Partnerships key for industry to overcome inflationary pressures?

30 Jun 2022 --- With inflationary pressures reaching record highs, governments, consumers, and businesses alike are clambering to mitigate the consequences of the inevitable cost hikes. Companies are observing two parallel ongoing dynamics across industry: on the one hand, an innovation boom spurred by the COVID-19 pandemic.

On the other hand, spiraling energy prices coupled with the supply chain crisis, which result in months-long delays for shipments, has made it increasingly difficult to secure ingredients.

NutritionInsight speaks to industry players facing these challenges for an in-depth understanding of the current situation and what companies are trying to do to overcome the multiple crises hitting simultaneously.

“We’re seeing the impact in a multitude of fashions. The first one is raw materials, in which we saw an increase in raw material costs. Beyond the increase there is also scarcity,” explains Zakaria Benmerzouga, global product manager, Nutraceutical Ingredients at Lubrizol.

Costs of production have spiked  by 60% in some instances. Implementing price hikes
The lead times between what the company anticipates and the flexibility to change things during the year, has also become increasingly difficult. 

“Whether it’s the war between Russia and Ukraine or not, there has been an increase in the utility costs that have to be passed down. This includes electricity and gas, and that resulted in price increases from our manufacturing piece,” adds Benmerzouga. 

Similarly, Ignacio Cartagena, CEO at Monteloeder, says, “everybody is affected by the delays in transportation because of COVID-19 plus the war.” 

“We have tried to absorb prices, but there comes a moment where you are forced to increase them otherwise, you may even lose money. We were forced, at the end of the year, to increase prices though in the least possible. We were forced by the circumstances.” 

The price increases were instituted in markets that can “manage” the hike, he underscores. These include industries that have the human element involved: medical devices, pharmaceuticals and nutraceuticals, adds Benmerzouga

“It’s hard not to absorb price increases” in these markets because demand is still there, he explains. 

Companies such as DSM, Glanbia and Probi have openly expressed the challenges inflationary pressures are having on their operations, admitting to price hikes. Probi, which hit a 10% sales decrease in Q1 of 2022, attributed this to factors including the Russia-Ukraine war and rising inflation.

Protein supply 
Though companies are constantly trying to find alternative solutions, the fact remains they are limited under tight constraints. Cecile Da Cunha, senior brand manager, health and nutrition, Ingredia, explains the company requires proteins for its line of sports nutrition supplements. 

Nonetheless, within the dairy industry, farmers are experiencing difficulties with both the energy costs and the pricing of actual feed. As such, it is becoming increasingly expensive to maintain. Cows and farmers are finding it more profitable to use their animals for meat rather than milk, as they can profit more that way. Currently, production costs have increased by 60%, she explains. 

“We are seeing a decrease in milk production, and it is difficult for us to deliver now,” she says.

Additional vitamins that could help with protein production are not being added in - or done so less - to mitigate the energy costs, Cunha observes. “The knock-on effect is then our ability to extract the proteins.”Farmers are now choosing to use their cows for meat instead of milk, in a bit to make the best out of the situation.

Fierce competition
One strategy that Monteloeder is implementing is to secure more quantities so as to avoid supply interruptions. “We keep close communication with customers and ask them about their future needs to anticipate orders. This is the only thing we can do,” Cartagena explains. 

Nonetheless, several companies are attempting the same strategies, only tightening the competition even more. 

Amid the observed pricing increase, companies are scrambling to keep abreast of both their profits but also their competitors. 

“We’re trying to catch what price other competitors are using for selling the same thing and keep up with that.”

Alternative options?
In a bid to mitigate supply chain issues, companies are increasingly turning to sourcing locally. Biocell Technology has a manufacturing site in both the US and EU. The company’s sales and marketing manager, Douglas Jones, reveals it was “quite surprising” how many European partners wanted affirmation the company had a source of supply in Europe. 

“They were looking at new products and new ingredients and wanted to know that they would be locally sourced and not something that would have to come in a container.” 

“There’s been supply chain issues and bottlenecks, so I think companies that are introducing new products in particular, want to know that if they’re going to invest, the ingredient is going to be there when they need it.”

COVID-19: A saving grace?
The question underlying much of the tension surrounding the price fears, lies in consumer interest. With inflation rates reaching 8.1% in the EU in May 2022 and 8.6% in the US, the impact on consumers’ pockets is inevitably being felt. 

One would think that nutraceuticals would be disadvantaged when compared to pharmaceuticals, Benmerzouga explains. Medicine for blood pressure or diabetes for instance, may feel more “necessary” than a supplement. 

Nonetheless, COVID-19 has played a huge role in transforming this mindset, he underscores.

“What the pandemic did was make consumers more knowledgeable. When talking about inflation and the impact on this industry, due to it being such a sensitive time for the world, people are more conscious about their well-being.” 

As people grew increasingly concerned for their health due to COVID-19 and turned to supplements to try and prevent themselves from falling ill, the interest in vitamins for instance, has not waned, Benmerzouga highlights.

“If COVID-19 didn’t happen and we only had inflationary pressures, I’d say yes, the market and industry itself would have had a lot of challenges to deal with. But fortunately, consumers are more knowledgeable and more proactive about wanting to improve their health.”

Consumers are more concerned about their health now than before the pandemic.Resilience is key
While a “wait and see” approach does appear to linger, Cartagena says it is about weathering the storm.

“I don’t see any solution for the short term. I hope that in the next few months maybe transportation can be improved and there can be a big comeback to normal prices.” 

Hoping that governments will take measures to tackle inflationary pressures, he says: “I've been in the industry for 36 years. We have experienced different moments of financial challenges, and this industry has always shown that it does not get too affected by the economy.”

“I think this is because people think health is something very important to them, and they want to continue taking care of themselves.” 

Echoing Benmerzouga, beyond the COVID-19 impact, he notes the industry is very much about the prevention of illnesses which is something important for consumers. 

Partnerships to weather the storm
Though big companies have long-established connections that can play a role in helping them secure ingredients, Benmerzouga observes that small brands and companies trying to pivot into the space are presenting a new form of competition. 

“These companies have assets and resources that they’re able to utilize and grow substantially.” Their key advantage is they can be far more flexible, are less hierarchical and have fewer internal infrastructure challenges. 

“Startups are getting creative. They’re developing products very quickly, for example, a caffeine-based bubble gum.” This was an item Benmerzouga says he saw become popular three years ago. The market now has plenty of brands experimenting with this idea – chewing gum is good at keeping consumers alert. 

“It’s hard for big organizations to deliver as well in this space.” Therefore, for Benmerzouga, the opportunity lies not in competing with these companies but partnering with them instead. 

Synergies to combat ingredient shortage
With an eye on creatively tackling the ingredient supply issues, potential also lies in working together to make the best of what different companies have, according to Benmerzouga.

“This could mean looking at ingredients that have not been formulated together in the past. This could be due to interaction challenges or just a lack of flavor.”

Benmerzouga suggests this can be an opportunity to revert back to these challenges and use this period as an innovation boom, using for example curcumin, or turmeric type of antioxidant, with iron, to have an antioxidant product that can increase ferritin levels.

By Andria Kades