U. S. Food and Drug Administration
Center for Food Safety and Applied Nutrition
March 1999

Section 5
Dietary Supplement Markets, Distribution Channels, and Industry Structure

Estimates of retail sales of DS products vary widely from Frost & Sullivan's 1997 estimate of $5.8 billion to F-D-C Reports, Inc.'s 1996 estimate of $10.3 billion. However, most sources agree that the industry has grown rapidly and will continue to do so in the near future. In addition, the distribution channels for these products are changing as grocery stores, drugstores, and mass marketers are increasing the range of DS products they carry. Because consumer demand has increased greatly, larger pharmaceutical companies are entering the market, often by buying supplement firms (Stewart, 1998). As a result, the structure of the market is changing and will continue to change as the DS market matures.

In this section, we first provide information on the size of vitamin, mineral, and herbal and botanical markets as reported in secondary sources. We then describe the marketing of DS products by the following outlets: supermarkets, drugstores, mass merchandisers, natural food stores, mail order and Internet, health care practitioners, and specialty shops. Finally, we describe the structure of the industry including market concentration and vertical and horizontal integration.

5.1 Sales of Dietary Supplement Products

Growth of DS product sales has been fueled in particular by increases in sales of herbal and botanical products and mineral products. However, vitamins are still the largest component of DS product sales. Table 5-1 breaks out sales of DS products by category, as reported in the F-D-C Tan Sheet (F-D-C Reports, 1997b). Vitamins account for 48 percent of sales, minerals for 6 percent, and herbals and botanicals for 28 percent, with sports nutrition (much of which is dietary supplements), meal supplements, and specialty supplements making up the remainder. As indicated in Table 5-2, the leading brands of DS products in 1994 (the most recent year available) were Centrum (9 percent market share), Nature Made (8.7 percent), and Your Life (8.4 percent). However, nearly a third of sales are private label brands. In the following sections we describe sales of the major DS product categories.

5.1.1 Vitamin Supplement Sales

Vitamins are the largest supplement category, with $4.9 billion in sales in 1996 and 48 percent of the supplement market (see Table 5-1). Since vitamins are the most mature supplement category, they experienced growth of about 8 percent from 1995 to 1996, which is slower than the other DS products (Nutrition Business International, September 1997b). Multivitamin preparations continue to make up the majority of vitamin sales. Among single-category vitamins, vitamins E, D, B₆, and folic acid led sales growth in 1996.

Table 5-1. Dietary Supplement Sales and Market Share, 1996

Product	Sales($ millions)	Percent of Dietary Supplement Market
Vitamins	4,900	48%
Herbal and Botanicals	3,000	28%
Sports Nutrition Products	927	9%
Meal Supplements	618	6%
Minerals	618	6%
Specialty Supplements	309	3%
Total	$10,372	100%
Source: F-D-C Reports, Inc. 1997b. "The Tan Sheet: Nonprescription Pharmaceutical and Nutritionals." Chevy Chase, MD: F-D-C Reports, Inc. F-D-C Reports, Inc. 1997a. "The Tan Sheet: Dietary Supplement Sales up 16% to Approximately $10.3BIL." Chevy Chase, MD: F-D-C Reports, Inc.

Table 5-2. Market Shares of Leading Dietary Supplement Product Brands, 1994

Brand	Manufacturer	Market Sharea	Sales ($ millions)	Percentage Dollar Change from Previous Year
Centrum	Lederle	9.0%	67.2	17%
Nature Made	Pharmavite	8.7%	64.7	6%
Your Life	Leiner	8.4%	63.1	48%
Nature's Bounty	Nature's Bounty	5.0%	37.7	243%
Theragran	Squibb	3.0%	22.6	3%
One-A-Day	Miles	2.6%	19.3	89%
Ginsana	SunSource	2.5%	18.5	-8%
Os-Cal	SmithKline-Beecham	2.1%	15.4	1%
Flintstones	Miles	1.3%	9.5	19%
Lederle	Lederle	1.1%	8.0	8%
Private Label	(various)	33.8%	252.6	N/A
Other	(various)	22.5%	168.0	N/A
Total		100.0%	$746.6
a Market share is based on product movement from distribution centers among Towne-Oller reporting retailers for the 12 months through December 1994. Source: Chain Drug Review. February 27, 1995. "Drug Chains Adopt New Tactics to Meet Competition in Vitamins." Chain Drug Review 17(5):30, 32. Values for other products and total are inferred.

