Bringing Health to the Bottom Line Winning in the Lucrative but Complex Health and Wellness Market

OUTLOOKConsumer Products

April 2015

At a GlanceHow Can Companies Best Capitalize On Health and Wellness Opportunities?

Mapping the health and wellness landscape is a savvy first step. With map in hand, industry players can then navigate that landscape—and come to understand:

}} what, exactly, consumers look for in products for which they’ll pay a premium

}} how baby boomers’ and millennials’ preferences are influencing that market

}} which developments consumers consider trends as opposed to mere fads, and

}} where consumers are shopping most often for those premium products.

At a Glance

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In the North American food and beverage industry, the health and wellness boom continues, presenting alluring opportunities for industry players. But while opportunities abound, AlixPartners’ latest food and beverage–focused consumer survey suggests that companies may be leaving money on the table. Why? Complicated dynamics and shifting consumer preferences are powerfully shaping the health and wellness market, presenting new challenges for companies.

For example, companies seeking to play in this market face increasing complexity on numerous fronts such as consumers who are more fragmented—in terms of their segment characteristics, more selective—because they consider more than just price while shopping, and they are more educated. Additional complexities include retailers’ higher expectations regarding distribution and in-stock positions, as well as greater channel diversity for health and wellness products.

The AlixPartners North American Health and Wellness Review surveyed 1,107 consumers to learn the key drivers behind consumers’ choices for food and beverage purchases with health and wellness in mind. We also assessed respondents’ reactions to current health trends, their views on healthy snacking, and their levels of satisfaction with retailers and manufacturers when it comes to health and wellness offerings. This report presents the major themes that emerged from our findings.

The burning question we’re left with is, How can companies best capitalize on health and wellness opportunities while also surmounting the new challenges that are arising in this lucrative but complex market? Mapping the health and wellness landscape is a savvy first step. With map in hand, industry players can then navigate that landscape—and come to understand what, exactly, consumers look for in products for which they’ll pay a premium, how baby boomers’ and millennials’ preferences are influencing that market, which developments consumers consider trends as opposed to mere fads, and where consumers are shopping most often for those premium products. Only then can industry players craft the strategies needed to succeed in the health and wellness market.

Health and Wellness Landscape

The North American food and beverage industry overall stands to benefit from recent improvements in important macroeconomic and other factors such as modest growth in US median household income and dramatically lower gasoline prices. The more-positive outlook for the industry at large comes at a time of recovery from the longest downturn in food-at-home

and beverage spending coupled with the lowest postrecession growth rates since 1945 (figure 1).

If, as many economists predict, economic conditions and consumers’ confidence and financial well-being continue to improve, the industry’s health and wellness subsector will likely see particularly substantial growth. During the past decade, that subsector—dominated by sales of natural and organic products, whose profit margins are often considerably higher than other products’—has already enjoyed sales growth that’s three or four times that of other food-at-home items.

Responses from our survey participants helped us begin painting a picture of the people purchasing health and wellness products today. Of those participants, 79% said they view eating healthy as at least “somewhat important.” But healthy eating apparently matters more to baby boomers—82% of whom said eating healthy is “extremely important”—than it does to millennials, 72% of whom said they view eating healthy as either “extremely important” or just “somewhat important.”

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FIGURE 1: A long-awaited recovery

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However, millennials are likely far ahead of where baby boomer—and older—consumers were at their age in terms of awareness of the connection between diet and health. Thus, we expect that healthful eating will gain importance for this younger age cohort. At the same time, we expect that older millennials (those 25 to 44 years old), older baby boomers, and other mature consumers (those older than 65) will account for an ever-increasing share of income spent on food and beverages in general as their shares of the overall population grow and as the collective annual income of those two otherwise disparate cohorts increases—from an estimated $5.3 billion in 2015 to more than $6.9 billion by 2035 (figure 2).

