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Digital Media, Gummy Product Forms, and Mergers Impact OTC Cost Structures

 

The OTC industry continues to consolidate and transform itself with companies merging or acquiring/divesting brands. Recent examples include the merger of Bayer’s and Merck’s OTC businesses, the joint venture between GlaxoSmithKline’s and Novartis’ consumer health units, and Sanofi’s upcoming acquisition of Boehringer-Ingelheim’s OTC unit. With acquisitions come synergies, such as more media buying power, widened retail distribution, and competitive strengths across more OTC categories. However, mergers and joint ventures can also lead to increased costs of raw materials, packaging, and processing to manufacture a larger array of products. Increased marketing expenditures in support of newly acquired brands also impacts profitability, with the longer term goal of increasing sales and market share. Sales growth of acquired brands can help offset additional costs in cost of goods sold (COGS) and marketing. 

 

Market trends can also impact cost structures significantly. For example, many OTC categories have seen strong sales growth of gummy product forms, which initially were focused on pediatric products and now include a wide variety of both pediatric and adult nutritional supplements, cold medications, and digestive products. With the increased demand for gummy product forms across multiple categories comes the need for investments in gummy manufacturing capabilities and increased transportation costs among other cost shifts.

 

Furthermore, marketing expenses can be rather volatile in the industry and often depend on the relative degree of competition in a category, private-label share of the market, and other variables. New ways of reaching consumers have proven to be less costly than traditional media. Many OTC marketers are utilizing increased digital media to advertise their brands than the more costly traditional television and print media, resulting in ad spending being reduced accordingly. This reduction in advertising expenses allows OTC players the flexibility to reallocate funds towards other marketing initiatives, such as increased trade or consumer promotions, improving manufacturing capabilities, or simply to realize increased operating margins.

 

In 2013, Kline published the ninth edition of its well-regarded series, OTC Drugs: U.S. Competitor Cost Structures. That study pegged the average operating margin of leading OTC players at about 20% as of 2012. With the consolidation of several major companies, the return to market of major brands from Johnson & Johnson and Novartis, the potential for reduced ad spending, and some increases in COGS since then, margins in the industry have shifted significantly. Therefore, Kline plans to produce a new edition of OTC Drugs: U.S. Competitor Cost Structures in 2016 to examine how these market and competitive changes have affected costs and profitability for the industry. The study can be used to benchmark a company with its competitors and to understand relative profitability across various OTC product classes. For more information, please contact us.

 

 

Fonte: Kline & Co.

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