5.1.2 Mineral Supplement Sales

Minerals experienced the second largest growth in sales in the DS category from 1995 to 1996, trailing only herbals and botanicals (see Table 5-1). In 1996, sales reached $600 million, an increase of 18 percent over 1995. Calcium and selenium were two of the best-selling mineral products; both benefited from reports of positive clinical trials on their usage and from media stories (Nutrition Business International, September 1997a).

5.1.3 Herbal and Botanical Supplement Sales

As illustrated in Table 5-1, herbal and botanical products totaled $3 billion in sales for a 28 percent share of the DS market. Their growth rate of 20 percent from 1995 to 1996 was the highest of all DS products. However, sales volumes of specific products are relatively concentrated in a few products. Specifically, garlic, ginseng, ginkgo biloba, and echinacea were the best-selling herbal products in 1995 and 1996 (Table 5-3). The leading herbs in terms of sales growth in 1996, each with greater than 50 percent growth (in sales), were ginkgo biloba, echinacea, and saw palmetto. St. John's wort, a relative newcomer to the industry, has experienced phenomenal sales growth as well.

Table 5-3. Market Shares of Leading Herbal Dietary Supplement Products, 1995 and 1996

While most of these products are sold in tablet, capsule, or powdered form, some are sold as tea products. However, not all teas are dietary supplements; they are considered DS products only if their label indicates that they are. Table 5-4 lists the types of tea products sold as well as their market shares and growth rates.

Table 5-4. Herbal Teas Dollar Share and Sales Growth^a by Subcategory, January - August 1997 Compared to January - August 1996

This section describes the sales and marketing practices for the various distribution channels for dietary supplements, as well as the marketing techniques used by manufacturers and distributors. Sales of DS products by sales channel are listed in Table 5-5 for 1995, 1996, and 1997. DS products in this table include vitamins, herbals and botanicals, sports nutrition, meal supplements, minerals, and specialty supplements. Percentages of sales by distribution channel for herbals and botanicals in particular are included in Table 5-6. While multilevel marketing and natural food stores each have high market shares of 38 percent and 37 percent, respectively, mass merchandisers trail at only 10 percent.

The market share of natural food/health chain stores has been steadily increasing at the expense of the market share of multilevel marketing firms. From 1996 to 1997, natural food and health chain stores sales increased 55 percent while multilevel marketing firm sales were unchanged. The market shares of the other distribution channels have remained fairly constant.

Table 5-5. Dietary Supplement Product Sales and Market Share by Distribution Channel, 1995 and 1996

Outlet	1995 Supplement Sales ($ billion)a	1995 Supplement Market Shareb	1996 Supplement Sales ($ billion)a	1996 Supplement Market Sharec	Percentage Growth from 1995 to 1996	1997 Supplement Sales ($ billion)a	1997 Supplement Market Shared	Percentage Growth from 1996 to 1997
Natural Food and Health Chain Stores	2.3	26%	2.9	28%	26%	4.5	35%	55%
Mass Merchandisers	2.8	31%	3.2	31%	14%	3.8	30%	19%
Multilevel Marketing Firms	2.7	30%	2.9	29%	7%	2.9	23%	0%
Mail Order	0.6	7%	0.7	7%	17%	0.8	6%	14%
Health Care Practitioners	0.5	5%	0.6	5%	20%	0.7	6%	17%
Total	$8.9	100%	$10.4	100%		$12.7	100%
aConsumer sales. bSupplements accounted for 52 percent of sales in the $17.2 billion nutrition products industry in 1995. cSupplements accounted for 52 percent of sales in the $19.8 billion nutrition products industry in 1996. dSupplements accounted for 55 percent of sales in the $23.2 billion nutrition products industry in 1997. Sources: Nutrition Business International. September 1997a. "$20 Billion and Counting: Nutrition Industry Momentum Builds." Nutrition Business Journal 2(9):1-5. Nutrition Business International. August 1996. "$17 Billion and Counting: Defining the Nutrition Industry." Nutrition Business Journal 1(1):1,4-5. Nutrition Business International. September 1998. "$23 Billion and Counting: Nutrition Industry Braces for a Competitive Future." Nutrition Business Journal 3(9):1-5, 13, 18.