But we also looked at consumers’ ideas about what health and wellness means to them, asking survey respondents such questions as, What is your primary health and wellness goal? and, What two aspects of your health and wellness program do you consider most important? When it comes to goals, better physical quality of life was the top goal cited by 46% of respondents. No other goal they cited came even close to that

number, including living longer (20%), increasing balance in one’s life (12%), improving one’s appearance (9%), and having a more holistic life (2%). As for important aspects of their health and wellness program, 59% of respondents ranked eating healthy as their top priority, followed closely by exercise (54%).

Responses also suggested that consumers are taking a number of steps to improve their diets: 37% said they plan to add more fruit and vegetables into the mix, followed by 33% who said they aim to consume less sugar and 30% who said they plan to eat less fast food. Of our total survey sample, 23% of respondents said they’re on formal diets, with Weight Watchers the most-often-cited program of choice (6% of respondents are members of that program). Finally, 59% of the consumers in our study said that

leading a healthy life is “very important,” so they take time to understand what they’re eating and to make healthy choices.

Size of the Premium “Prize”

As recent history has taught the entire industry, consumers who buy health and wellness offerings are usually willing to pay a premium. But what, exactly, do they want to get in return for their premium dollars? To truly understand which product attributes consumers will pay a premium for, it helps to first identify the most-important drivers of food purchase decisions across all categories, not just health and wellness. To that end, we asked our survey respondents to rate the importance of a wide array of attributes: not only health and wellness benefits but also price, convenience, availability across stores and in-stock inventories, in-store service, name brand, and “works as intended.” We found that 76% identified price as important, down from 88% in our 2013 survey. Price was followed closely by “works as intended” (74%, down from 81% in 2013), “product convenience and ease of use” (71%, down from 78% in 2013), and “in stock” (71%, up slightly from 70% in 2013).

We also asked survey respondents questions focused on the health and wellness subsector, with an eye toward assessing their willingness to pay a premium for specific health and wellness product attributes. The consumers in our survey who consider a health and wellness product attribute as most important to them in selecting a product are willing to pay a higher price premium than they indicated in a similar 2013 survey: 8.9% versus the 6.2% we saw in our 2013 survey.

In addition to a significant rise in the premium consumers are willing to pay for grocery items with health and wellness attributes that matter to them, we also saw a noticeable shift in the specific health and wellness attributes that matter most to consumers. When we asked respondents to rate attributes most

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FIGURE 2: Population share and income for consumers age 25–44 and 65-plus

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important to them when buying food and beverage products that contribute to their overall health and wellness, 40% of them cited taste, followed by fresh (not frozen) (31%), low sugar (26%), low sodium (25%), known ingredients (23%), and high fiber and all natural (21% each). We saw significant changes in several categories—namely, all natural (which increased by 11 percentage points over the results from our survey of a year ago, to 21% from 10%), organic (up by 10 points), trans-fat free (down by 21 points), and fat free/low fat (down by 9 points). Some attributes received surprisingly low rankings in our recent survey, including scientific claims (4%), gluten free (6%), non–genetically modified organisms (GMOs) (11%), and organic (15%).

But identifying an attribute as important doesn’t necessarily correlate with the size of the premium consumers are willing to pay for offerings that have those attributes. For example, we asked respondents how much more they’d be willing to pay for food and beverage products that have certain specific health and wellness attributes. The attribute for which they’d be willing to pay the biggest average premium was organic (a premium of 11%, up from 9.3% in 2013). In terms of premium size, organic was followed closely by scientific claims and consumer claims (10.6%, up from 6.2% and 3.1%, respectively, in 2013). Next came gluten free (10.4%, up from 8.4% in the previous year), all natural (9.9%, up from 5.7%), and non-GMO (9.8%, up from 6.4%).

If we combine from the survey the importance of particular health and wellness attributes with the size of the premium consumers are willing to pay, we find that taste, fresh, and all natural score high on both appeal and willingness to pay more—a strong indicator that companies should focus not only on ensuring that their offerings have those attributes but also properly emphasizing the attributes in their marketing campaigns (figure 3).

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FIGURE 3: Important and premium-worthy

Spotlight on Millennials (But Not Just Millennials)

Results from our new survey reveal the importance of both the millennial and older-age cohorts in the health and wellness food and beverage space. Share of income is growing among both of those groups, and both show high levels of interest in health and wellness. For those reasons, the two groups merit closer attention.

