Top 8 Insights From the 2018 Beauty, Health & Wellness Survey

Think nutritional supplements and skincare are of interest only to consumers of a certain age? Think again. According to L.E.K. Consulting’s third installment of a biennial survey of the healthy living marketplace, this one focusing on nutrition and skincare, some 80% of health and wellness (H&W) consumers across generations — from millennials to baby boomers — are highly engaged with both categories.

The survey captured insights from more than 1,600 respondents, representing roughly 77% of the U.S. adult population who identify with H&W themes, and generated eight key insights across categories. Together these insights make clear that consumer interest in nutritional supplements and skincare often lasts a lifetime.

For additional insights, please see L.E.K.’s 2016 Health & Wellness Survey and the two-part 2015 Health & Wellness Study: “The Many Faces of H&W Consumers” and “Six Ways to Win With H&W Consumers.”

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2018 Brand Owner Packaging Survey

L.E.K. Consulting recently surveyed more than 200 U.S. brand managers and packaging stakeholders at consumer packaged goods companies to understand their packaging needs and views on trends driving demand.

The survey focused on topics that include:

  • Brand trends and their effect on packaging demand
  • Shifts within packaging (e.g., new materials, packaging innovations)
  • Perspectives on packaging demand (including forecast spend on packaging for their brands)

This Executive Insights analyzes key findings from this proprietary research
 

Assessing the Health of the Nutrition Retail Sector

Consumer interest in maintaining a healthy lifestyle has remained strong over the past decade, buoying retail categories that focus on health and fitness. This includes nutritional supplements, which have enjoyed steady 6% growth since 2005 in the U.S. And after years at the same level, the number of U.S. adults taking supplements has begun to rise, reaching 76% in 2017. 

While nutritional supplements appear to be an attractive category with room for growth, they have been subject to the same seismic shifts as the broader retail market. Specifically, the rising importance of all things digital is placing pressure on some players while simultaneously paving the way for others. 

In this Executive Insights, we examine the four trends that are reshaping the nutritionals landscape. We also discuss which key players stand to win and which ones will be at a disadvantage over the next several years – and the steps these key players can take to shape successful outcomes during this period of industry upheaval.

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The Strong Winds Driving Packaging Demand

An uptick in new product launches, along with increased private-label/Tier 2 brand participation, is among the key trends driving brand-mix shifts in the consumer packaged goods (CPG) segment. In addition to boosting packaging demand (even through periods of lower economic growth), the rise in product updates resulting from increased SKU proliferation has in turn led to shorter run lengths across numerous categories, while also emphasizing the need for more innovative product packaging. 

In this Executive Insights, L.E.K. Consulting outlines the key trends that are driving demand for higher-value packaging products. To succeed, packaging converters must be cognizant of shifts in CPG trends and their likely impact on different product categories; further, they must be nimble enough to develop innovative packaging solutions on behalf of CPGs as they strive to meet consumer demands. For investors, understanding how these trends are driving mix shifts in packaging substrates and formats, as well as where higher value-add products are being developed, is key to identifying opportunities in the making. 

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Plant-Based Products — Not Just for Vegans Anymore

The grocery aisle is getting greener. Consumers — fueled by a host of concerns, including health and wellness, food safety, environmental sustainability and animal welfare, and adopting restrictive diets due to food sensitivity worries and more general lifestyle choices — are increasingly choosing plant-based food products. 

But while the appetite for plant-based products is vast and the sector is already experiencing notable growth, it’s still early days. The market remains difficult to size, and there are a number of challenges that need to be addressed before its value can be fully unlocked. 

In this Executive Insights, we examine why more and more consumers are moving toward plant-based food products. We also discuss how manufacturers, retailers, distributors and investors can drive even greater adoption through increased investment in product development and innovation.
 

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As Amazon Turns Its Gaze to Healthcare, the Industry May Be in for a Wild Ride

Amazon has been making waves in different parts of the healthcare industry over the past 12 to 24 months, but its recently announced alliance with JPMorgan Chase and Berkshire Hathaway demonstrated that Amazon’s ambitions go much further than simply selling healthcare products.

True, the initiative is still in its infancy and is limited to employees of the three partners, but the statement sparked a flurry of speculation and sent the stocks of insurers and major healthcare companies into a tailspin. Now that Dr. Atul Gawande has been appointed to lead this joint healthcare venture, many industry watchers are now asking: How far will Amazon, the master disrupter, take this?

The answer: very far, it’s safe to assume. Anyone who continues to think of Amazon as just a very big digital retailer needs to think again. From an online bookstore, to an online everything store, to a leader in cloud computing, to a business-to-business (B2B) ecommerce platform, to a provider of in-home services, to a brick-and-mortar food purveyor — over the course of its existence, Amazon has continued to expand on its original business model. The company has repeatedly shown that it has the capabilities, the patience and the deep pockets to disrupt industry after industry. Healthcare is no exception.