Table 5-6. Distribution Channels for Herbal and Botanical Products, 1996

Distribution Channel	% of Total Sales
Multilevel Marketing	38%
Natural Food Stores	37%
Mass Merchandisers	10%
Mail Order	9%
Health Care Practitioners/Herbalists	4%
Specialty Shops	2%
Source: F-D-C Reports, Inc. 1997b. "The Tan Sheet: Nonprescription Pharmaceutical and Nutritionals." Chevy Chase, MD: F-D-C Reports, Inc. F-D-C Reports, Inc. 1997a. "The Tan Sheet: Dietary Supplement Sales up 16% to Approximately $10.3BIL." Chevy Chase, MD: F-D-C Reports, Inc.

5.2.1 Food Store Sales and Marketing

Of the types of mass merchandisers, which had a 30 percent share of the dietary supplement market in 1997 (see Table 5-5), food stores trailed drugstores in every category of vitamin and mineral product sales while surpassing mass merchandisers in sales of some products and trailing in others. Table 5-7 breaks out the values and quantities of sales by mass market stores for each of these products. At the specific brand name level (see Table 5-8), food stores led the other mass market stores in sales of some brands, such as One-A-Day, Flintstones, Bugs Bunny, and Nature Made and trail in the others. DS product sales in food stores have recently been erratic, as DS sales increased 24 percent in 1993, increased 6 percent in 1994, decreased by 7 percent in 1995, and then increased 4 percent in 1996 (Nutrition Business International, October/November 1997b).

As more consumers are purchasing supplements at food stores and supplements are becoming an important part of the Health and Beauty Care (HBC) section, food stores are responding by increasing the product mix and the variety and selection they offer. In particular, multivitamin and vitamin shelf space has been increased as has space for children's vitamins. Food stores are also adding other DS items, especially herbal products, to their product list.

In addition to expanding their product mix, food stores are also working to educate consumers and make them aware of supplement product offerings. Educational pamphlets and shelf talkers, which provide information on the shelf about the specific items sold on that shelf, can be found in food stores across the country. Price discounts, coupons, and products with "25% More Free" are also common marketing techniques used in supermarkets for supplement products. Food stores

Table 5-7. Dollar and Unit Volume of Vitamin and Mineral Sales at Food, Drug, and Mass Merchandise Retail Outlets^a

Retail Outlet	Multivitamins		1& 2 Letter Vitamins		Mineral Supplements		Liquid Vitamins/Minerals		Total
	Annual $ Volume (millions)	Annual Unit Volume (millions)	Annual $ Volume (millions)	Annual Unit Volume (millions)	Annual $ Volume (millions)	Annual Unit Volume (millions)	Annual $ Volume (millions)	Annual Unit Volume (millions)	Annual $ Volume (millions)	Annual Unit Volume (millions)
Food Stores	197.2	30.3	153.6	28.8	130.4	23.3	9.5	1.6	490.7	84.0
Drugstores	307.6	43.0	314.9	58.9	375.8	58.2	26.8	3.5	1,025.1	163.6
Mass Merchandisers	165.2	26.7	156.6	35.1	197.2	38.1	8.4	1.7	527.4	101.6
aFor the year September 9, 1995, through September 8, 1996. Source: Supermarket Business. November 1996. "Vitamins." Supermarket Business 51(11):72.