Our research shows that 36% of consumers aged 25 to 44 years devote at least 20% of their total food and beverage spending on health and wellness items, with 17% spending a whopping 40% or more of their budget on health and wellness. However, for consumers aged 45 to 64, the comparable numbers are 39% and 20%; for those 65 or older, they’re 45% and 19%. And, of course, older consumers generally have more disposable income to spend to begin with.

Millennials and other cohorts also differ in terms of dietary behaviors aimed at improving their health and wellness. For instance, boomers in our survey said they’re adding more seafood, fiber, and vitamins while reducing their consumption of red meat, salt, and processed food. Millennials said they’re adding more protein, counting calories more, and reducing their consumption of fast food to be more healthy.

When it comes to health and wellness food preferences, taste seems to be substantially more important to boomers (44% of them in our survey cited taste as one of their top five factors when buying a healthy product) than it is to millennials (30%). Boomers also place more importance than millennials do on food and beverage items that have had “bad things taken out”—such as low-carb, trans-fat-free, sugar-free, non-GMOs, and low-preservative or no-preservative offerings.

Millennials, on the other hand, consider all natural and organic substantially more important attributes than baby boomers do (28% versus 19%, and 44% versus 29%, respectively). Overall, however, baby boomers are willing to pay higher premiums for all health and wellness food and beverage items than millennials are, including for attributes that are less important to them than they are for millennials.

Companies across industries appear to be sharpening their focus on how to reach specifically millennials, but baby boomers remain an important demographic in the food and beverage industry, particularly in health and wellness. Therefore, companies will have to allocate as much attention to boomers as they do millennials, especially given that those millennials they’re chasing now will eventually reach the same age range that boomers are in today.

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Trend—or Fad?

To dig even more deeply into consumers’ thoughts about healthy eating, we also asked survey respondents for their impressions of which health and wellness developments they view as long-term trends versus passing fancies or fads. Non-GMO foods, probiotics, gluten free, and reduced red-meat consumption were all identified by roughly half of our study participants as fads. (Non-GMO foods came in first, at 54%; the others, at 53%, 52%, and 46%, respectively.) Meanwhile, organic, reduced sugar, natural, and increased fruits and vegetables received the fewest “fad” responses among our survey sample. For instance, only 33% of respondents identified organic as a fad; the numbers for the remaining three were 28%, 25%, and 12%, respectively. Developments that consumers view as long-term trends rather than fads may represent health and wellness product attributes that will remain attractive in the future, suggesting sustained market potential for companies.

Interestingly, more of the boomers than the millennials in our survey viewed multiple health and wellness developments as long-term trends rather than fads—perhaps because focus on health and wellness often sharpens with aging. The exceptions were probiotics and high-protein content in foods—which more millennials than boomers view as long-term trends.

We also found that income and education levels as well as age-group correlated with the tendency to identify certain health and wellness developments as trends or fads (figure 4). For example, just 37% of the participants in our study who earn annual incomes of more than $150,000 identified non-GMO foods as a long-term trend. That compares with 59% of such high earners, who said organic food is a long-lasting trend. Obviously, a deep understanding of what consumers—especially well-heeled ones—view as lasting can have lasting benefit for players in the health and wellness space.

The Challenge of Channels

With an overwhelming number of product choices available for health and wellness food and beverage products, determining how best to earn their way into consumers’ minds and pocketbooks has grown more challenging than ever for industry players. To secure share of wallet from the consumers they’ve targeted, companies will have to make the right health and wellness bets on which products they should develop and how best to market those offerings. But the diversity of channels through which companies distribute the products is increasing as well. Thus, industry players need to first learn which channels consumers are using most and then take steps to distribute their products through those channels. With those issues in mind, we analyzed our survey findings to identify key drivers behind consumers’ purchase decisions.

When it comes to the factors consumers consider when selecting retailers from which to purchase health and wellness products, we found that low prices, quality produce, and quality

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FIGURE 4: Fads versus long-term trends

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fresh meat counted among the most important (identified by 49%, 45%, and 40% of our study participants, respectively). Proximity also matters; 31% of the consumers we surveyed cited “location nearby” as the most important factor.

