SUPPLEMENTAL INCOME

ROBERT VOSBURGH

WHAT'S HUGE, FLAT AND REQUIRES a lot of attention?

Retailers who took their acetyl-L-carnitine today should know the answer: the sprawling $20 billion dietary supplement category, of course.

Supplements are everywhere, available in multiple forms. They're in supermarkets - and they also line the shelves of specialty merchants like GNC, sit on gas station counters in single-dose blister packs, and are the subject of miracle-induced testimonials on late-night television.

The food/drug/mass channel, excluding Wal-Mart, captures less than a quarter of the market. ACNielsen puts sales of what it calls the "total vitamins" category at $3.4 billion, while Information Resources Inc. pegs annual sales at $2.3 billion.

While the firms generate different numbers based on which subcategories they include, both show sales flat or decreasing. According to IRI, dollar sales were down 1.9% over the same period a year ago; Nielsen showed virtually no statistical change for roughly the same period.

The size of the supplement market and its universal presence burden traditional supermarkets with a challenge often faced in commodity categories: The one-size-fits-all "sameness" does little to attract new consumers. The situation may soon improve, however, as consumers gravitate toward solution-based shopping in all departments. In the case of wellness and supplements, they're looking for solutions to condition-based ailments.

"The three [trends] that are up there right now are healthy heart, bone and joint, and overall women's and men's health," said Steve Smith, vice president of marketing at Kash n' Karry/Sweetbay, Tampa, Fla. "Bone and joint in particular seems to be a baby boomer thing. A lot of active adults are looking to stay fit."

Industry observers say supermarkets using this strategy are able to maintain an attractively priced offering of everyday vitamins, while cherry-picking cutting-edge specialty formulas - such as condition-specific remedies - that bring a higher ring.

"We as consumers tend to think of conditions," said Loren Israelsen, president of the LDI Group, a Salt Lake City-based consulting firm. "Consumers in the food store are finding things like Minute Maid orange juice with a big red heart label that says, 'Now containing phytosterols,' which have an authorized health claim. They're being invited at various points of purchase to be thinking in terms of condition-specific items."

Sweetbay and other retailers who group supplements in this manner are onto something that's already prevalent in the rest of the store. Consumers have begun thinking about food as one way to address specific health conditions, and it's natural for them to extend this approach to the supplements aisle.

"We segregate our sections by specific remedy," said Matt Mesok, category manager of natural and organics for Heinen's Fine Foods, Warrensville Heights, Ohio. "All our joint and muscle remedies are merchandised together. Products for healthy heart we'll merchandise together. That kind of thing."

The 16-store independent operates Planet Source whole-health sections in 10 units, each with a large selection of supplements.

"Planet Source is our umbrella and includes the wellness centers, and natural and organic meats, produce and groceries," Mesok said. "We try to get Planet Source toward the front of the store. As we remodel stores, we're getting them up close toward the front end. In our latest store it's snuggled between health and beauty aids and produce."

According to the Natural Marketing Institute, condition-specific supplements are showing a compound annual growth rate of 9% - more than double the rate of the entire industry. The increase explains why traditional retailers are redesigning their supplement sections to offer convenient, one-dose solutions for the various conditions afflicting mainstream shoppers. At Stop & Shop, Quincy, Mass., the mix in individual stores is determined by the size of the store and the amount of space devoted to the segment.

"The products are merchandised in distinct sections that are directed at lifestyle and product function," said Rob Keane, the Ahold USA-owned company's spokesman. "For example, these sections include heart health, women's health, diabetes health, bone and joint health, multivitamins, and single entity/amino acids."

All of the chain's 365 stores carry dietary supplements to some degree, with an average of 1,200 stockkeeping units per store, he said.

As supermarkets update their formats and incorporate up-to-date merchandising schemes, retailers are finding new opportunities to revive lukewarm sales. The key is to tie the section in strongly with a retailer's whole-health strategy, just as natural and organic foods and beverages are.

