The issue was highlighted by the recent sale of ChromaDex’s analytical testing lab to Labcorp/Covance. Covance, along with Eurofins, has been an aggressive aggregator of smaller analytical labs. With the addition of ChromaDex’s Boulder lab, Covance will now have eight labs operating in the United States with a focus on nutritional products. On its website, Eurofins lists 11 labs in the US with expertise in the testing of various food products and ingredients.
Aggregation within markets is a facet of maturity, said Mark Blumenthal, founder and executive director of the American Botanical Council. In that sense it’s neither a good nor a bad thing.
“In principle I’m in favor of anything that results in a better industry. In every market there is a dynamic that trends toward consolidation,” he told NutraIngredients-USA.
But while that is the general trend in markets, experts in the field said it’s important to focus on what could be lost in that trend. The dietary supplement industry is a highly variegated one, with thousands of ingredients that need to be verified going into tens of thousands of different finished products. The concern is that smaller clients with specialized needs might lose out in a scenario dominated by a few big players.
What could be gained?
One of the arguments in favor of aggregation, of having fewer, but larger, companies in the game, is a potential for cost savings. Economies of scale operate in labs as in other industrial sectors, but might not be as much of a factor in an industry that is not consuming large quantities of raw material nor shipping large amounts of products.
“The upside of consolidation is that you may have a ‘one-stop-shop,’ meaning that the same company can do a wider array of tests, which may result in cost savings, and often less paperwork for the customer. Additionally, if you have a policy of qualifying or auditing your contract analytical laboratory, it means you may have fewer companies to qualify/audit, again leading to savings in time and costs,” said Stefan Gafner, PhD, chief science officer for ABC.
James Neal-Kababick, founder of Flora Research Laboratories in Grants Pass, OR, said the cost savings are not always a given with a bigger lab. It’s really a matter of policy on the part of the individual company.
“Economies of scale can work in the client’s favor and consolidation can mean being able to bring more expertise and resources to bear on the problem at hand. [But] lower pricing is not always the case.We often charge far less per sample than some of the biggest labs on some tests while they may beat us on other tests.This really depends on the big lab and how they handle the situation,” he said.
Cost-saving argument not compelling
Neal-Kababick said lab equipment is by its nature very expensive and must be amortized over relatively short time scales. There is also little negotiating room, meaning the big players won’t be able to purchase equipment for, say, 30% less than a small lab buying one instrument at a time would. A big lab could negotiate better prices on consumables like chemicals, gloves and so forth, but those don’t make up a big portion of the costs of running a lab, he said. And labor costs will be similar.
“The price per sample is usually not dramatically different if the lab is running equipment effectively,” Neal-Kababick said.
Meeting each client's unique needs
Elan Sudberg, CEO of Alkemist Labs based in Costa Mesa, CA, said the big, one-size fits all model has significant drawbacks in an industry with so many unique products that have unique testing problems to solve.
“In theory it’s possible to get all the testing you need performed by one company with mega-labs. That’s like going to only Walmart for everything; all your produce, meats, household supplies etc... No one lab can be good at everything and my experience is that they aren’t great at many things. You may get lower prices with companies that batch samples, [but] that causes significant delays in turn around time while they wait for enough samples that need the same test,” he said.
ABC’s Gafner agreed that consolidation might have drawbacks that outweigh the potential benefits.
“For those looking for dietary supplement testing options it means one less company they can choose from. Since every laboratory has its own expertise and competency, having more options provides more choices, e.g., regarding test methods, customer service, quality of the work, turnaround time, or the pricing,”Gafner said.
Gafner said specialized services, such as testing for essential oil content which he managed during his time at natural personal care products manufacturer Toms of Maine, requires special equipment that is not common in the industry. They found a small lab willing and able to do the test and were happy to have found them. Gafner said in his experience smaller labs were willing to offer personalized service to retain customers whereas the big players usually just sent an e-mail with the results.
Advantages of being small and private
Neal-Kababick said he has had offers to buy his company, but he has so far been unwilling to sell because he believes consolidation tends to drive down service to a standard level of mediocrity.
“As a smaller lab, we can provide very personalized attention to clients and take the time to discuss their unique issues. A sales rep [at a big company] is not going to spend a bunch of time on a client that is spending $250. We can do that,” he said.
“ I still review all data leaving the lab including every HPTLC plate image and photomicrograph. That is not possible in a huge lab operation and that means things slip through the cracks. A small lab like FRL is able to be more agile and respond to emerging events rapidly by adding tests or modifying tests to address new issues. Labs like FRL are innovators and ride the cutting edge of the science often at the expense of maximizing profit. That is a business model that is not easily embraced when you answer to shareholders,”he said.
Sudberg echoed the notion that remaining as a private company allows him to respond to clients need more easily that a big, publicly traded entity might be able to do.
“We are not the last little lab but certainly one of the few remaining on their own two feet. I can only name a few and that list is dwindling fast. . . . Brand trust is more important than ever right now in our industry and this move [toward consolidation] is a danger to the reputations of brands. Our advantage is that our brand has remained transparent, specialized and personal for 20 years. It's a family owned and operated business and will stay that way as long as the industry continues to value those attributes and doesn’t race to the bottom with price centric value systems. . . . Thanks to an ever increasingly compliant industry and a growing list of loyal customers actively avoiding the big lab experience, we are about to undertake an enormous lab expansion to offer more to the industry without straying from our mission and vision,”he said.
Effect of consolidation on dry-labbing
One argument in favor of consolidation was put forward by Frank Jaksch, CEO of ChromaDex. Jaksch has long campaigned on the subject of dry-labbing in the industry, i.e. the practice of sending samples to labs that will report the test results that the client wants to see, perhaps without even having run any tests on the sample. In Jaksch’s view, an industry with fewer players will result in one in which there will be fewer nooks and crannies for such companies to operate in. Gafner and Neal-Kababick aren’t buying that argument.
“I don’t think it will impact the existence/operations of dry labs. These are fraudulent companies that operate on a completely different economy. As long as there are manufacturers that are willing to send their samples to an unknown (to them) analytical lab without any prior qualification, and without verification of the results, there are likely unethical people that will take advantage of this,” Gafner said.
“It could actually make it easier for them to operate. When you have five labs against one it often exposes the dry lab. When you have major consolidation and have two labs against one it is not as compelling,” Neal-Kababick said.