trying, then you’re going to see outsourcing. Once they become successful, they’ll ultimately come to the decision of whether or not to make the products themselves.”

One of the unusual things about the nutraceutical sector, he says, is that there is no single, well-trodden path to success – people can enter from the industry from many angles.

“You have the technical side of the business – health practitioners, researchers and such who work on the back end of a product – and at the same time you have a lot of people who maybe use the products, believe in the lifestyle, and see a marketing opportunity that’s under-fulfilled,” he explains.

As a result, nutraceuticals are attracting attention from all corners. With major corporations plowing funds into the sector, and a surge of new companies attempting to gain a foothold, the industry is expected to grow rapidly in the next few years. According to a report by Transparency Market Research, the global nutraceuticals market was valued at $165.62bn in 2014 and is expected to reach $278.96bn in 2021, expanding at a rate of 7.3% a year.

This will create important opportunities for third party manufacturers, which are likely to see a corresponding surge in demand.

“While the industry does have its issues, it still looks bright long-term,” says Altenburg. “As contract manufacturers, our mission is to provide solutions for our customers, large and small. Our role is to make other people’s brands, while protecting and growing their brand equity.”

This article appears in the 2016 vol 1 edition of Ingredients Insight

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