This KRI Working Paper is a work in progress that will eventually be revised and published elsewhere. This Working Paper does not necessarily represent the position of the Khazanah Research Institute.
Abstract
The value chain studied covers the manufacturing of health supplement products made from traditional herbs whereby the value chain covers research and development (R&D), manufacturing, and downstream product distribution. We found 49 services that contribute to this value chain. The case study also details the challenges faced by policymakers and businesses in creating an environment that is supportive of the development of innovative products. Services play a significant role in the firm’s value chain and they contribute to a substantial percentage of the cost of the final product. The research and development (R&D) activities constitute a large portion of the value chain. However, a considerable number of services in the R&D stage are outsourced. These services tend to require specialised skills and facilities (e.g. safety studies and clinical trials) and therefore a certain level of scale economies to result in optimal costing/pricing. Learning about the markets and the regulations of new countries constitute a large barrier. The costs are significant, and the tasks are difficult to perform in-house due to the level of technical and market knowledge required and the geographical distance. Thus, independent vendors (to whom the services are outsourced) that are able to provide advisory services in multiple markets are able to grow with their clients as they seek to enter the said markets. There are cost implications of government policies. The government policy to support R&D in herbal products has contributed to the growth of the industry. Even though the firm has invested heavily in the R&D of its products, it is unable to make any new health claims based on the scientific outcomes. This is due to the regulatory classification, i.e. traditional medicine, which the product falls under.
Acknowledgement
The authors would like to acknowledge the collaboration of the Asia Global Institute (formerly Fung Global Institute), Hong Kong, in this study. This paper is part of a wider AGI-led project on the role of services in value chains. In particular, we would like to thank Patrick Low of the Institute, who has worked with us on the project. The views expressed here are those of the authors and should not be attributed to the parties who have contributed to the case study or their representatives, to whom the authors are very grateful for their generous advice and assistance. We would like to thank Nazihah Muhamad Noor and Sarena Che Omar for their input. We would also like to thank Sitti Nadhirah Md Rusli for her diligent and resourceful research assistance.
Firm’s Background
The firm represented in this case study develops, manufactures, and markets health supplement products made from traditional herbs. Its main selling products are made from the tongkat ali plant also known as Eurycoma longifolia. This plant is native to Southeast Asian forests. Among the local Malaysian population, the consumption of this traditional herb is widely believed to enhance the male libido, energy, and the immune system.[1]
The firm distinguishes itself from other companies in the market by using R&D to develop traditional medicine-based products. Its products are highly innovative and are anchored to Malaysia’s unique natural assets. Thus, the firm develops products that are based on science and high manufacturing standards.
Industry Overview: The Malaysian Health Supplements Market
Malaysian consumers are increasingly showing appreciation for consumer health products such as vitamins and dietary supplements, believing that taking supplements can help to improve their health and wellness. Indeed, Malaysian consumers are spoilt for choice when it comes to health supplements, given the wide range of supplements and the presence of established international brand names such as Nutrilite, Live-well, Blackmores, and VitaHealth in the local market. Aggressive promotional campaigns by manufacturers of vitamins and dietary supplements have also helped to increase the popularity of health supplements.
Market growth by product category
Over the past decade, the Malaysian market for vitamins and dietary supplements has experienced robust growth, with retail sales doubling from RM940.4m (USD248.3m) in 2005 to RM1.9b (USD572.6m) in 2014 [2] (Figure 1). This represented a compound annual growth rate (CAGR) of 7.0% over the past 10 years. In 2014, retail sales of vitamins and dietary supplements recorded an annual growth rate of 7.9% from sales of RM1.7b (USD545.3m) in 2013 [3], which was slightly above the 10-year CAGR of 7.0%.
Among the different product categories, tonics and bottled nutritive drinks have gained significant popularity over the past decade. These include products such as BRAND’S ® Essence of Chicken, and health and beauty drinks by NH Colla Plus and Kinohimitsu that are popular particularly with female consumers.
In 2005, tonics and bottled nutritive drinks registered total retail sales of RM93.5m (USD24.7m). By 2014, retail sales of these products are estimated to have increased 3.6 times to RM333.0m (USD102.8m) [4] (Figure 2). This translated into a CAGR of 13.5% over the 10-year period, which was almost double the industry average. 2014 also saw tonics and bottle nutritive drinks registering a robust annual growth rate of 14.5% from sales of RM290.8m (USD92.2m) [5] in 2013 (Figure 3).
Retail sales of non-herbal/traditional dietary supplements registered the second highest growth rate over the past decade, having more than doubled from RM278.4m (USD73.5m) in 2005 to RM576.2m (USD177.9m) [6] in 2014 (Figure 2). This marked a CAGR of 7.5%, slightly above the industry CAGR for the same period.
As for herbal/traditional supplements, vitamins as well as paediatric vitamins and dietary supplements, retail sales in these categories grew at slower pace of around 5.0% over the past 10 years, below the industry average of 7.0% (Figure 3).
