Winning the Battle for Consumer Healthcare

Which companies will successfully combine the power of science with knowledge of the consumer?

Global demographic changes are creating a new market for consumer-focused products with significant health benefits. This new "consumer healthcare" segment is emerging midway between mass retail-based consumer goods and pharmacy-based pharmaceuticals—and it will be a new battleground between the giants in these two industries. Which industry will win? It's not yet clear. Consumer goods companies boast strengths in marketing and distribution but are weak on science, an area in which pharmaceutical companies excel. The unique challenges of this new segment will likely require a mixed model, with capabilities from each industry.

Big changes are afoot in consumer markets. It seems that most food companies are keen to persuade consumers that their products are tasty and healthy. Personal-care companies are following a similar path, emphasizing that their products have a scientific basis. At the extreme end of this trend, emerging new products promise to deliver health benefits traditionally offered by pharmaceutical products. These products are scientifically tailored either to address specific health needs or increase some dimension of performance—and it is big business going beyond the traditional over-the-counter (OTC) market estimated at approximately $125 billion globally. For example, functional foods alone are predicted to grow from a global market of around $165 billion in 2007 to more than $240 billion by 2012, according to Euromonitor.

Although these complex, scientifically based products were originally the preserve of niche companies such as Yakult, major consumer goods companies are now focusing on opportunities for growth and profitability. Danone is venturing into medical foods, Minute Maid has introduced juices enhanced with plant sterols, multivitamins and omega-3 fatty acids, and Nestle is starting a consumer health business. The company has already launched several joint ventures with L'Oreal, including one called Inneov Laboratories that combines the nutritional expertise of one with the dermatological expertise of the other. At the same time, pharmaceutical companies, starved of new blockbuster prescription molecules, are also getting into the act; for example, GlaxoSmithKline is buying sports-nutrition specialist Maxinutrition to expand its consumer health products lineup.

Why is everybody so interested in consumer health and what is required to succeed in this market? This paper examines the global demographic changes that are leading to demand for mass-market consumer-focused healthcare products. It also looks at how these changes are affecting markets, creating a huge new battleground for the 2010s. Finally, it analyzes what consumer goods and pharmaceutical companies need to do to win.

Big Demographic Changes

Healthcare around the world is being transformed by major demographic shifts: increased wealth, improved lifestyles and urbanization. Wealth brings people many benefits, not the least of which is longevity and reduced risk of death from infectious disease, malnutrition and diarrhea. Yet improved lifestyles mean richer diets and less exercise, which lead to obesity; and people can afford to smoke and vacation in the sun. And as people live longer, they are at greater risk of suffering from one or several chronic diseases, including osteoporosis, diabetes, cancer, vascularitis and dementia (see figure 1).

Figure 1: Changing demographics create risk factors that accelerate the growth of chronic diseases

Indeed, the rate at which people are suffering from chronic diseases is rising at an alarming pace. And the health risk factors (obesity, smoking and longevity) are expected to accelerate throughout the next decade. Today, 45 percent of the total population of the United Kingdom has one of the three main risk factors; by 2020, this figure will be 60 percent. Developing countries are experiencing the same trends. In India, for example, 25 percent of today's population has one of the risk factors; in 2020, it will be 40 percent (see figure 2).

Most health systems are ill-equipped to deal with an explosion of chronic diseases associated with these risk factors. Long-term management requires changing the behaviors that caused the diseases and many years of treatment with a variety of drugs. However, today's health systems have generally been designed around short-term interventions, with only about 50 percent of patients taking their medicines as prescribed. Thus, the cost burden is huge. A diabetic patient in the United States is estimated to consume more than three times the health resources of a non-diabetic.¹

Figure 2: Health risk factors are expected to accelerate over the next decade

Although different countries are approaching the problem in different ways, three major trends are encouraging consumers to participate in their treatments:

• 1. Increased focus on prevention. Governments and payers are investing in public health campaigns to convince citizens to change behaviors and begin early treatment, focusing primarily on obesity and smoking. They are also providing incentives for doctors to identify those at risk and engage them in their own treatments.
• 2. Increased consumer spending. In the developed world, payers are experimenting with different co-payment mechanisms both to reduce the cost of healthcare and to encourage appropriate behaviors. In the developing world, as emerging health systems fail to keep up with the expectations of their citizens, consumer spending is filling the gap. Between 2000 and 2015, for example, consumer spending on healthcare services is forecast to increase 130 percent in India, nearly 80 percent in China, and more than 70 percent in Thailand.
• 3. New spending trends due to an aging world population. By 2030, 36 percent of Germans and 30 percent of Chinese will be older than 60 years of age and more than one million centenarians will be living in the United States. These older populations will have a wide range of self-medication options and aspirations, including maintaining fitness levels, preserving youthful appearance, preventing fractures, halting muscle decay, and staving off dementia.