Table 5-8. Mass Market Share of Leading Brands in Multivitamins, 1996

Brand	Manufacturer or Brand Parent	Food Stores ($ thousands)	Drugstores ($ thousands)	Mass Merchandisers ($ thousands)	Total Mass Market ($ thousands)	Mass Market Share
Centrum	Lederle	37,377	46,509	30,022	113,908	16.9%
Centrum Silver	Lederle	16,760	28,499	17,504	62,763	9.3%
One-A-Day	Bayer	18,445	16,423	12,894	47,762	7.1%
Flintstones	Bayer	16,400	9,213	9,749	35,362	5.2%
Theragran M	BM Squibb	6,636	16,474	4,985	28,095	4.2%
Ocuvite	Lederle	2,175	10,575	4,711	17,461	2.6%
Bugs Bunny	Bayer	5,500	2,775	4,567	12,842	1.9%
Geritol Complete	Warner Lambert	3,059	5,102	3,891	12,052	1.8%
Centrum Jr	Lederle	4,131	3,750	3,287	11,168	1.7%
Stresstabs	Lederle	2,608	5,060	3,330	10,998	1.6%
Nature Made	Pharmavite	4,208	5,317	627	10,152	1.5%
Sundown	Rexall Sundown	1,370	4,757	2,630	8,757	1.3%
Sesame Street	J&J	3,711	2,074	2,057	7,842	1.2%
Protegra	Lederle	1,249	3,146	1,386	5,781	0.9%
Your Life	Leiner	1,897	3,182	612	5,691	0.8%
Your Life Daily Pack	Leiner	866	2,273	2,124	5,263	0.8%
Icaps Plus	Icaps	512	2,983	1,312	4,807	0.7%
Nature Made Essential Balance	Pharmavite	1,261	1,904	1,567	4,732	0.7%
Your Life Max Pack	Leiner	518	1,637	1,868	4,023	0.6%
Theragran M	BM Squibb	883	2,437	583	3,903	0.6%
Other Brands		18,413	44,823	14,885	78,121	11.6%
Private Label		51,883	84,688	46,971	183,542	27.2%
Total Category		$199,862	$303,601	$171,562	$675,025
Source: Nutrition Business International. December 1996a. "Dominant Brands Still Up for Grabs in the Nutrition Industry." Nutrition Business Journal 1(5):1-3.

are also using manufacturers' point-of-purchase displays to generate interest in the products, educate consumers, and explain the uses of products. These displays are generally arranged by product attribute without making any health claims; for example, energy, digestion, and the immune system are terms that are used. These displays enable retailers to move the display unit around in the store to get supplement products into high-traffic areas without rearranging existing shelf space, a bonus considering the shortage of shelf space in nutrition products aisles.

In addition, some food stores are developing a "store within a store" concept for nutrition products, including supplements, to build category awareness. Other ways in which food stores are trying to increase supplement product visibility, include placing vitamins near the checkout counter to increase impulse purchases, placing them more prominently in stores, and cross-merchandising supplements with other food categories (e.g., children's vitamins in the cereal aisle, other supplements mixed in with incontinence care).

The attention given to expanding product offerings, educating consumers, and giving supplements prominent store location is not a surprise considering the large profits food stores make on DS products. The profit margin for most products in food stores ranges from 1 to 3 percent. Dietary supplements, however, yield profit margins near 40 percent (Gaseau, 1995). A buyer from a large East Coast supermarket chain said that pricing is not an issue and that food stores can "...price [supplements] competitively and make a ton of money" (Gaseau, 1995).

5.2.2 Drugstore Sales and Marketing

Although drugstores are experiencing increased business in the overall supplement category, their market share is declining. Drugstores maintained a 49 percent market share in sales of dietary supplements and had sales of $1.1 billion, according to AC Neilsen (Nutrition Business International, October/November 1997c). Drugstores lead the way relative to food stores and mass merchandisers in sales of multivitamins, minerals, one- and two-letter vitamins, and liquid vitamins/minerals (see Table 5-7). In addition, they lead sales of the majority of individual brands listed in Table 5-8. However, there is evidence that this share is being eroded by mass merchandisers, who experienced a 60 percent increase in vitamin sales in 1994, and natural food stores (Chain Drug Review, 1995).

To slow the flow of supplement sales toward other retail outlets, drugstores are working to educate consumers and to leverage their unique competitive advantage "the in-house pharmacist" to attract consumers. DS products are intentionally positioned in most drugstores near their pharmacies to capitalize on the advantage of having a knowledgeable, accessible health care provider located nearby to educate and help guide consumers in their purchase decisions. Monthly newsletters, manufacturer' supplied informational brochures, and educational programs are also being offered by chain drugstores as a means to educate consumers.

