NBTY: Below-cost bidding for private label contracts is not sustainable

By Elaine Watson

- Last updated on GMT

Related tags Private label Marketing Business

NBTY: Below-cost bidding for private label contracts is not sustainable
Suicidally low bids for contracts to supply top US retailers with private-label dietary supplements have forced supplements giant NBTY to “walk away” from some tenders, bosses have admitted.

Speaking on a conference call Friday on its second-quarter (Q2) results, NBTY president Harvey Kamil said competitive pressures had dented profit margins at NBTY’s private label supplements business, although this had been offset by gains from its branded supplements and retail operations.

How much lower than NBTY winning bidders were betting was not always clear, he said. “The answer is we don’t know. You’re in a bidding situation and someone wins. But we’ve seen several instances where we’ve lost some business, but these bidders that are bidding below cost sooner or later will go out of business.”

‘We will walk away from that type of business …’

However, it was important to stress that the below-cost bidding in question was focused on tenders for single items rather than large tranches of private label business, he said.

“What we are talking about here is strictly individual items that are being bid on to the major chains and in certain instances we will walk away from that type of business. They are being bid on by companies that may or may not be in business tomorrow.

“Of course we don’t want to lose business but at the same time we are realistic and we want to have a profitable business.We are still the major supplier to the mass market for private label products​ and we are pleased that our gross margins have improved."

Due to the competitive pressure in private label, NBTY expected the cost of sales as a percentage of net sales in this division would “increase in future quarters​”, added Kamil.

This should adversely affect gross profits during the affected periods. To address this issue, we are in the process of implementing additional improvements in supply chain management and increasing our focus on our branded sales.

“Anything we lose ​[in private label] we seem to be replacing with branded business.”

Private label drives volumes through production facilities

Private label should also be seen in context, added chief executive Jeffrey Nagel: “If you look on a bid-to-bid basis, we have one value equation to offer our retailers.

"But when we look at the totality of the business we do with retailers we have a significantly different total value equation on offer because as we do category management we can make their shelves in total more productive by looking right across our business."

He added: “The difference NBTY has versus some of the other players in the market is that two thirds of our business is in branded; private label gives us a chance to load up our factories and gives us better scale across the board.

“It’s about the power of the totality of the NBTY business private label gives us more as a branded player than it would to someone that only has that single card in their deck to play."

Is the supplements market recession-resistant?

NBTY, which posted a $20m net loss (attributed in part to costs from its takeover by private equity firm The Carlyle Group last year) said net sales for the three months ended March 31 were up marginally at $706.5m compared with $705.2m for the same period in 2010.

However, the supplements market in general had performed a lot more strongly than many other markets during the recession, noted Nagel, who said NBTY was also eyeing up new acquisition opportunities.

“We’ve been doing quite a bit of analytical work on elasticity in this market and the volume response to price increases or decreases is smaller on average in dietary supplements than it is in say, health and beauty aids.

“I think this is because people get it, that dollar for dollar, you get so much more nutrition out of taking supplements …the equation is so much better there than anything else you are going to spend money on."

Q2 results breakdown

Q2 net sales for NBTY’s Wholesale/US Nutrition division (which supplies branded and private label products for leading retailers) dropped 5.3 percent to $404.1m, which it blamed on lower net sales of private label products, which​were down $40.8m.

Net sales in the European Retail division (which includes Holland & Barrett, Julian Graves, GNC (UK), De Tuinen in Netherlands and Nature’s Way in Ireland) were up 12.6 percent to $179m.

Sales in the direct Response/E-Commerce channel were u 1.2% while North American Retail sales (Vitamin World stores in the US, Le Naturiste stores in Canada) were up 5.6 percent to $57.8m.

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