It is around these trends that the consumer market is developing, as science provides solutions to meet increased consumer demand. With greater understanding of how diet and behavior influence the development of disease, scientists are finding ways to reverse negative effects. The diets of those at risk of heart disease, for example, have long sought to avoid foods that would increase cholesterol; now they're evolving to include cholesterol-lowering foods. Similar advances are being made to address risk factors for diseases such as diabetes and osteoporosis. Now mass-market products—including food and drinks, personal-care products, and OTC pharmaceutical-type products—show great promise for helping consumers avoid disease.

Of course, this consumer focus has some less benign effects. A tendency also exists to "medicalize" conditions that in earlier years might have been deemed to be quite normal consequences of aging. The whole area is also extremely susceptible to fads, for example, the evidence that many of the superfoods have any real effect is often extremely weak—and evidence suggests that many healthy food supplements may actually be harmful.

Whether effective or not, however, demand is growing for products that people think can make them healthier. Which companies will be best placed to meet this demand?

New Battlegrounds

To meet the increasing demand for these products, a whole new consumer healthcare segment is emerging, midway between the mass market, supermarket-based world of consumer goods companies and the scientific, pharmacy-based world of pharmaceutical companies (see figure 3). Currently, this new segment is largely occupied by fragmented niche players, but those players are likely to be swallowed up or swept aside by the incipient entry of giants. Indeed, as populations with risk factors grow (again, by 2020 it's likely to be about 60 percent of the population of a country like the United Kingdom and about 40 percent of India), healthcare products will move to the heart of the mass market.

Figure 3: A new, large mass market will develop midway between pharmaceutical and consumer goods companies

The battle has already begun. Many pharmaceutical companies, facing structural declines in the value of their branded drug portfolios, are focusing more on nonprescription products. Consumer goods companies are planning to increase margins and accelerate growth by enriching products with health-oriented features. It has been known since 1984, for example, that a strong link exists between blood cholesterol and heart disease—a link that led to Lipitor, Pfizer's cholesterol-lowering treatment, becoming the world's best-selling drug. By 2009, this class of drug—which includes Crestor, Questran and Lescol—was worth more than $25 billion. The industry has also made pushes into OTC remedies such as the nonprescription Zocor Heart-Pro.² To build on its strengths—making and proving claims, capitalizing on medical endorsements and accessing pharmacy channels—the pharmaceutical industry focuses on the technical aspects of these products. They're packaged in white, functional boxes, for example, to make them look like the prescription products they replace.

Meanwhile, many niche manufacturers have developed OTC anti-cholesterol products, including Raisio Group's Benecol, Cedar Health's Lestrin and Futurebiotics' Cholesterol Balance.³ Consumer goods companies are also offering products designed to lower cholesterol: Kellogg's Optivita cereal, for example, boasts of its oat bran. Danacol Danone, a dairy drink, contains plant sterols, which are also the key to Unilever's Flora pro.activ product line of drinks, yogurts and spreads. The selling point for all of these products is that they help lower cholesterol, but their makers—seeking to build on strengths in mass-market distribution, brand development and understanding of consumer needs—focus on the products' appeal to consumers (for example, the products come in colorful packages designed to build emotional associations).

As is often expected in any new market, both sets of players have made missteps. It's hard to know exactly how to price such products, how to convince consumers that they will deliver on their health promises, how to find the most effective distribution channels and marketing media, how to assemble complementary ingredients (for example, does it hurt the health claims of food products when they contain genetically modified organisms or artificial sweeteners?) or how to build loyalty. The smartest companies are learning from these experiences. Going forward, some companies will refine their approach and become global leaders. The only question is: Which companies will they be?

Which Companies Will Win?

According to a quote attributed to Mark Twain, "History does not repeat itself, but it does rhyme." If so, the pharmaceutical companies are in trouble. Traditionally, consumer goods companies have mastered the art of using their marketing might and access to mass-market channels to crowd out more specialized first-mover rivals (see sidebar: Traditionally, Marketers Beat Scientists). In some segments of the consumer health market, we already see these forces at work.

Traditionally, Marketers Beat Scientists

Figure: The perfume industry illustrates how consumer goods ousted more "scientific" players

Historical precedents suggest that typically, consumer goods successfully oust more "scientific" players from new markets. Consider the perfume industry, for example: In the 1970s, fragrance was practically a crafts business—targeted at an elite niche, it was full of small, fragmented players (see figure). The 1980s, however, saw an increased number of launches and expanding brands, such as Jacques Bogart. Attracted by the boom in demand and the industry's high margins, chemical players and even pharmaceutical companies came to see it as a natural extension of their chemical expertise—but then the consumer goods giants decided to enter the fray massively.