L.E.K. Consulting has three reasons to believe Amazon is serious about healthcare. First, as one of the largest private employers in the United States, Amazon would reap huge financial benefits from lowering the high cost of healthcare in this country. Second, the numerous inefficiencies of the healthcare system present enticing avenues for Amazon to explore, and as CEO Jeff Bezos has famously stated, “Your margin is my opportunity.” Finally, healthcare is just the kind of big, complex problem that Bezos likes to sink his teeth into. An unabashed “Star Trek” fan with a utopian view of the future, Bezos has always aspired “to boldly go where no one has gone before.” The fact that he has personally invested billions in space exploration with his company Blue Origin shows he is willing to put his money where his mouth is. While healthcare poses a more earthbound challenge, Bezos strongly believes that Amazon has a role to play in making things better.

Indeed, Amazon has many of the core competencies that are needed to compete in healthcare — from data analytics to technology and innovation (see Figure 1). Furthermore, the company is already testing the waters both at home and in markets outside the U.S. For example, in Japan it will begin offering Prime Now drug deliveries directly to consumers who have approval from a pharmacist. Stateside, the company has begun recruiting for multiple healthcare-related positions, and some news outlets have reported that it has a clandestine health team working on medical records and virtual doctor visits. Its joint initiative with JPMorgan Chase and Berkshire Hathaway will give it broad leeway to experiment and learn more about operating in this space before entering it more aggressively.

As Amazon turns its aggressive focus to healthcare, what will the onslaught look like, and what might the impact be across different parts of the healthcare landscape? We believe there are five potential points of entry, with increasing levels of complexity from simple product distribution (see Figure 2).

1. Durable medical equipment and medical supplies

This one is a no-brainer because Amazon is already there: It currently sells a broad array of general medical supplies and durable medical equipment (DME) to consumers. Given its core competencies in logistics and distribution and its existing B2B ecommerce platforms, expansion into wholesale distribution is a logical next step. In fact, the company has already obtained licenses to distribute medical supplies directly to providers in a variety of medical settings in 43 states. In those states, licensed professionals can enroll in the Amazon Business Professional Healthcare program to order restricted-access products.

If Amazon begins selling to hospitals, this could significantly disrupt the established group purchasing organization (GPO) contracting model. As a result, some original equipment manufacturers (OEMs) are already starting to sell older or more established equipment directly into hospitals without sales reps. On the business-to-consumer (B2C) front, Amazon could also disrupt the self-pay DME market by providing price-transparent, simplified online platforms for patients to buy consumable or durable DME for in-home use. Increased transparency and disintermediation for both B2B and B2C markets will likely lead to price reductions and margin compression. This is a wake-up call for existing DME and medical supply retailers, who will need to focus on greater customer engagement in the purchasing process.

2. Mail-order and retail pharmacy

Amazon appears to also have mail-order pharmacy players in its sights. It has secured approval as a wholesale distributor from 12 state pharmaceutical boards. While the company faces some hurdles in complying with drug storage and distribution regulations, these challenges are hardly insurmountable. Amazon has another ace in the hole with its recent acquisition of Whole Foods. Stores could be used to house brick-and-mortar pharmacies that would be powered by Amazon’s mail-order fulfillment capabilities. Amazon has other significant capabilities that strengthen its position in this space. For example, its digital platform, predictive analytics and customer data could be leveraged to create digital health tools that track and influence patient behavior. This, in turn, might give it entry into some of the less intuitive areas of healthcare delivery.

Should Amazon choose to enter the mail-order pharmacy space, its ability to quickly deliver products (Prime Now is striving for two-hour delivery times) would put pressure on existing mail-order pharmacies to improve delivery times for essential prescriptions. Traditional retail pharmacies are also likely to feel the heat and may have to respond by diversifying their offerings (for example, by offering blood tests). Furthermore, if Amazon can come in as a low-cost player, existing pharmacies and pharmacy benefit managers (PBMs) will almost certainly experience margin compression.

3. Pharmacy benefit manager

PBMs leverage the combined purchasing power of health plan enrollees to lower prices for prescription drugs, a strategy with which Amazon is certainly familiar. Because the PBM market is fairly consolidated, Amazon would most likely enter the space either by partnering with a large PBM such as Express Scripts or by purchasing a smaller player like Prime Therapeutics. This would give it access to the requisite claims adjudication systems and networks of pharmacies. Its relationship with millions of Amazon Prime customers makes it an attractive partner for a PBM, and once again its data-analytic capabilities could be leveraged to improve patient compliance and health behaviors. As with other sectors, if Amazon became a low-cost PBM alternative, this would apply downward pressure on prices, and existing PBMs might need to create more user-friendly offerings (e.g., online portals, tracking).