As to the kinds of purveyors from which consumers buy health and wellness offerings, 42% of study participants said they buy from mass merchandisers, followed by 34% who buy from

traditional grocery stores (figure 5). Convenience stores and community-supported-agriculture (CSA) programs were ranked lowest (5% each). On the other hand, 55% of survey respondents said they buy other grocery items at traditional grocery stores; 40%, at mass merchandisers.

Still, consumers are shopping for food and beverage items—including health and wellness products—at a decidedly wide range of retailer types, ranging from drugstores, dollar stores, and farmers markets to online retailers, convenience stores, and CSA programs. All of those formats are thus competing with mass merchandisers and traditional grocery stores for consumers’ wallets. Indeed, nearly 25% of the consumers in our study said they shop at multiple stores for their health and wellness and traditional grocery items at least 61% of the time. Just 21% of them reported loyalty to one store.

Moreover, in addition to willingness to patronize multiple retailers, our latest study respondents are more willing to switch product brands than they were in a study we conducted in 2012. For instance, 9% of the 2014 survey respondents “strongly agree” with the statement “I change brands frequently”—a decided increase over the 6% we saw in 2012. Meanwhile, 28% “agree” with that same statement, up from 24% in the earlier study.

Wrapping It Up

Health and wellness remains a vibrant trend in the food and beverage space—and shows no signs of slowing down. Yet a number of forces are introducing complexities into this lucrative market. Desires and demands among consumers in different segments—such as groups defined by age, income level, or education level—are more fragmented and diverse than ever.

Consumers have grown more discerning—and fickle, willing to switch brands and retailers. Meanwhile, retailers and food manufacturers alike are experiencing stiffer competition. Capturing and holding consumers’ attention by distinguishing one’s offerings from all the others has become more challenging. And supply chains have grown more and more complicated.

To win in this profitable but complex market, companies will have to craft and execute well-informed, focused strategies that sharply differentiate them from rivals while they safeguard their bottom lines. We maintain that strategies aimed at leveraging customer segmentation, improving product development and assortment, and maximizing the supply chain can pay big dividends—especially if all of them are underpinned by modern-day but business-informed data analytics

Regarding segmentation, companies should develop smarter clustering schemes that deliver fresh insights into what customers in each segment want and how they buy. As for product assortment, manufacturers have to enhance their product differentiation without busting their own pocketbooks, and retailers must develop smarter marketing strategies—again, underpinned in part by advanced data analytics—to drive traffic to the moneymaking health and wellness offerings in their stores. Finally, manufacturers and retailers alike must hone their supply chains and, in some cases, develop new supply chains, with an eye toward getting to market faster than rivals can the products today’s consumers most want—and then making sure the items are regularly in stock.

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FIGURE 6: Consumers say they shop for health and wellness products more at mass merchandisers than at traditional grocery stores

FOR MORE INFORMATION, CONTACT:

David Garfield Managing Director dgarfield@alixpartners.com +1 (312) 286-1274

Jonathan Greenway Managing Director jgreenway@alixpartners.com +1 (310) 715-9733

ABOUT ALIXPARTNERS

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The firm’s expertise covers a wide range of businesses and industries whether they are healthy, challenged, or distressed. Since 1981, we have taken a unique, small-team, action-oriented approach to helping corporate boards and management, law firms, investment banks, and investors respond to critical business issues. For more information, visit www.alixpartners.com.

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This article is the property of AlixPartners, and neither the article nor any of its contents may be copied, used, or distributed to any third party without the prior written consent of AlixPartners. The article was prepared by AlixPartners for general information and distribution on a strictly confidential and nonreliance basis. No one in possession of this article may rely on any portion of the article. The article may be based in whole or in part on projections or forecasts of future events. A forecast by its nature is speculative and includes estimates and assumptions that may prove to be wrong. Actual results may and frequently do differ from those projected or forecast. The information in this article reflects conditions and our views as of this date, all of which are subject to change. We undertake no obligation to update or provide any revisions to the article.