Nutrition industry braces for winter of discontent as cash-strapped consumers prioritize energy crisis

18 Jul 2022 --- With Europe fearing a permanent cut-off from Russia’s energy supplies, nutrition companies are attempting to combat soaring electricity costs and plan ahead for a winter of possible gas rationing.

NutritionInsight speaks to industry players who express a prominent fear that cash-strapped consumers may focus on necessary products – with questions on where supplements may lie on their criteria. 

Russia’s annual maintenance work on the Nord Stream 1 pipeline that brings gas to Germany via the Baltic Sea has unleashed “nightmare scenarios” in the EU’s largest economy due to fears gas flow may simply not restart. Hungary has already declared a state of emergency over the threat of fuel shortages, while Germany has already moved to stage two of its three-tier emergency gas plan. 

“With utility costs increasing across the board, the impact is that the price increases are spilling over across the whole chain, from the raw material supplier to the manufacturer, to the B2C company to the end consumer. It is a domino effect from materials to consumers,” says Denis Ðalapa, technical director at PharmaLinea.

Vitamins, fish oils, probiotics and ingredients tackling macronutrient deficiencies may weather the storm.Skyrocketing costs
Similarly, a BASF spokesperson explains that energy costs have already risen sharply in recent months. “Approximately 50% of additional costs resulting from the further increase in natural gas price was incurred in the fourth quarter alone.”

“In Q1 2022, additional costs due to further increases in natural gas prices for BASF’s European sites amounted to €900 million (US$914 million) compared with Q1 2021. BASF had to pass on the higher energy, raw materials and logistics costs through price increases across the human nutrition portfolio.”

The almost US$1 billion cost hike BASF outlines comes as the International Monetary Fund’s managing director Kristalina Georgieva says the outlook for the global economy has “darkened significantly” with costs of living “only getting worse.” 

“It’s clear the costs of doing business are increasing at a very steep rate,” highlights Daniel Fabricant, Natural Products Association CEO and president.

Changing consumer habits
Though BASF refrained from delving into the short and long-term effects of price fluctuations, Dalapa says, “the short-term impact is of course, inflation, and the long-term impact could be changed consumer habits.” With expenditure cuts from consumers, a likely consequence is removing non-essential products from shopping baskets. 

“The higher costs of basics like energy, fuel and labor lead to discretionary income getting squeezed and budgets for anything else get squeezed. For some products, there will be less demand, and subsequently, the supply chain for those will feel the pain next,” adds Fabricant.

“For others where demand remains strong – such as essential products to stay healthy – the key question will be what will be the cost of those goods.”

Fabricant elaborates that products more likely to weather the storm are personal to each individual but multivitamins, minerals, fish oils and probiotics at a value-conscious price point will likely fare better than costlier items. 

According to Dalapa, items addressing serious health issues such as micronutrient deficiencies (including prenatal supplementation), urinary tract issues, digestive issues and joint pain should be more resilient.Higher utility costs are being passed down to consumers, as inflation rates soar. 

Hoping for resilience
Currently, PharmaLinea hopes that, similarly to the financial crisis in 2008, “the supplement industry will be resilient to some extent, at least for the essential products addressing serious health issues,” Dalapa notes.

“It is highly likely that part of the industry’s resilience in 2008 was the fact that the industry was in an earlier growth stage, a high-growth stage, with around 10% growth in pre-crisis years. So in 2008, growth dipped, but it was still growth.”

Now, the industry is more mature and not growing as much by default, he adds. Nonetheless, companies are again coming out of a high-growth local peak caused by the pandemic, he adds.

“It is very hard to estimate what the end net outcome will be this time because the factors at play are now multiple and much more varied, but there is hope that consumers will once again consider supplements (at least a certain segment) a necessity.”

Tough winter ahead
Companies are also bracing for the worst, as energy giant Shell’s chief executive Ben van Beurden warned: “It will be a really tough winter in Europe.” 

Energy and operations cuts in Chinese factories caused the supply volume to decrease, leading to an increase in raw material costs. “We will all face very significant escalation in energy prices. In the worst case, Europe will need to ration its energy consumption.”

Should this come into effect, this will mean lower manufacturing productivity, Dalapa explains. 

BASF stresses that at present, there are no supply-related shutdowns or curtailments. “Currently, our Human Nutrition production plants in Ludwigshafen (Germany) are operating normally.”

“To avoid disruptions in the supply of natural gas, we coordinate closely with suppliers and network operators and, if necessary, government agencies. We closely follow developments on the European natural gas market and the measures taken by the EU and national governments in Europe.”

Nutrition brands have realized this is a “precarious time” as consumers are increasingly forced to choose between eating or heating their homes.

Hard-pressed for solutions
In an attempt to mitigate some of the issues, there is an observed increased demand for alternative energy sources, with companies seeking energy self-sufficiency, Dalapa underscores.

“Many companies are choosing solar panels to be self-sufficient and to be able to sustain basic operations in times of power cuts. There are also efforts to find more energy-efficient machines, such as the use of energy-saving lighting,” he says.

When it comes to raw materials supply, “the name of the game is forming long-term relationships with strategic supply partners, with reputable companies, instead of spot buying,” he adds. 

“Building long-term relationships with reputable suppliers is probably the best thing one can do in terms of reducing risk or exposure to the availability and price of raw materials. Secondly, timely and precise planning of material needs far in advance to ensure sufficient stock and avoiding shortages. These two things have aided us crucially in addressing this crisis.”

By Andria Kades