4. Telemedicine or in-home healthcare

The three points of entry discussed above leverage Amazon’s capability in logistics and distribution, as well as its ability to negotiate rock-bottom prices. But Amazon has shown that it’s more than a distributor of boxes. With its deep knowledge of machine learning, the company has launched its enormously successful Echo, a smart speaker that connects to the voice-controlled intelligent personal assistant service Alexa, currently the market leader. With more than 20 million Echos sold in the U.S. to date, the possibilities for rolling out a host of new voice-activated services are extensive, and healthcare could be among them. Indeed, Bezos has talked publicly about the role for Alexa in the future of healthcare delivery.

The first step toward this could be offering telemedicine through current Echo devices whereby Alexa would contact available physicians for a consultation. The Echo Show, which combines traditional smart speakers with a screen, provides the opportunity for video telemedicine, helping with conversion as consumers become familiar with the concept of in-home healthcare. The next step could be for Amazon to facilitate frictionless in-home visits from provider networks at simple, transparent prices. A move like this could apply downward pressure on the price to treat common illnesses at doctors’ offices or walk-in clinics and could force those establishments to diversify their services (for example, by offering telemedicine, late-night hours, weekend hours or in-home nurse visits).

Of course, Amazon’s leading the “Uberization” of medicine is hardly a shoo-in. Developing provider networks could prove a challenge unless the company is able to acquire some existing telemedicine providers. Furthermore, there is no guarantee that consumer trust in Amazon would transfer to the area of personal healthcare. But it remains a potential direction, and one that healthcare providers should take seriously.

5. Artificial intelligence-powered diagnostics and continuous care

There is every sign that Bezos’ long-term vision for Amazon could start to disrupt healthcare provision as we know it, and the last frontier to feel the impact of that vision may be in-home diagnostics and care delivered through artificial intelligence (AI). Amazon has already made tremendous strides in AI, as witnessed by Alexa’s burgeoning capabilities. In fact, one of Alexa’s “skills” — first-aid information and voice-driven self-care instructions for a variety of situations — has been implemented by none other than the famed Mayo Clinic.

Machine learning drives many of Amazon’s offerings, from its customer recommendation engine to optimization at its service centers. A conceivable next step for Amazon could be to use its AI capabilities to turn Echo into an in-home diagnostic tool, without the need for a human doctor. The company could seek to further remove the human element from basic healthcare by leveraging next-generation Alexa technology (for example, offering a first-line diagnosis, providing reminders to take meds and auto-replenishing prescriptions).

Some consumers may resist the idea of receiving healthcare advice without the involvement of a medical professional, and certainly the idea would face regulatory and safety hurdles — not to mention pushback from physician organizations such as the American Medical Association. Nevertheless, removing medical professionals from basic diagnostics would drastically lower cost-to-serve, applying downward pressure on volume and price for doctor and nurse practitioner visits. Furthermore, if Amazon were to apply commercial principles to healthcare referrals (for example, by creating a service marketplace or instituting pay-to-play), this could profoundly disrupt traditional referral patterns.

To live long and prosper, keep Amazon on your radar

Many people, including business executives, continue to view Amazon through the lens of their personal experience as consumers — meaning they tend to think of it as an online retailer. But dismissing Amazon as a master mover of boxes would be a big mistake. It is at core a technology company, and it is driven by a central belief that technology can be applied to most problems. Jeff Bezos has made it abundantly clear that he considers healthcare to be one of those problems, and that it fits within the company’s vision to tackle it. With a relentless and resourceful culture, an effective global distribution network, and an agile technology infrastructure, Amazon has the potential to make meaningful strides toward realizing that vision. Any players in the space would do well to move beyond having a mere digital strategy and step up their game by developing an Amazon strategy. After all, with a founder who finds a touchstone in the starship Enterprise, Amazon is likely to find new frontiers just about everywhere it goes.

As Amazon Turns Its Gaze to Healthcare, the Industry May Be in for a Wild Ride was written by Robert Haslehurst and Joseph Johnson, Managing Directors at L.E.K. Consulting. Rob is based in Boston and Joe is based in New York. For more information, please contact strategy@lek.com.

Crossing the Digital Divide: No Brand Left Behind

When news broke last spring about Amazon’s courtship of some of the world’s biggest consumer packaged goods (CPG) brands, it touched off a wave of speculation. Did the ecommerce giant simply see an untapped opportunity for its fulfillment solution? Or was it engaged in a longer game to alter the relationships between consumer goods makers and their brick-and-mortar retail partners?

