Hidden within the current turmoil surrounding US-Russia relations, frayed over events in Ukraine, lies an opportunity for US dietary supplement firms: a large and thriving market with a thirst for products with a made-in-USA image.
Alexey Petrenko, general manager of the Moscow branch of Brussels-based consultancy EAS, said this market has been made possible by the birth of the Customs Union of Russia, Kazakhstan and Belarus that has created an unified economic zone with a population of 170 million, an upward trending GDP growth rate and surprisingly favorable business conditions. Petrenko said the economic power of the union had something of a stealth approach, perhaps overshadowed by the domestic political drama in Russia.
“The customs union was declared in 1994, but it took them some years to actually launch it,” Petrenko told NutraIngredients-USA. “It was finally launched in 2007, and now you have a single tariff and common customs across the whole union. If you get a product into Belarus, you are clear to go into the whole union. The main fact is if you are importing you are saving a lot of money importing from one country into another.”
Petrenko gave a talk yesterday outlining the attractive features of the union at an event hosted by the United Natural Products Alliance that continues today in Salt Lake City, Utah. The event is a global regulatory update for those involved in the North American dietary supplement business that focuses on the Commonweath of Independent States area, Latin America and Europe.
Favorable business conditions
Petrenko said EAS has found some surprisingly favorable developments in the CU market. Despite news of corruption and great fortunes being made (or in the cynical view, stolen) and lost and former moguls ending up as political prisoners, at another level down, the CU presents a stable picture for business. For example, according to World Bank statistics cited by Petrenko, Russia had a better ranking on an ease of doing business scale than China, Brazil or India (with whom it is often lumped together as the BRIC countries). Registering new property takes a little more than 20 days on average (compared to a month and a half in India and Brazil) and starting a new business takes about two weeks on average, the fastest path of the BRIC countries.
And businesses have some protection, too, Petrenko said. If it becomes necessary to hold a recalcitrant partner to the letter of an agreement, enforcing contracts in the country takes an average of less than a year (it’s more than a year in the US and as much as 4 plus years in India), according once again to World Bank statistics.
Growing demand for supplements
The market for dietary supplements within the union is growing, Petrenko said. According to estimates assembled by EAS (and Petrenko took pains to point out that the company is not generally in the business of economic forecasting) the market was pegged at about $1 billion in 2008 and is forecast to grow to almost $2 billion by 2017. It’s a market that is hungry for American-made supplements, which carry a halo of quality and safety.
“The US-made products are very desirable to consumers. Their reputation for quality and efficacy is a big part of the story,” Petrenko said. “Sometimes we hear of American manufacturers who might be tempted to move their manufacturing to lower cost areas overseas, but they might find they could gain more in export sales from that made-in-USA image than they would save in manufacturing costs.”
American products still make up a minority of the market. Of almost the almost 10,000 products that had been registered in the market as of the end of last year, 16% came from the US, Petrenko said, but it is the fastest growing piece of the overall pie.
Some of those US products are pushed into the market by direct selling companies, which is the fastest growing sales channel, with more than 20% growth in 2012. Network marketing giants Amway and Herbalife are among the notable brands in the market, Petrenko said. Sales of supplements in pharmacies makes up the largest share of the market.
One feature of the market that differs from the US but is common in many markets around the globe is the need for premarket approval. Petrenko said from the Russian point of view, this is an absolute necessity, as the fear is the country’s 5,000-kilometer common border with China would become a free-for-all with a more open system.
“There are some really crazy products that could come in from China. The fear is they couldn’t control that,” Petrenko said.
But Petrenko emphasized that the registration process is fairly easy and transparent. Companies will need to allocate some capital to having product testing done at an approved lab within the union, and documents will need to be assembled and translated. He estimated that the average registration would take about four to six months, but the effort is well worth it in his view.
“The union offers a big enough potential market to make it worth a company’s while to spend the money to enter it. It’s a growing market, with space for new products. If you look at Europe, for example, the market is crowded and the economic growth rate is close to zero. The only way to have a market share there is take a piece out of somebody else’s share,” he said.