The taxman was as unwelcome as ever when he slapped sports nutrition products with VAT last October. “Great move, George Osborne,” fumed one reader on thegrocer.co.uk. “Kill one of the few retail growth industries dead, generate bugger all tax and remove products proven to offer significant health benefits from shopping lists.”
So did Osborne land a killer blow on the sports nutrition market? Or has the industry largely absorbed the impact of VAT? Are consumers still ripped… or feeling ripped off?
Sports nutrition was looking buff in the run-up to VAT. Bodybuilders had been forking out growing amounts on increasingly sophisticated products, helping to sustain a compound annual growth rate of 18% in the five years to the close of 2012 [Euromonitor].
Then, nearly a year ago to the day, the government added VAT to sports nutrition products at the standard rate of 20%.
“Margins are under extreme pressure. There is complete carnage in the market”
Kyle Rowe, NBTY Europe
The industry, already facing rising input costs thanks to rampant inflation in key raw materials such as whey, had little choice but to pass on all the duty to consumers overnight and watch as sales growth fell back sharply. “We have seen a visible slowdown in category growth across all sectors of the business, from grocery to specialist,” says Craig Read, category marketing director at Maxinutrition.
A quick glance at the sales performances of the key brands (see right), shows how hard the category’s biggest players have found the going over the past year. If you discount the 20% growth resulting from the imposition of VAT, two of the five biggest brands suffered value declines (Maximuscle and Phd) and the market as a whole realised growth of just 4.7% [Nielsen 52 w/e 17 August].
It’s a similar picture with the bestselling sectors, with two - powders and tablets - both in decline when VAT is stripped out.
Volumes have taken a hammering, with savvier consumers stocking up before the new tax came into force. This led to a particularly weak end to 2012, says Jason Rickaby, MD of Phd Nutrition. “For the initial three to six months post-VAT, the market showed huge uncertainty, with consumers buying in bulk pre-October in order to beat the VAT price increase.”
Trade picked up in the new year, but a return to the double-digit sales growth of previous years feels a long way off. “Value sales - excluding VAT - are flat or in decline and margins are under extreme pressure. There’s complete carnage in the market,” says Kyle Rowe, trading director at NBTY Europe, which owns Holland & Barrett and GNC.
That’s not to say efforts haven’t been made to cushion the blow for consumers. Although the industry passed on VAT by the full amount, retailers have since upped promotional activity - offering more deals and deeper discounts.
And increasingly the retailers are asking the brands to help fund the deals. “Margin-maintained promotions were the norm before VAT, but now retailers are realising that by sharing the cost of promotions they can be stronger,” says USN sales director Steve Bernstein. Retailers have also moved away from advertising percentage discounts to emphasising the money saved, taking the view that on a £50 tub of whey protein, it sounds more impressive to say ‘£10 off’ than ‘20% off’, he adds.
However, there is a limit to how much brands can promote given the rising cost of raw materials. Over the past year, whey protein prices have increased by 4% to 8% - depending on the grade - and on top of even larger increases in prior years, that is putting enormous pressure on margins.
“We have maintained our prices since the last spike in May 2011 as VAT meant we couldn’t justify our customers getting hit with more rises,” says Bernstein. It appears to have paid off for USN: the brand sales are up a category-leading 129.5% [Nielsen].
Brands go mainstream with bars and RTDs
Sports nutrition products were once the preserve of muscle-bound gym fanatics.
Not any more: the industry has done a good job of broadening their appeal to attract other sports enthusiasts who have picked up on the benefits of protein and are now an important consumer group.
“Only a few years ago, the number of triathletes using protein products would have been low,” says NBTY Europe’s trading director Kyle Rowe. “Now that has been transformed.”
Realising that large tubs of whey powder were unlikely to appeal to lithe runners, swimmers and cyclists, and even less to ordinary consumers, brands have developed more approachable products - such as protein drinks, soups (below) and meal bars. These products now represent by far the fastest-growing segment of the industry.
“USN bars are selling superbly well,” says USN sales director Steve Bernstein. “Certainly in the mass arena, they are way and above the bestselling products in units per store per week. So much so that one major grocery chain is looking to have these in their local convenience store sites.”
Proof, if proof were needed, that sports nutrition is finally joining the mainstream. Bernstein attributes much of the success of this new breed of products to their nutritional profile. “They have calories, sugars and fat but the key is not as much as a confectionery bar.”
Other brands have noticed that increasing numbers of ordinary consumers are buying their products, even though they are mainly aimed at sportspeople. “We have seen huge growth in everyday use among consumer groups like busy mums, office workers, senior citizens and students,” says Jag Singh, marketing manager at protein milk brand Nrich.
“There’s also a wider audience who enjoy it for its taste and people who use it to make mixed drinks like Guinness Punch.”
Despite the higher input costs, the industry has largely resisted the temptation to reformulate products. “You can never compromise on quality,” reasons Rowe. “Customers will see that the whey protein content has been reduced and they will switch.”
Instead, brands and retailers are turning to NPD in areas of the market enjoying strong levels of growth, such as RTD formats, which have enjoyed VAT-beating growth of 55.6% in the past year and nutrition bars, up 36.4% [Nielsen]. Notable examples include Maxinutrition’s Protein Milk - launched in May in a 250ml format and backed with a £1m media campaign - and Phd’s Woman range of shakes and bars aimed specifically at sporty females, launched in March.