However it plays out, Amazon’s outreach exposed a digital divide in the consumer products world. On one side is the growing interest of brands in direct-to-consumer (D2C) models. On the other side are persistent worries about conflict — not just with traditional distribution channels but also with retailers carrying the brand. To bridge this gap, we identified seven dimensions along which a variety of pioneering brands have arrived at an effective digital strategy.

Understand how digital serves different consumer segments. That way, brands can deepen engagement by bringing people together for shared experiences. Kimberly-Clark, for example, specifically designed its Huggies rewards club to attract and educate new parents. Luxury brand Burberry maintains microsites where customers share snapshots of themselves in their own Burberry coats, and streams exclusive fashion shows for younger users of its mobile app. And on Twitter, fast casual restaurant chain Denny’s replicates the sort of fun, laid-back quips one might overhear from one of its booths.

Use the right digital channels. A D2C initiative can involve one platform or many, depending on things like image, objectives, target audience and what’s feasible in a given market. Longchamp, for one, bases its D2C efforts in China on the blockbuster WeChat app. Whirlpool differentiates its brands — including WP, Maytag and KitchenAid — by conveying each unique brand voice across a mix of landing sites, social media and YouTube channels.

Add value to the consumer. This includes making decisions about whether to sell online and what assortment to feature. Either way, consumers need a reason to tune in, and mass-offered discount coupons are increasingly insufficient. Instead, Patagonia secures customer loyalty through its “Worn Wear” website, where environmentally conscious consumers can purchase secondhand clothing at a discount and trade their own used duds for gift certificates. Meanwhile, Subaru extends well-matched offerings at the right time in the consumer life cycle, from prepurchase targeting to end-of-lease management and loyalty incentives to repurchase.

Look for measures that matter. CPG manufacturers in particular can use analytics to make all of their digital direct-to-consumer channels better. At Procter & Gamble, for instance, technology says it’s time to remind parents about Pampers while analytics says that direct marketing is the best way to do it. Then there’s L’Oréal, which, through its work with Google, discovered that ombre hair color was trending. The cosmetic company’s response? A new product, backed up with a dedicated consumer marketing plan.

Make room for new technologies. They’re increasingly important to marketing, customer engagement and sales — in any sector. For instance, as a technology company, it makes sense that Samsung uses virtual reality to help consumers visualize space for its TVs. But what about Rebecca Minkoff? The accessories and apparel designer uses in-store radiofrequency identification to send clothing items to dressing rooms, helps customers choose different styles and sizes, and shows stock availabilities in stores and online. There’s also MATCHCo, which uses an app to scan the customer’s skin tone and deliver the perfect foundation. Finally, consider home goods seller Wayfair’s augmented-reality app. It lets customers evaluate virtual, full-scale 3-D models of furniture and décor amid their own day-to-day surroundings.

Keep the online conversation going. If brands don’t create a social media presence themselves, customers will create one for them. Fast-food purveyor Wendy’s famously took command of social media with its clapbacks, showing how wit can gain consumer attention in the Twittersphere. But for brands with a more conservative sensibility, alternative social media strategies can work as well. For instance, L’Oréal signed on 15 social media influencers to review the company’s offerings, record video tutorials and cover behind-the-scenes beauty events. 

Find a way to work with Amazon. Despite concerns about losing the customer relationship, high-profile multibranded websites are worth consideration, if for no other reason than the online traffic they bring in. Nike agreed to sell its athletic gear through Amazon and Instagram, for example. Brands participating in Amazon’s Prime Wardrobe — where members can order clothes without paying and get discounts on the pieces they keep — include Levi’s, Kate Spade and Theory. For its part, Prada sells its ready-to-wear outfits via third-party websites in Europe, with plans to replicate its ecommerce success in Asia.

Bringing it all together, brands tread a narrow path with digital. Retailer relationships can impose varying levels of constraint in D2C selling — less for apparel, perhaps, and more for CPG. On top of that, the online world is tough for brands to influence. But brick-and-mortar retail doors are closing, especially for apparel, as shoppers take their business online. In this environment, a failure to think digitally may have the most severe consequences of all.

So someday soon, digital agility will be as important to consumer brands as traditional capabilities like brand-building, new product development and distribution. What that digital response looks like will vary from brand to brand. For now, product makers can look to retailers and innovative brands for lessons in ways to balance universal best practices with choices that are authentic to the brand, the evolving consumer purchase process and the specific channel environment.

Crossing the Digital Divide: No Brand Left Behind was written by Robert Haslehurst and Chris Randall, Managing Directors, and Noor Abdel-Samed, Principal, in L.E.K. Consulting’s Consumer Products practice. Robert, Chris and Noor are based in Boston.

For more information, contact consumerproducts@lek.com.

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