Sweetbay's Smith said the chain's growing format uses supplements strategically to bridge categories and capture cross-over consumers.

"[Supplements] appear in two areas, depending on the store - in health and beauty care, which is attached to our pharmacies, and they also appear in Nature's Place, which is our natural and organic section, which is more of a store-within-a-store," he said. "HBC is packaged with pharmacy to create sort of a store-within-a-store, as well."

The Hannaford Bros.-owned chain is converting its 84 remaining Kash n' Karry's into Sweetbays, with 48 slated to be completed this year.

Research shows consumers buy supplements in supermarkets because they usually find better prices and more bonus packs. Indeed, no one can accuse supermarkets of having a poor selection of nutritional and dietary supplements. Single- and multivitamins dominate the overall section, and allow supermarkets to capture about a third of total category sales.

But it's this standardized, conservative approach that may be hindering sales, too.

"You see this particularly in categories adopted by consumers - glucosamine, CoQ10 or fish oil," Israelsen said. "If you go to Costco you'll see they have a tremendous inventory load because the consumer is looking for best price, best value. You won't see a lot of innovation in the big boxes, however. They seem to adopt whatever's already a successful product. The new, innovative products remain in the health food retail channel."

Maryellen Molyneaux, president of Harleysville, Pa.-based NMI, agreed, adding that conventional retail's tendency to segregate natural and organic products throughout the store creates a piecemeal atmosphere that can confuse customers.

"This is what makes consumers seek out natural and specialty channels, and it's something supermarkets miss: The specialty channel has put everything in one place with a lot of information available," she said.

The natural food channel does have some advantages over conventional retailers. For one, they are masters of presentation, merchandising supplements and homeopathic remedies in a homey, intimate shopping environment that fosters associate-consumer relationships. When it comes to discussing personal matters like health conditions, this can be a distinct advantage. Many large operators try to re-create this scenario - with varying degrees of success - by building store-within-a-store sections with track lighting, lower ceilings and different flooring. However, there's another aspect that remains largely untapped, particularly with regard to specialized supplements: private label.

"If you want to nail customer loyalty or put your imprint on the category, you have to offer private label. We offer a lot of herbs, like oregano oil, that you normally wouldn't find in other private labels," said Shayne Butler, manager of health and beauty at Ellwood Thompson's, a well-known natural food store in Richmond, Va. "We do some formulas, too, like acetyl-L-carnitine, that are very competitively priced. People will come in over and over just for these and are very disappointed if we're out of stock."

There's typically a $10 to $15 price differential between the brands and the store's own Ellwood Thompson's label. Butler said it's the products with unique formulas that make the difference, and it's something mainstream retailers should consider including in their portfolio.

"Having a few specialty items is the real payoff. Everyone has vitamin C and they're going to be pretty close price-wise," he said. "But when someone can save 15 bucks on an amino acid, that's where you can really make a hit with people."

Consumers might still be learning about alternative health, but industry observers point out that the market is only going to increase in the coming years as shoppers empower themselves with knowledge of alternatives to traditional medicine. Supermarkets can be a primary destination for getting them started - if they offer the right products and the right information.

"There's lots of room for diversity in the marketplace because we're talking about half of the U.S. population using some form of supplements," said Harry Balzer, vice president of The NPD Group, a Port Washington, N.Y.-based research firm. "The easist way to take care of your health, to many, is to take a pill."

GOOD ADVICE

Keep a section of the planogram fluid to try new products.

Stay alert to emerging categories, such as "mental clarity/memory enhancement."

Associates should know the supplementary alternatives to both prescription and over-the-counter drugs.

Consider expanding private-label products to include higher-margin specialty formulas with a proven track record.

Conditions

These are the most popular, high-volume supplement categories consumers are shopping:

Bone Health

Brain/Mood Support

Cancer

Diabetes

Digestive Health

Energy & Stamina

Eye Health

Heart Health

Immune Support

Joint Support

Lung Health

Men's Health

Sports & Fitness

Weight Management

Women's Health

Source: SupplementWatch