It is interesting to note that probiotic supplements were the most popular supplements in 2014, registering the strongest annual growth rate of 15.4% among all supplements. Probiotics are popular for their benefits of supporting a healthy digestive system (Ciorba, 2012; Nagpal et al, 2012; Kailasapathy, 2013), with lactobacillus and bifidobacterium being the most commonly used species or strains. However, in terms of market share, retail sales of probiotics totaling RM9.0m (USD2.8m) in 2014 accounted for less than 1% of total vitamins and dietary supplement sales for that year.
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Market share by product category
In terms of market share, dietary supplements accounted for the bulk at 58.3% or RM1.1b (USD333.9m) of total retail sales in 2014. This is followed by vitamins, with retail sales of RM389.2m (USD120.2m), translating into a 2014 market share of 21.0% [7] (Figure 4).
Tonics and bottled nutritive drinks accounted for 18.0%, or RM333.0m (USD102.8m) of total retail sales in 2014 [8] (Figure 3). Fueled by a meteoric rise in their popularity, their market share has almost doubled from 10% in 2005.
Paediatric vitamins and dietary supplements garnered the smallest market share of 2.7%, with retail sales of RM50.9 m (USD15.7m) in 2014 (Figure 4). Nevertheless, paediatric vitamins and dietary supplements are an emerging trend in health supplements in Malaysia, owing to increasingly health conscious parents who also provide supplements to their children as part of familial health routines. Vitamin C ranked as the most popular paediatric vitamin, while examples of paediatric dietary supplements include fish oil, probiotic supplements and colostrum [10].
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Dietary supplements
Within the category of dietary supplements, non-herbal/traditional supplements accounted for a larger proportion of sales in 2014, at RM576.2m (USD177.9m), or 53.3%, while herbal/traditional supplements accounted for the remaining sales at RM505.4m (USD156.0m), or 46.7% [10]. In terms of trends in market share, however, herbal/traditional supplements have seen their market share eroding over the past decade. In 2005, herbal/traditional supplements occupied the pole position with a market share of 32.2% based on total retail sales of RM302.7m (USD79.9m). This has since shrunk to 27.2% in 2014, with retail sales totaling RM505.4m (USD156.0m). Herbal/traditional supplements have largely lost their market share to nonherbal/traditional supplements as well as tonics and bottled nutritive drinks [11] (Figure 5).
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Vitamins
Within the category of vitamins, multivitamins accounted for the bulk at RM243.4m (USD75.1m) or 62.5% of total retail sales of vitamins in 2014, while single vitamins accounted for 37.5%, with retail sales totaling RM145.8m (USD45.0m). Vitamin C was the most popular single vitamin in 2014, as has been the case for the past several years, with sales of RM92.8m (USD28.7m) in 2014 [12]. Indeed, sales of Vitamin C accounted for more than 60% of sales of single vitamins in 2014.
Major market players
Amway continued to enjoy the local market leader position in vitamins and dietary supplements in 2014, with total retail sales of RM302.2m (USD93.3m) accounting for a market share of 16.3% [13]. With its popular international brand name of Nutrilite that offers a comprehensive portfolio of vitamins and dietary supplement products, Amway has managed to defend its top position over the past decade. In addition, the company is supported by a strong network of direct sellers for its products. However, its market share has eroded from 19.4% in 2005 due to greater competition from other market players.
Within the category of vitamins, Amway accounted for an even larger market share of 27.5%, while in the dietary supplements market, Amway’s market share was 17.8% in 2014 [14].
Cerebos enjoyed the second largest market share of 9.1% in vitamins and dietary supplements, derived from total retail sales of RM169.5m (USD52.3m) in 2014, with its popular Brand’s ® products, notably Brand’s Essence of Chicken. Its retail market share has also increased significantly from 5.2% in 2005. Not surprisingly, within the category of tonics and bottled nutritive drinks, Cerebos acquired a market share of almost 51% in 2014 [15].
USANA was ranked the third most popular brand in vitamins and dietary supplements, with retail sales of RM121.1m (USD37.4m), providing a market share of 6.5% in 2014 [16]. The US based company, which has been present in the Malaysian market since 2007, is a direct selling company for health supplements, weight management and personal care products [17].
Cosway, a subsidiary of the Berjaya Group, is a well-established brand in Malaysia that sells health supplements as well as personal care and household products [18]. Its market share of vitamins and dietary supplements stood at 5.7% on the back of retail sales totaling RM106.3m (USD32.8m) in 2014 [19], placing the company at the fourth position in the vitamins and dietary supplements market.
Elken, is another direct selling company for health supplements, and is also known for its water purification systems [20]. With total retail sales of RM88.2m (USD27.2m), the company was ranked as the fifth most popular brand with a market share of 4.8% in 2014 [21].
Collectively, these five brand names garnered a market share of 42.4% with combined retail sales of RM787.3m (USD243.0m) in 2014. Other popular brands such as Blackmores, Herbalife and Kordel’s accounted for less than 4% each in the vitamins and dietary supplements market in 2014 [22].
Figures 6 and 7 illustrate the retail sales and market shares respectively of the Top 5 brands in vitamins and dietary supplements in the Malaysian market.
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