In or out: the great divide – outsourcing product development

Food and beverage manufacturing has never been especially reliant on outsourcing. Despite a general drift in this direction, delegating product development to a third party remains a relatively niche pursuit. According to research conducted by Rabobank, contract manufacturing will represent just 6% of Europe's processed food and beverage market by 2020, up from 3% in 2012.

This stands in sharp contrast to many other industries in which contract manufacturing is near ubiquitous. In fact, some years ago, Dartmouth business professor James Quinn described outsourcing as "one of the greatest organisational and industry shifts of the century", making food and beverage something of an anomaly.

Still, one market segment has fully embraced the shift: the growing business of nutraceuticals.

Cast a wide net

Faced with rigorous quality standards and increased regulatory scrutiny, many companies are choosing to pass their manufacturing operations - and in some cases, even research and development - to third-party organisations. This can save considerable money, time and resources.

"Contract manufacturers offer cost savings and the capacity to scale without capital investment. This combination has allowed many companies to concentrate their investments into branding, marketing strategy and other programmes," explains Paul Altaffer, chief innovation officer at RFI Ingredients.

John Altenburg, vice-president of sales and client services at Vit-Best, adds that contract manufacturers can provide a flexibility that is rarely feasible in-house: "They can make smaller batches, they're more adaptable to changes in order quantities and they are able to bring products to market faster," he says. "They also understand what is required for clients in different countries."

The cost crisis

It isn't hard to see why nutraceuticals should follow a distinct set of manufacturing practices; after all, these are no ordinary food products. A blanket term covering dietary supplements, herbal products, isolated nutrients, functional foods and additives for animal feed, nutraceuticals blur the line between food and drugs.

In the US, dietary supplements must abide by stringent US FDA requirements that ensure they are properly certified and tested. These requirements, covered under the current good manufacturing practice (cGMP) guidance released in 2007, ask that "proper controls are in place for dietary supplements so that they are processed in a consistent manner and meet quality standards".

The implications of these rules were far-reaching. No longer could a small supplements manufacturer set up shop with some equipment and an operating site. In order to remain compliant, they had to ramp up their documentation, quality control and certification processes. For many, the costs were simply too high to shoulder in-house, and outsourcing became the only viable option.

"The major trends right now in contract manufacturing have to do with ensuring cGMP and other regulatory compliance, confirming identity and supply-chain transparency, and ensuring product safety," says Altaffer. "Co-manufacturers that can partner with brand stakeholders to ensure quality, safety and innovation will continue to experience growth in the industry."

Of course, the regulatory environment hasn't just affected brand-owners. Contract manufacturers, which often bear the brunt of regulations, have also been forced to up their game.

"The requirements for maintaining GMPs, identification, labelling and claims make the relationship between the parties all the more important. Not all contract manufacturers are going to be fully prepared to meet these requirements and support their brand stakeholder customers," continues Altaffer.

Go all the way

RFI Ingredients doesn't define itself as a contract manufacturer per se - in Altaffer's words, it is "more of a full-service product development partner". A speciality ingredients manufacturer based in New York, the company has clients in the food, functional food and dietary supplement industries, and develops products ranging from fermented black garlic to enzyme-supplemented ginseng.

Because the company is vertically integrated, it provides a direct bridge between its clients and its suppliers, and offers more than just manufacturing: its services span from product development and formulation to packing and delivery. This provides a valuable competitive advantage: brand-owners can outsource the whole process, knowing they're benefitting from RFI's expertise every step of the way.

Vit-Best, too, has a far-reaching proposition. Formerly Vitatech Nutrition Sciences, the California-based company develops products across weight management, sports nutrition, alternative health maintenance and dietary supplementation. It offers
full packing services and product formulation, along with sophisticated analytical laboratory monitoring.

"We're a solutions provider," Altenburg says. "Whether customers have needs in speed to market, the updating of a formulation or in unique manufacturing, or whether they need to export to certain regions within a short time, we can provide solutions to all these scenarios."

These companies are emblematic of an emerging trend. The classical outsourcing template, predicated around ingredients sourcing and manufacturing, no longer seems so fit for purpose. Co-manufacturers increasingly prefer to define the relationship less as a straightforward transaction and more as a strategic partnership.

"It's no longer, 'I have something and you can buy it from me'; it's, 'how do we work together to produce a quality product and provide cost savings?'," says Altenburg. "It's, 'how do we shorten the supply chain, and how do both parties make a return on the investment?'."

In a relationship of this kind, transparency is crucial. In this new climate of regulatory oversight, there is little to be gained from obscuring key details. In fact, certain contract manufacturers are going so far as to sacrifice proprietary technologies in a bid to ensure an open flow of information.

"You should have the difficult conversations up front and align expectations," says Altaffer. "Brand stakeholders who are looking to outsource to some degree should make themselves very close to and familiar with their co-manufacturers."

Within this new outsourcing paradigm, there is no such thing as a one-size-fits-all solution. Today's nutraceutical brand-owners have hugely varied needs, and each is looking for something different from the relationship.

Vit-Best, for instance, says its customers range from entrepreneurial companies focused on a specific niche market to multi-outlet chains servicing a multilayered customer base. This is perhaps representative of the nutraceutical industry in general, which is notable for its heterogeneity.

Transparent workings

The market is currently dominated by large multinational players that are rapidly expanding their presence in the global functional food and nutraceuticals markets. These are household names - such as Coca-Cola, Nestlé and PepsiCo - that have nutraceutical segments as part of a broader product offering. Companies of this size may not need to outsource; their business models may revolve around enhancing their in-house capabilities or acquiring smaller, specialist businesses.

Nestlé is a good example of this dilemma. In 2011, the Swiss food giant created two new entities - Nestlé Health Science and the Nestlé Institute of Health Sciences - with a view to "pioneer[ing] a new industry between food and pharma". It said it planned to invest $510.0 billion in pharmafoods over the decade ahead. A year later, the company announced the $11.9 billion acquisition of Pfizer's infant nutrition division, following a similar move by its French rival Danone to acquire the nutritional supplements manufacturer Complan UK.

The road to success

Beneath the major players, however, sit a growing number of small and medium-sized nutraceutical companies for which outsourcing is essential. Altenburg says the need is greatest when companies are first starting out.

"Much of the industry is built on entrepreneurship," he explains. "New entrants in the marketplace will rely on outsourcing initially, simply because they don't have the necessary expertise or infrastructure. So when there's innovation coming in, and a lot of young companies are trying to succeed, you're going to see outsourcing. Once they become successful, they'll ultimately come to the decision of whether or not to make the products themselves."

One of the unusual things about the nutraceuticals sector, he says, is that there is no single, well-trodden path to success - people can enter the industry from many angles.

"You have the technical side of the business - health practitioners, researchers and such, who work on the back end of a product - and at the same time, you have a lot of people who maybe use the products and believe in the lifestyle, and see a marketing opportunity that's under-fulfilled," he explains.

As a result, nutraceuticals are attracting attention from all corners. With major corporations ploughing funds into the sector and a surge of new companies attempting to gain a foothold, the industry is expected to grow rapidly in the next few years.

According to a Transparency Market Research report, the global nutraceuticals market was valued at $165.62 billion
in 2014, and is expected to reach $278.96 billion in 2021, expanding at a rate of 7.3% a year. This will create important opportunities for third-party manufacturers, which are likely to see a corresponding surge in demand.

"While the industry does have its issues, it still looks bright in the long term," says Altenburg. "As contract manufacturers, our mission is to provide solutions for our customers, large and small. Our role is to make other people's brands stronger while protecting and growing their brand equity."