In addition to trying to educate consumers, drugstores are also increasing the number of products they offer in response to rising demand and are using the media to highlight their larger product mix. The expanded shelf space is likely to be filled with herbal products, as drugstores increase the number of herbal products they carry. Advertisements inform consumers that the drugstores carry these herbal products. In general, West Coast drugstore chains have larger stores and generally devote more shelf space to the supplement category than those east of the Mississippi, although East Coast stores are trying to turn the supplement section into a destination department for shoppers. Some drug chains also use secondary display locations in the store to drive impulse sales.

As in food stores, manufacturers are also using point-of-purchase displays in drugstores to educate consumers about their products. Information Delivery Systems of California is taking this approach one step further in chain drugstores across the country. They are providing these stores with a point-of-purchase audio system that allows customers to ask about and receive information on over 60 key nutrients, botanicals, and related products. Manufacturers benefit from this system as they receive feedback on the number of times an inquiry was made about a product each week, a feature that provides them with quantitative data on how well their marketing and public relations activities are working. Several major retailers are also working to develop CD-ROM touch screen technology to allow consumers to determine which products best fit their needs. Drugstores also advertise price discounts in flyers and in other media to generate sales.

5.2.3 Mass Merchandiser Sales and Marketing

Mass merchandise outlets accounted for approximately $665 million in sales of dietary supplements in 1996, giving these mass retailers a 26 percent market share (Nutrition Business International, October/November 1997c). Over 40 percent of these sales were vitamin products, for a total of $266.6 million in sales (F-D-C Reports, Inc., 1997b; F-D-C Reports, Inc., 1997c).

Mass merchandisers carry a broad mix of private label and brand names, although most of the major advertising expenditure is on national brands. The presentation and mix that mass merchandisers offer consumers is more streamlined and mainstream than that found in health food stores, meaning that their product lines are similar to those in supermarkets and drugstores. Mass merchandisers carry what may be viewed as "commodity products." Product lines of national-brand multivitamins, in particular, are better represented in mass merchandise outlets than in health food stores. Mass merchandisers make buying decisions on the national level and therefore wield large buying power. This enables them to be very price sensitive in choosing which products to carry and to refrain from getting locked into long-term contracts with manufacturers and distributors. Therefore, mass merchandisers have great flexibility in determining which products to present to consumers and the power to obtain these products at low prices.

Like drugstores and supermarkets, mass merchandisers are struggling to educate their consumers. Those that have pharmacies in the store position DS and nutrition products near the pharmacy. Mass merchandisers are also making an effort to educate their pharmacists by offering them continuing education programs, newsletters, and seminars. Point-of-purchase displays, common in drugstores and supermarkets, are also used extensively in mass merchandise retail outlets. In addition, targeted couponing, shelf promotions, and pricing strategies are also used by mass merchandisers to generate supplement sales.

5.2.4 Natural Food Store Sales and Marketing

Natural and health food stores commanded $4.5 billion in DS sales in 1997 for an overall market share of 35 percent (see Table 5-5). Sales increased 55 percent from 1996 to 1997, making natural food stores the fastest growing DS distribution channel. Sales of herbal and botanical products are more concentrated in natural food stores and multilevel marketing firms than in the overall supplement category with 37 percent and 38 percent, respectively, of the herbal and botanical market (see Table 5-6).

Of the natural food stores, General Nutrition Centers (GNC) stands out with $1.2 billion in sales in 1996, or 20 percent of the $6.2 billion retail market for supplements (Nutrition Business International, October/November 1997d). Large natural food store companies, such as GNC, produce their own products and may manufacture private-label products for supermarkets and drugstores as well. Other natural food stores carry both national brands and private label brands manufactured by other companies.

In the past, many natural foods stores concentrated on sports nutrition. Now they are focusing on sales strategies that are science-based and concentrating on good nutrition and care of the body to lure consumers. GNC in particular is also trying to appeal to mainstream consumers via advertisements on network television. In addition, stores are taking steps to customize their service as well. Some natural foods stores are creating nutrition profiles for customers to fit their own lifestyles and needs and others are packaging the DS regime, which is tailored to an individual, right in the store. At Great Earth stores, the sales staff must pass a unique 5-week training course. In addition to the more scientific and individualized approach, health food stores are also using touch-screen computers for research information and consumer education, point-of-purchase displays, educational literature, pamphlets, and newsletters. Natural food stores also advertise their products, among other places, in magazines, on the Internet, and on radio and television.

