In April, Amazon announced it would be requiring supplement companies to use testing firms NSF International, Eurofins or UL to screen products for adulterants, with the new policies initially focused on the sexual enhancement, weight management and sports nutrition/body building categories. As companies work quickly to come into compliance, there are questions as to how this might affect the market, especially when 77% of e-commerce supplement sales happen through Amazon.
“I do think that mid-size and larger brands can take advantage of the circumstances [at Amazon] and acquire some of the smaller brands that might not be prepared for extra costs coming their way,” said Scott Dicker, market insights director at wellness-focused data technology company SPINS.
According to SPINS, most supplement companies are small businesses, but those that can navigate the new regulations can benefit.
“In the long run, however, [this Amazon policy] should increase the sales and opportunities for all brands putting forth products that meet their label claims by increasing margins and sales,” Dicker said.
He added that it is often the untested products that are selling for low prices, drawing sales and attention away from brands that are priced for fully-dosed ingredients.
‘Devastating’ policies fuel unexpected costs
For small supplement businesses, staying in the market post Amazon’s latest policy is far more challenging than it is for larger firms in the industry, said Brian Yam, vice president of regulatory affairs and quality assurance at Blue Ocean Regulatory. The Canada-based organization specializes in regulatory consulting for supplement organizations in North America.
“They are devastating in the sense that companies are scared that their products will be suppressed, and they’re working really quickly to figure out how to make sure that doesn’t happen,” he said.
Relying on three firms for testing may mean months of backlog and could drive some companies out of business while waiting for sales to be greenlighted, he said.
NSF previously turned around results in a matter of weeks, but that was prior to Amazon’s April 17 webinar announcing the details of its new policy, according to Yam. If his clients’ experiences are a bellwether, he said that the number of companies demanding testing has gone up considerably since then.
He predicts that the compliance review process will also force small companies to leave Amazon because of indirect costs.
At first glance, the cost of testing—details negotiated directly between testing companies and brands—might not seem exorbitant, ranging from $5,000 to $7,000 annually. For businesses earning $10,000 to $100,000 a month in revenue, a cost of $7,000 a year is minimal when spread across a company’s units per lot, Yam noted. His estimates are based on his clients’ experiences with more complex product formulations.
The real expense comes later, according to Yam, as companies may be surprised by the cost incurred after the compliance review process, which is part of the third-party testing. There, Good Manufacturing Practices (GMP) certifications, labels and other documentation are inspected.
The process may reveal to companies that the supplement manufacturers they have relied on for years are, in fact, brokers. In other circumstances, the ‘manufacturer’ could be a distributor of products from other manufacturers based overseas. That discovery could require small firms to move their supply chains to the United States to be compliant, but the associated cost may be prohibitive for some companies, pushing them out of business, Yam said.
Although he welcomes the changes at Amazon, he predicts the industry will become less diversified in the long run, as companies will use similar ingredients and the “good” manufacturers to remain compliant.
“I think it’s going to be interesting for the consumer because they may feel that [Amazon] is not as exciting of a platform as it once was,” Yam said, adding that there will be fewer companies making unconventional product claims.
“I think it’s going to be harder for established [smaller] brands in the Amazon space to stand out.”
Alternative financing
It’s too soon to tell how many companies will experience the fallout from Amazon’s new policies, but some may need different forms of financing to weather the changes, according to Drew Brasiel, an account executive at Florida-based payment solutions provider TouchSuite. However, getting access to capital may not be so straight forward.
“A lot of financial institutions don’t want to support [supplement businesses],” Brasiel said. “And it’s very hard for any SMB right now in any market to secure capital from traditional banks or SBA loans… ever since COVID and with the rise of inflation—I think the statistic is that one in three businesses right now are struggling to find capital.”
In a saturated supplements market, he said that a strong differentiator does not guaranteed venture capital backing and that businesses must also be able to show significant profits and a “well-groomed operation.”
Although TouchSuite’s main service is helping businesses to accept online payments, Brasiel said that his company (and others) offer cash advances, which have fewer credit requirements and less of a complex approval process. He explained that one advantage to securing these advances is that when brands apply for a bank loan, they will not see the cash advance appear anywhere on the approval or underwriting documentation.
Even if able to access financial assistance, Brasiel noted that brands may decide to remove their products from Amazon.
“I think you’re going to see a lot of brands that don’t want to deal with the complications,” Brasiel said. “And I think a lot of them may pull out of that market and then shift more focus to selling direct to consumer on their website and through other channels. I think [these testing policies] just complicate the entire commerce market.”
