It seems demand for nutritional supplements has been shrinking in developed markets as indicated by decreasing sales volume from store-based manufacturers and as well from direct selling. Nutritional supplement direct selling is, to large extent, about direct selling and pool size of sales force.

Sector’s current, trend, causes behind trend, and future

Current and Trend

1. Demand for nutritional supplements has been shrinking in developed markets as indicated by decreasing sales volume from store-based manufacturers.
2. While direct selling companies may sell different nutritional supplements, in terms of quality, to different segments of consumers as store based manufacturers and changes in size of their sales force for those direct selling companies may reflect more on the direct selling business mode than changes in demand for their products, a general decrease in sales force/numbers in all developed market may be a sign that the demand for the products is shrinking.
3. It is also possible that the favourable factors for direct selling, which are mainly consumers’ knowledge and their acceptance of direct selling, are shifting from developed market to developing markets.
4. The average selling price of store-based products has risen as a result of raised costs. This exerted pressure on sales but also brought high margins.
5. The drivers for direct selling have been shifting to developing market. However, the tightened regulation of direct selling in China may have significantly impacts on this shifting.

Causes behind the trend

• We think that there are many reasons that may contribute the downward trend in demand for nutritional supplement including those factors from demographics and products’ distribution channels. However, the changes in consumer’s concepts on health and nutrition may play the major role. The increasing awareness for more natural and healthier lifestyle may make consumers to turn to intake nutrition naturally such as from foods instead of eating nutritional supplement.
• The knowledge and concepts on nutrition and resulted demand for nutritional supplement have certainly direct impacts on performance in sales for those direct selling companies. However, to a large extent, direct selling is not selling one product but selling a business mode. Therefore, the direct selling depend more on size of potential sales pool ( local unemployment rate) and the acceptance of consumers to direct selling in that market but not on what are being sold. It is also related to government regulations and the available companies’ incentives, which is indirectly related to acceptance of consumers direct selling.

 

Industry Future

• Demand for nutritional supplement products will continue to exist but probably experience increasing downward pressure from shrinking demand as consumers in mature market re-think the alternative ways for them to intake nutrition.
• Direct selling is losing their drivers in mature market as more knowledgeable consumers grew up. New developing market, while getting more tightening in terms of regulation, will continue to present opportunities for direct selling.

General Financial Performance of Companies In the Sector

Our company data indicate that, in this direct selling nutritional supplements sector, the growth in sales basically has less to do with the products themselves than it is in store-based selling as the market and consumers get mature. The competition is intensive and companies are competing with each other mainly in sales force (re-sellers), which is the key determinant in performance of sales in this sector. The key to attract more re-sellers is certainly related to brands’ realization and incentives/commissions. However, to a larger extent, it is the acceptance of local consumers to direct selling to determine performance of direct selling and availability of sale force/unemployment rate.

This is particularly true in matured markets such as Western Europe, North America, South America, and Japan, where the total numbers of active sales force are limited in current favourable employment market and the demand for nutritional supplement products has been decreasing as more alternative products and concepts are available.  As our data indicate, the sales have been shrinking in those markets for years (especially in 2017) and the only way for some certain company to gain sales growth is to provide more favourable incentives than competitors. Immature markets and consumers seem to have potential to become the driver for direct selling of nutritional supplements. However, internal uncertainties in Eastern Europe and small market in Southeast Asia all create unfavourable environment for this sector. China has been contributing to growth significantly. However, the newly tightened policy of direct selling in China has made things changed and some companies have to look to channels other than sales force direct selling, such as e-commerce, to sell their products, which is completely different stories. Some of companies, who utilize agencies in Hong Kong to delivery products to their direct sales in china, seem working well even though the margins are not likely to be as high as before. In addition, this business operating gets involved with risks of more complicated policies.

High gross margin is major characteristic of this sector. The typical gross margin for company in this sector is around 79% with 42% commission as percentage of sales and 25% SG&A as percentage of sales. Therefore, they usually have operating margins of 12%. All companies have experienced decline in cash flow in 2017 due to slowing down sales/deleveraging of incentive spending in US market but positive growth in cash flow in 2018 thanks to rebounding sales.

According our analysis, a typical ratio of enterprise price/adjusted EBI is about 33 with very wide span between 10 and 65 with interest/EBI ratio of 1%. 

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