Natural food stores have recently begun to broaden their customer base by establishing stores on military bases. GNC will open an undisclosed number of stores on military bases in order to tap an estimated $1 billion commissary market (Tascarella, 1997). In addition, Fitness and Nutrition Centers already has outlets on Department of Defense property.

5.2.5 Multilevel Marketing

Multilevel marketing, also known as direct selling, party plans, relationship selling, person-to-person selling, and network marketing, accounts for a large percentage of consumer sales in the DS industry. In 1997, multilevel marketing firms accounted for 23 percent of overall DS sales (see Table 5-5). Multilevel marketing of DS products experienced no growth from 1996 to 1997. However, it accounted for the largest percentage of sales (38 percent) of herbal and botanical products in 1996 (see Table 5-6).

Direct selling has been a relatively successful distribution channel for the nutrition industry. The product is consumable, which is vital for the sustained growth and profitability of multilevel marketing firms, and sales benefit from consumer education and the word-of-mouth technique intrinsic in person-to-person selling. The personal relationship established between distributor and customer may be a competitive advantage for direct selling companies. Multilevel marketing also gives companies another sales advantage in that distributors are able to quickly and inexpensively dispense information on product research and new scientific studies. In addition, companies are able to keep their selling networks full with many new products as the nutrition industry expands.

Multilevel marketing is a growing industry that is increasingly attracting more companies for a variety of reasons. Multilevel marketing attracts small manufacturers in particular, as it is one of the few alternatives available to them without the high slotting fees and advertising expenditures of traditional retail sales. The improvement of information technology, which facilitates product distribution, and tracking of products, customers and distributor performance, has attracted more entrants into multilevel marketing. In addition to these cost-saving improvements, technology has enabled communication up and down the sales network to be more efficient and cost-effective, thereby enabling the companies to get the product to the consumer at a lower cost, which makes the business more attractive to potential entrants. The downsizing of corporate America and restructuring of the workforce has also contributed to the growth in multilevel firms by increasing the demand for entrepreneurial opportunities. Multilevel marketing provides an opportunity for "downsized" people to earn money to get back on their feet and bridge the gap between jobs or to start a new career.

5.2.6 Mail Order and Internet Sales and Marketing

Mail order channels make up only 6 percent of sales of dietary supplements (see Table 5-5). The market share of mail order remained fairly constant from 1996 to 1997 even as the nutrition industry's growth continued. Mail order accounted for a slightly larger percentage of herbal and botanical product sales (9 percent) in 1996 than overall supplement category sales (see Table 5-5 and 5-6). As of 1997, according to Nutrition Business Journal, there were about 300 mail order companies carrying dietary supplement products (Nutrition Business International, September 1998). Nutrition Headquarters and Amrion, which was acquired by Whole Foods, are two of the largest of these companies.

Marketing for mail order is carried out via 800 numbers on shopping channels on the television, on the Internet, and through media advertising. Advertisements on the Internet frequently refer to scientific studies done on the product and generally include personal testimonials from "product users." Some companies carrying out mail order operations via the Internet have come under scrutiny by the Federal Trade Commission (FTC). The FTC contacted about 400 companies in November 1997 following a 2-day sting operation in which these companies were found to be making deceptive or potentially false advertising claims.

5.2.7 Health Care Practitioner Sales and Marketing

Health care practitioners made up a small segment of dietary supplement sales at 6 percent of the total DS product market in 1997 (see Table 5-5) and 4 percent of the herbal and botanical product market (see Table 5-6). However, sales grew by approximately 17 percent from 1996 to 1997 (see Table 5-5). Rather than being seen as a retail outlet, physicians and chiropractors are used generally by supplement manufacturers and companies as marketing avenues to get information about their products out to potential customers. The supplement companies educate health care practitioners on the science behind their products in hopes that the research-supported message of their products' benefits are passed on to the doctors' patients, who will then buy their supplements.

