Building Long-Term Value In Nutraceuticals

Partnerships and acquisitions appear to be key.

By Greg Kitzmiller

What are nutraceuticals and functional products worth?

As we went to press, PepsiCo decided that the world’s greatest functional beverage, Gatorade®—plus all of the other Quaker pieces—is worth over $13 billion. To put that in perspective, it is expected that the spirits (alcoholic beverage) business from Seagram’s will bring about $7 billion. Clearly the Gatorade business alone is worth less than the $13 billion (PepsiCo’s convenience snack lines of Frito-Lay® products marry nicely with Quaker convenience items) and Gatorade has been enhanced beyond functionality with many flavors and a great “gotta have it” image. Yet, the core foundation of Gatorade business is functionality and without Gatorade, PepsiCo would not likely have wanted Quaker.
PepsiCo is seeking to build a beverage dynasty with Pepsi, the fading carbonated cola soft drinks business, Tropicana, its current functional star, its recently acquired SoBe business, its Aquafina water business and now Gatorade. According to announcements by PepsiCo’s current CEO Roger Enrico, “Quaker’s powerful Gatorade brand, the world’s number one sports drink, will make PepsiCo the clear leader in non-carbonated beverages, the fastest growing sector of the beverage industry. Additionally, leveraging the much larger scale of Gatorade’s vast warehouse distribution system will enable PepsiCo’s Tropicana juice unit to gain the scale it needs to make its ambient juice brands stronger and more profitable” (PepsiCo Press release, 12/4/2000).

In many ways the Gatorade story is old news but it clearly shows potential for functional products. It also shows the focus of a major food company, PepsiCo, on functional beverages. We’ve previously highlighted the story of PepsiCo’s premier functional beverage to date, Tropicana, as a world example of how to build a business with functionality. Now Tropicana will benefit from the latest health claim they’ve sought, this one for potassium. The company has been absolutely focused on communicating functional benefits. Now PepsiCo has a stable of nutraceutical products.

The PepsiCo purchase also exhibits the recently popular strategy of most largest firms—acquire or enter into a joint venture or partnership. This news also puts into question the role the joint venture between Quaker and Novartis—Altus Foods—will play. We’ve been told that Altus Foods is housed within Quaker in Chicago, IL, but staffed by both sides. The first product introduction is expected by first quarter of 2001. We’ll take a bit of a wait-and-see attitude after Novartis pulled its line from most of Europe and is clearly focusing on pharmaceuticals.

In other Novartis news, the company entered the supplement business recently with a 10-SKU line called Resource® Wellness. This line has some similarities to One-A-Day® and Centrum® by combining vitamins, minerals and herbals. It shows Novartis’ continuing interest in the consumer business outside of its outstandingly successful Gerber baby business.

Looking again at acquisitions, part of PepsiCo’s beverage competition in the future will come from the healthy beverage business North Castle Partners, Greenwich, CT, has put together mostly in the past year by acquiring Fantasia Fresh Juice Company, Orchid Island Juice, M.H. Zeigler and Sons, Saratoga Beverage Group, California Day-Fresh Foods/Naked Juice and Wiman Beverage. In North Castle’s press release they called themselves, “the country’s’ leading premium healthy beverage company” (North Castle press release, 12/6/2000). North Castle continues to grow as a company strongly anchored in functional products with acquisitions or major stakes in supplements with EAS, Enzymatic Therapy and Leiner Health Products.

Playing The Partnership Game

The partnership opportunity is clearly the direction many are heading, as seen with firms such as GalaGen. GalaGen was formerly part of Land of Lakes and has used dairy as the basis for very interesting partnerships. Proventra™ is the company’s first major branded ingredient and appears in supplement form in GNC stores plus in a Basics Plus line by Lifeway, which has a major ownership stake by Dannon. GalaGen’s business model is based on partnership and branding. Galagen’s CEO Henry Cardello gave an interview in December in which he said that Galagen is “the poster child” for forming alliances (CEOcast interview, 12/6/2000). The company’s intention is to follow the NutraSweet or Intel example of branding a component ingredient and supplying that ingredient to a number of partner firms in different categories. AHP/Wyeth will be relying on an alliance with GalaGen in the infant formula business.

At this time GalaGen is relying on its proprietary science and technology in the immune field. The company claims it can show better immune performance than many existing immune enhancers such as vitamins E and C and echinacea. One important factor will be how well GalaGen and its partners can make Proventra as an ingredient known. Tropicana learned a lesson that consumers readily accept component substances when they have high awareness. Will GalaGen be able to do major ingredient marketing (Intel inside) with its revenue stream coming from up front monies from partners? If it can find the correct investment flow model, it claims immunity is only the first of many categories of entry. Sports nutrition, skin care and oral care are also on Galagen’s list. The firm already began a relationship with Estee Lauder in 2000 for colostrum (the ingredient Proventra™) to be used in skin care.

PepsiCo, North Castle, and GalaGen have one similar strategic ingredient. Rely on something known. PepsiCo has not developed its businesses, it put together an interesting stable of brands. In this way PepsiCo has been more aggressive than Coca-Cola, who turned down the opportunity to bid on Quaker just before PepsiCo got it for a substantially lower price. Coca-Cola, it seems, has preferred to build from within. Interesting that Coke CEO Douglas Daft suggested the PepsiCo/Quaker deal might run afoul of the FTC after trying to sell such a deal to his own board and the same day he announced Coca-Cola’s lackluster financial performance.

North Castle, controlled by Charles Baird, has aggressively bought its way into known brand equities. It faces higher risk with less national brands and reliance on the supplement business, a segment of which has been built more on fads than long-term benefits since consumers cannot see immediate results. This has already been seen with concern over Leiner’s performance in 2000. Yet, North Castle has many opportunities in its stable.

So what makes GalaGen similar? Instead of buying brands it has tied to some strong existing brands and firms. It has covered multiple industries and is building on known and emerging science rather than fads. Strategically, this may be one of the most important firms to watch in the nutraceuticals arena.Can it command enough revenue and investment to allow it to build both science and marketing?

The combination of science and marketing made the Gatorade business what it is today. Who can build the next brand worth billions? Who has the patience to not expect an overnight $300 million? This will be another interesting year to observe—and comment on!

NW

Greg Kitzmiller is a marketing faculty member at Indiana University’s Kelley School of Business, Bloomington, IN. He is also co-director of the Global Business Information Network (GBIN) at the Kelley School of Business. He combines international and domestic strategic and marketing management experience with university teaching, professional speaking, executive education and consulting. Mr. Kitzmiller can be reached at 1309 East Tenth St., Bloomington, IN 46405-1701; 812-855-1004; Fax: 812-855-6440; E-mail: [email protected].