The dietary supplement industry is a fast-growing industry that has strong growth opportunities. However, it is a highly-competitive and hyper-fragmented market. A proper strategy is critical to launching successfully. Often, competition is only looked at as direct rivals going head-to-head for customers. Competition is more complicated than that. It goes beyond gaining market share and is more about improving profitability. Michael Porter, the founder of the Institute for Strategy and Competitiveness at Harvard Business School, discusses the five forces of competition. These forces include rivalry among existing brands in the industry, the threat of new entrants, threat of substitute products or services, bargaining power of suppliers, and buyers' bargaining power. Here is a look at the dietary supplement industry concerning the five forces of competition.
Threat of New Entrants
The threat of new entrants in the dietary supplement industry is high. I've joked that the only qualification you need to have a supplement brand is bench 315 lbs. Jokes aside, it doesn't take much to start a supplement company. Some contract manufacturers will "white label" a formula, allowing tiny run sizes to increase profit margins. This means that a contract manufacturer will create a stock formula and run thousands of units without labels. Then when you want to start your company, you can order a small quantity (I've heard as low as 24 units) and provide labels using their label template. The concern here is it severely dilutes the industry and causes minimal points of differentiation. This is why you see supplement companies pop up all the time. The threat of new entrants is a significant concern and not one to be ignored.
Threat of Substitute Products
The threat of substitute products is high in the supplement industry and ties in with the notion of white labeling discussed above. There is very little product differentiation in the dietary supplement industry today. Because consumers have demanded clear labeling (no proprietary blends), companies are failing to innovate. If a brand launches with a proprietary blend, it is immediately scrutinized for it. But if a brand launches with a new ingredient or blend of ingredients in an open-label, companies jump at the opportunity to knock it off. All this has created is an industry flooded with "me too" products. Running out of product for any length of time will create immediate problems, as your product can and will be replaced by the consumer. The threat of substitute products is another major concern in the dietary supplement industry.
Bargaining Power of Suppliers
As a dietary supplement brand, you have more bargaining power over suppliers except with branded dietary ingredients. Commodity or generic ingredients have very little bargaining power over their competitors. For example, creatine monohydrate can be purchased by most raw material suppliers in the industry. The lowest price wins the business. On the other hand, branded ingredients have most of the bargaining power on the supply side of the supplement industry. If you wanted to purchase a certain branded ingredient for your formula, you would be limited to the exclusive supplier of that ingredient. Sure, do generic versions of these branded ingredients show up? Absolutely. But if the branded ingredient has solid IP and is patented, it isn't too hard to stop those generic versions from gaining much traction. This is especially true when the ingredient is complicated to produce. The bargaining power of suppliers in the dietary supplement industry is something to be aware of but doesn't pose as much of a risk as to the threats of new entrants or substitute products.
Bargaining Power of Buyers
For a long time, dietary supplement companies were at the mercy of the retailers that distribute their products. Payment terms, pricing, and other policies were mostly in favor of the retailer. But times have shifted. The emergence of the direct-to-consumer model has limited the bargaining power of retail buyers. However, this has also shifted the bargaining power in favor of the end buyer (consumer). Hyper-fragmentation and ease of product substitution have put stiff parameters on the pricing models for dietary supplement brands. Consumers can easily find another option for the type of product they want at a lower price. There is always someone willing to operate on a lower margin. It is critical to understand the market's price point for product categories, as this will be a significant determining factor of a brand's success. Additionally, if a retailer's demands are not favorable for your brand, don't do it. Focus your efforts on direct-to-consumer and establishing a true demand for your products first.
Rivalry Among Existing Competitors in the Industry
The fitness world is driven by ego. Look better than someone else, lift more than them, run faster, etc. This same ego follows into the business side of the supplement industry. If you launch a product with six grams of L-Citrulline, expect your competitor to launch with eight grams. I know brands that will reformulate a product the moment they get knocked off of a top-ranked spot on a review site. If you launch something entirely new and it's an open-label formula, a knock off will be on the market in a month. Losing sight of your customer's best interest to win an online ranking competition is a recipe for mediocrity. The rivalry in the dietary supplement industry is fierce and driven by ego. No matter what you do, someone will try to one-up you or copy you. This is an expectation, and you have to be prepared to navigate around it.
What other factors do you see in the dietary supplement industry that influence competition?
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