5.2.8 Specialty Shops

Specialty shops include small, family-run stores as well as ethnic food stores that carry dietary supplements in addition to other products. They account for only 2 percent of herbal and botanical product sales (see Table 5-6). Sales growth in 1996 was only 10 percent compared to a growth rate of 25 percent at all retail outlets for natural products (Nutrition Business International, September 1997a).

5.2.9 Distributor and Manufacturer Marketing Efforts

In addition to the marketing efforts of retail outlets, manufacturers and distributors engage in marketing efforts as well. To get their products on the shelves at supermarkets, drugstores, mass merchandise outlets, and health food stores, they use a variety of marketing techniques. For example, they place advertisements in medical journals and in the Physicians' Desk Reference as well as on network television and radio and in magazines to develop consumer and retailer brand loyalty to their products. Manufacturers also rely heavily on advertising in retail trade publications such as Supermarket Business and Drug Store News and support large retail outlets with advertising in the mass media and through public relations campaigns.

In addition, manufacturers supply retail outlets with the point-of-purchase displays to use in their stores, which gets their products into more heavily trafficked areas of the store. To generate sales of their own products and to make their products more attractive for retailers to carry, manufacturers provide coupons at the store level, give retailers money to advertise, and produce "bonus bottles" with, for example, 30 percent more of the product inside for free. They also offer retailers chain-specific promotions, targeted coupons, and cooperative advertising to client stores.

5.3 Market Structure of the Dietary Supplement Industry

Market structure is of interest because it determines the behavior of producers and consumers in the industry. If an industry is perfectly competitive, then individual producers are not able to influence the price of the output they sell or the inputs they purchase. This condition is most likely to hold if the industry has a large number of firms, the products sold and the inputs purchased are undifferentiated, and entry and exit of firms is unrestricted. Product differentiation can occur from both differences in product attributes and quality and from brand name recognition of products. Entry and exit of firms is unrestricted for most industries except, for example, in cases in which government regulates who is able to produce, one firm holds a patent on a product, one firm owns the entire stock of a critical input, or a single firm is able to supply the entire market.

In the next section, we consider the factors that affect the degree of competition (number of firms and concentration ratios, product differentiation, and barriers to entry) as well as the degree of vertical integration. We focus primarily on the input markets for raw materials and the output markets for wholesale DS products.

5.3.1 Market Concentration

Four-firm and eight-firm concentration ratios (CR4 and CR8) and Herfindahl-Hirschman indexes provide preliminary information that is useful in determining the structure of the market. Although the U.S. Department of Commerce computes these values, they do so only in census years and at the 4-digit SIC level. Because the most recent information available is from the 1992 census and DS products are scattered across SIC codes, measures of concentration from this source are of little use for the DS industry. However, we were able to construct a few measures of concentration using information available from the Nutrition Business Journal.

The September 1998 issue of the Nutrition Business Journal lists the top 40 manufacturing firms with their 1997 revenues and provides the summary information that is contained in Table 5-9. Using this information, we calculated that the CR4 is 23 percent, the CR8 is 39 percent, and the HHI is 250 (see Appendix A). Based on these values, the DS product manufacturing market is not highly concentrated. While there are not specific criteria for evaluating CR4s and CR8s, the 1992 Department of Justice's Horizontal Merger Guidelines states that industries with HHIs below 1,000 are unconcentrated.

The October 1996 issue of the Nutrition Business Journal provides the 1995 summary information on vitamin and herbal and botanical raw material suppliers that is contained in Table 5-9, but it does not list the revenues for individual suppliers that is necessary to construct all the measures of concentration. However, based on the information they provide, the CR8 for the vitamin raw material market is 73 percent and for the herbal and botanical raw material market, 36 percent.