Unilever, L'Oreal and P&G turned this niche product into a mass market, applying many strategies that had proved successful with shampoos, soaps and washing powders—such as mass marketing, distribution expansion and line extension. A few of the more specialized players, such as LVMH and Coty, also participated in this consumerization and market consolidation. More scientific players, such as Croda and Elf Sanofi, chose to exit the market. At the beginning of the 1980s, consumer goods and chemical companies had each owned about 20 percent of a global market estimated at $5 billion. Today, consumer goods companies control 60 percent and chemical companies less than 5 percent of a $25 billion market. The winners, therefore, were not the companies with the best technical understanding of perfumes. The winners were the companies that best understood consumer aspirations and distribution. Is it a prediction of the healthcare market's future?

Take probiotic yogurt drinks, for example— they're mass-market products focused on health benefits. The market for probiotic yogurt drinks did not exist in Europe in the early 1990s, when the Japanese company Yakult made its regional launch. Yakult was a classic small innovator, with technical expertise gleaned from having marketed its small bottles of "friendly bacteria" in Japan since 1935. Its drink proved relatively popular, penetrating 1 percent of U.K. households by 1999. That was enough to prompt Danone to launch its Actimel brand. Actimel had a huge advertising campaign and could take advantage of Danone's powerful distribution network and innovation pipeline. Danone, therefore, kept introducing new flavors of Actimel. By 2002, Actimel was slightly ahead of Yakult, and during the next three years its penetration tripled to 22 percent of households. By 2005, Actimel was one of the top 10 take-home soft drink brands in the United Kingdom.⁴

History is not necessarily destiny, however, and the consumer health market may prove to have unique characteristics that could spell trouble for consumer goods companies. One of their biggest problems is how to substantiate their health claims, particularly given the highly sensitive and litigious environment of healthcare. The U.K.'s Advertising Standards Authority, for example, has banned some Actimel TV spots, calling them misleading. Danone settled a U.S. lawsuit about similar claims for $35 million, and the European Food Safety Authority forced Danone to withdraw all health claims about Actimel.⁵ Again, responses may vary based on individual countries' politics, but governments are increasingly requiring proof of any health claim—if not at the same level required for pharmaceuticals, then at least using more rigorous science than in the past. For example, L'Oreal has responded to increasing pressure on claims for anti-aging products with Lift-Activ, the first anti-wrinkle cream clinically proven to be effective through a pharmaceutical-type clinical trial. Even in developing countries, where governments are often less vocal, consumers will seek reassurance through brand credibility and through recommendations of doctors and pharmacists—both areas where pharmaceutical companies excel.

Regarding innovation, the contest is too close to call. Pharmaceutical companies have a better understanding of risk factors, and already have clinically proven molecules with potential applications in consumer healthcare. Their clinical and safety track record is difficult to shortcut or even replicate. For example, in the OTC antihistamine market, Clarityn required far less development effort than the typical new product, because it represented merely a switch of an existing anti-allergy molecule, with a proven clinical and safety track-record, from a prescription to an OTC basis. On the other hand, consumer goods companies are champions at quick derivative innovation, successful brand extension, and effective consumer communication through traditional and new channels. Their shorter development cycles may provide them with enough agility to beat the pharmaceutical companies at getting products onto retailers' shelves and into consumers' minds.

The battle for consumer health is not restricted to products; it is also happening in retail channels. Traditionally, drugs were sold through pharmacies and food through mass-market supermarkets. However, these channels are converging. Wal-Mart, for example, has introduced around 100 mini-clinics in its stores to boost its healthcare credentials. In European countries where it is allowed (such as the United Kingdom), major supermarkets are opening more pharmacies and offering reduced prices for drugs—even in such areas as cancer therapies. At the same time, pharmacies are broadening their offerings with food, drinks and other consumer products. With pharmaceutical companies' traditional strengths in pharmacy, and consumer products' dominance of mass-market channels, the battle for supremacy is happening throughout the value chain.

A potentially complicating factor in the consumer healthcare market is the holistic nature of its goals. When it comes to improving health, using a single product may not be sufficient, and consumers may already be using a prescription medicine or undergoing therapy. Some physicians, for example, are concerned that OTC statin-based cholesterol-lowering products end up being used inappropriately by two types of consumers: some who don't really need the products and are pointlessly subjecting themselves to potential adverse side effects, and others who think the products are sufficient to manage their condition, when in fact they need to be under a doctor's care.6 In a broader picture, any consumer health product is part of a health solution, which may include other products, services or technologies (see sidebar: Technologies and Solutions). One key to the long-term success of any product, therefore, may be in positioning it appropriately in the overall package of care—and endorsement by healthcare professionals will be critical in this process. This "medical detailing" is a core competency of pharmaceutical companies, but quite foreign to the mass-market distribution models of many consumer goods companies.