The rise of single-serve premixes and bars is clearly a response to the escalating cost of bulk tubs of whey driven by VAT. Holland & Barrett has another answer to the problem: it launched 250g whey protein tubs (rsp: £10.99) - as opposed to standard tubs that weigh around a kilo and sell for circa £50 - earlier in the year, and it is preparing to launch a single-serve 30g format that will go on sale for £2.99-£3.99. The retailer says that the proliferation of small formats has actually caused volume sales by pack to increase since last October.
Supermarkets and convenience store retailers are taking note of the growing trend for more accessible sports nutrition products and giving over more shelf space to protein milks - which are increasingly sold alongside other soft drinks. Maxinutrition shakes are on sale at Sainsbury’s and Waitrose, while a number of other brands, such as USN, For Goodness Shakes and Dunn’s River have also picked up supermarket listings.
“Protein shakes are increasingly bought because supermarkets and brands are making them more widely available and therefore consumers no longer have to go to the specialist stores to buy them, and new users and beginners are attracted by friendlier, cheaper, tastier products,” says For Goodness Shakes co-founder Jeremy Martin.
Specialists v supers
Bernstein agrees. “Tesco and Sainsbury’s have made huge strides with the USN brand and we are negotiating with another two major high-street grocers as we speak,” he says. It’s just as well the brand was delisted by Holland & Barrett in June when the retailer took the decision to remove one of its four bestselling sports brands in response to the VAT-driven downturn.
With the supermarkets taking the category more seriously, brands are reporting higher levels of growth in grocery than in specialist retailers. “Supermarkets are winning,” believes Maxinutrition’s Read.
Increased space, wider ranges and improved product education continue to fuel growth. The multiples’ merchandising of the category has also improved. Retailers are selling the bulk of their sports nutrition ranges alongside vitamins and minerals rather than in other areas of health and beauty such as male grooming.
“Consumers expect to see sports products with vitamins and minerals,” says Bernstein. “To get maximum impact that is where they should be sat.”
However, the supermarkets will never be able to lure diehard sports nuts out of specialists, which have more knowledgeable staff and wider ranges, says Kinetica brand manager Hugo Youngman: “Supermarkets do play a role in sports nutrition but are often limited by available shelf space for what has traditionally been considered a niche market.”
Sports drinks squeezed
Established sports drink brands such as Lucozade Sport, Gatorade and Powerade should be more concerned by protein drinks’ incursions into the supermarkets, says Len Dunne, co-founder of Elivar, a sports nutrition brand targeting middle-aged athletes.”It is good news for sports nutrition companies and food companies in general as it is creating a new drinks category,” he says. “The losers will be the high-sugar sports drinks.”
They’re already losing out. While Lucozade appears to have turned a corner thanks in part to its new claim that it ‘hydrates better than water’ - with value up 3.9% on volumes up 2.7% [IRI 52 w/e 27 July], Powerade has seen value sales fall 22.8% on volumes down 23.8%.
“RTDs are good news for sports nutrition - the losers will be high-sugar sports drinks”
Len Dunne, Elivar
“Those who once thought they were ‘sporty therefore healthier’ now see through them as merely sugary drinks,” says Martin. “So much new stuff, perceived as healthier, has hit the shelves - everything from Innocent to vitamin water and coconut water. In many ways, traditional sports drinks are somewhat old-fashioned.”
With sports nutrition brands muscling in on mainstream retailers and investing heavily in RTD launches such as Protein Milk and Nurishment Active, traditional sports drinks are in danger of becoming even more old-hat.
As for sports nutrition brands, they will no doubt continue to push RTDs and bars given that these are the only segments that have grown significantly since the imposition of VAT.
These segments may have some way to go before they match the muscle of protein powders, but they show that consumers are prepared to pay for innovative products - and that there’s plenty of fight in the sports nutrition market yet.
Sports supps capitalise on wider health message
There is more to sports nutrition than protein. Sold alongside tubs of whey, protein drinks and bars are an array of supplements designed to improve sporting performance, from natural testosterone boosters to vitamin concoctions blended to help users avoid injury.
Sales of these sports supplements are going strong. “Non-core products are all on the up,” says Kyle Rowe, trading director at NBTY Europe. “People are becoming more health-conscious and are looking for products that support an active lifestyle.”
Reflecting the breadth of products on offer, sports supplements attract a wide cross-section of consumers from models to bodybuilders. Products that help consumers build a lean physique and shed the pounds tend to be the biggest sellers, says Rowe, citing green coffee bean extract and raspberry ketone as two examples of products selling particularly well in Holland & Barrett and GNC.
Similar products include Sci-MX’s Immunex Sport and Kinetica’s joint support capsules containing green-lipped mussel extract.
There are also a growing number of products designed to boost general health. Earlier this year, PhD Nutrition launched Green ph-7, which contains a mixture of 22 superfoods, whole foods and fruit green extracts. It is aimed at the health-conscious consumer as well as the “busy gym goer whose diet lacks fruit and vegetables”.
With such a plethora of products, there’s real cross-merchandising potential, believes Rowe, pointing to Holland & Barrett’s cross-promotion of supplements with whey protein products. “Packs of vitamins alongside whey protein products and low-fat foods can be sold as a body transformation package,” he says.
Supermarkets, too, are increasingly selling sports nutrition products next to vitamins and minerals. Given how well supplements are doing, will they be tempted to stock a wider range?