Table 5-9. Summary of Number of Companies and Revenue, by Size Category in the DS Industry

Size Category	Number of Companies	Revenue ($ billion)	Percentage of Market
Supplement Manufacturers (1997)
> $100 million	16	3.32	55%
$20 - $100 million	38	1.54	25%
< $20 million	996	1.19	20%
Total	1,050	6.05	100%
Vitamin Raw Material Suppliers (1995)
> $50 million	8	0.68	73%
< $50 million	32	0.25	27%
Total	40	0.93	100%
Herb and Botanical Raw Material Suppliers (1995)
> $20 million	8	0.176	36%
$5 - $20 million	15	0.135	28%
< $5 million	127	0.178	36%
Total	150	$0.489	100%
Source: Nutrition Business International. September 1997a. "$20 Billion and Counting: Nutrition Industry Momentum Builds." Nutrition Business Journal 2(9):1-5. Nutrition Business International. October 1996b. "Botanicals International Has Bulk of Herb Market." Nutrition Business Journal 1(3):6-7. Nutrition Business International. October 1996c. "Vitamin Suppliers Tackle Supply and Demand Issues." Nutrition Business Journal 1(3):13-16. Nutrition Business International. September 1998. "$23 Billion and Counting: Nutrition Industry Braces for a Competitive Future." Nutrition Business Journal 3(9):1-5, 13, 18.

Thus, the vitamin raw material market is much more concentrated than either the DS manufacturing market or the herbal and botanical raw material market. In fact, the Justice Department is currently investigating alleged price fixing and collusion in the vitamin raw material market (Scott, 1998). Nearly all vitamin E, in particular, comes from one raw material supplier.

In the DS market as a whole, mergers and acquisitions have been occurring frequently and are expected to continue. Thus, we expect that market concentration will increase over time.

5.3.2 Product and Brand Differentiation

Dietary supplements are by nature heterogeneous products. Even within a particular DS product type, there are many different types of products and many different forms in which the products are made available. Thus, many niche markets exist in which companies may be the only or one of a few manufacturers of a product. However, some of the products are more commodity-like and there is little differentiation among different manufacturers of the products (e.g., single vitamin products).

Products may also be differentiated based on their brand names within a particular type of product. However, according to the Nutrition Business Journal, the nutrition industry in general has few dominant brands. Some of the reasons they cite are the large number of product niches, the variety of distribution channels, the dynamics of consumer trends (changing preferences over time), and the evolution of nutrition science (Nutrition Business International, December 1996b). In some markets, however, a few companies have established strong brand name recognition. These include, for example, Centrum, One-A-Day, and Flintstones in the multivitamin market and Ginsana and Ginkoba in the herbal and botanical market.

5.3.3 Barriers to Entry

In the past, barriers to entry in DS product manufacturing were not particularly high, and many small firms entered the industry. Many products, especially herbal and botanical products, can be produced in small-scale operations that are not highly capital-intensive. However, the barriers to entry are rising and will continue to do so primarily because of the effects of consolidation and the effects of regulation, both federal and self-imposed.

Because many distributors and retailers are consolidating, it is becoming harder for small companies to gain access to customers (Nutrition Business International, July 1997a). Mass merchandisers that carry DS products need to acquire adequate product from manufacturers to supply all their needs. Also, because other manufacturers are consolidating, they are purchasing inputs in volume and thus are able to negotiate lower raw material prices than smaller manufacturers.

In addition, regulation is making it more difficult for small firms to enter the industry. It may be more difficult for these firms to acquire the needed resources to comply with labeling regulations as well as Good Manufacturing Practices (GMPs). Larger pharmaceutical firms that are branching out into DS product lines will have little trouble complying as their existing products lines in general must conform to much stricter regulations.

Some of the regulations are imposed by the industry itself. In particular, the industry, through organizations such as the National Nutritional Foods Association (NNFA), is working toward establishing standards for DS products. The NNFA has already established a True Label program in which it tests products to ensure that they are as represented on their labels. Although these self-imposed regulations are voluntary, consumers may come to expect products that conform and may not purchase products that do not. As with federal regulations, smaller firms may not be able to garner the resources for compliance.

5.3.4 Vertical Integration

Vertical integration refers to the extent to which firms operate at more than one level of production and marketing. In general, we expect that firms that are more vertically integrated will be able to retain a higher level of profits than firms that concentrate on a single level of the industry.

In the DS industry, we see examples of both ends of the spectrum. While many firms concentrate on a single level, others, such as GNC, span nearly the entire spectrum from manufacturing to consumer sales. According to the Nutrition Business Journal, the chain of manufacturing from raw materials to finished products may span four or five companies (Nutrition Business International, August 1996). On the other hand, multilevel marketers and mail order companies, both of which have a large presence in the DS industry, span many of these levels.