Looking for the Sweet Spot

No company will create this market in toto or dominate it in the short run. Not every company can address every opportunity. Companies will necessarily focus on a limited number of markets because of the investments required in applying science, proving efficacy and marketing. The trick will be to identify those areas that are set to grow the most and to establish where an individual company is most likely to be successful.

We believe the key to success will be for each company to identify and target its sweet spots in the new consumer healthcare market. A sweet spot exists where the following conditions come together:

• 1. A health need that's not addressed by the State. What do demographic and epidemiological trends, scientific research and other new developments suggest about how people can improve their health? Is this an area that has been recognized as important or could people be educated to understand its importance? Government health systems and structures are set up to provide funding and access to some treatments—but not others. Is this one of the others, in which targeting consumers may be profitable?
• 2. A potential consumer market that's accessible to your company. Do consumers have the wealth to afford this product and attitudes to adopt it? Will they see it as something important that will make a difference for themselves or their loved ones? Do you have the products, brands, distribution and competitive advantage to meet those customer needs?

Identifying the sweet spots will only be the first step. In order to execute successfully, the consumer healthcare players will have to assemble the right mix of capabilities. The challenge, in summary, is to develop effectively targeted, packaged and promoted products that are available to a large number of consumers and deliver what they promise. Aspects of this challenge draw on sources of competitive advantage for both pharmaceutical and consumer goods firms (see figure 4).

Figure 4: Consumer goods and pharmaceutical firms have different sources of competitive advantage

Pharmaceutical companies have the clear edge on research, regulations and compliance. With their molecule pipeline, ability to fulfill regulatory requirements at low costs, and experience at making and proving claims, pharmaceutical companies have the technical expertise and reputation to make consumers healthier. They have marketing and sales functions that play to these strengths, with effective medical endorsements and good access to pharmacy sales channels. They also have the brands to demonstrate clinical capa- bility, even if they are often wary of diluting those brands by association with less well-proven technologies. These strengths alone, however, will not be enough to win: These companies must become capable of far more rapid product innovation and must build flexible supply chains capable of reacting to the promotion-driven sales patterns of consumer goods. They must better understand consumers and their aspirations, and improve their ability to adjust product mix and marketing to meet those desires while keeping costs low.

Consumer goods companies face a nearly opposite situation. They are traditionally strong in both speedy product development and in incremental innovation and line extension to meet evolving consumer needs. Their marketing is good at establishing brands (which will be especially important in developing countries, where regulations are less of a barrier) and responding to consumer aspirations. Their manufacturing operations and supply chains are agile and efficient at producing and delivering mass-market products. They also use their presence in mass retail to make the products available to everyone. They have profound weaknesses, however, on the scientific side—which is, after all, much of what this market is about. Their brands also may not be extendable into more clinically oriented products—fizzy drinks are not readily associated with obesity reduction. If consumers and regulators do not believe that these products will improve health, then nothing else matters. If these companies cannot produce the research, meet the regulations and prove their claims, they too will fail.

Figure 5: Winning companies in this new market will marry the Yin and the Yang

The winning companies, therefore, will be those able to marry the yin and the yang into a mixed model, with some characteristics from each industry (see figure 5). Like pharmaceutical companies, they need:

• Products with proven efficacy and credibility with both consumers and health professionals
• Health innovation leadership, including the courage to lead the market with new technologies
• A vision of future market needs and their solutions
• Global development with local deployment

• Intimacy with, and understanding of, customers
• Strong brand portfolios that dominate categories
• Excellence in marketing strategies and execution
• Flexible and lean supply chains
• Access to mass retail

Most companies will find it difficult to launch new consumer healthcare brands and businesses from within their existing marketing or science dominated cultures. New entrants are typically setting these ventures up as separate business units. Launches will require new thinking and approaches, and dedicated cross-functional teams to shape the strategy, develop the capabilities and mobilize the resources for success. In fact, the unique set of potential roadblocks makes it hard to predict which companies from the pharmaceutical or consumer goods industries will dominate the consumer healthcare market. One thing seems certain, however—among the losers will be those companies that don't dare to try.

Authors

Emmanuel Hembert is a principal in the consumer goods and retail practice. He is based in the London office.

Jonathan Anscombe is a partner in the pharmaceutical and healthcare practice. He is based in the London office.

Michael Thomas is a principal in the pharmaceutical and healthcare practice. He is based in the London office.