Originally published in PE Hub
By Patrick J. Crocker
Private equity is in love with all things gummy, investing in a gummy-vitamin revolution that’s sweeping the $41 billion U.S. vitamin/mineral/supplement market.
Virtually nonexistent a few years ago, the gummy-supplement market is already valued at more than $1 billion in annual U.S. revenue and is rapidly growing — a more than 25 percent jump since 2015, according to IBISWorld.
The rapid expansion, compared with single-digit growth in the overall supplement business, comes as more companies market their own branded versions of everything from vitamins to such nutritional supplements as fish oils.
In recent years, private equity investors have snapped up a number of companies in the gummy-vitamin space.
— In 2013 Santa Cruz Nutritionals, a contract producer of gummy-based vitamins, was acquired by RoundTable Ventures.
— In 2015, PE firms CircleUp Growth Fund and North Castle investedin SmartyPants, which markets GMO-free gummy vitamins and supplements for kids and adults.
— And earlier this year, Gimbal Brothers was acquired by Highlander Partners.
Working on the Gimbal’s deal gave me insight into why so much excitement surrounds this rapidly growing sector. Founded in 1898, Gimbal’s is probably best known as a leading maker of gourmet jelly beans. Second behind Jelly Belly in the market for gourmet jelly beans, Gimbal’s five years ago leveraged its experience to make gummy vitamins and supplements for other firms.
The move transformed a manufacturer in the slow and steady candy business into a firm operating in a segment where revenues were rising rapidly — the set of circumstances that private equity investors favor. In business terms, adding this new line of manufacturing transformed a 120-year-old sleeper into a rocket-ship growth company.
The reason companies such as Santa Cruz Nutritionals and Gimbal’s are so attractive to PE investors is not just that the gummy market is expanding rapidly but that a supply-demand imbalance favors existing players. New entrants cannot just dive into the gummy market overnight and expect to succeed and grab market share.
Manufacturing gummy vitamins is extremely difficult, requiring highly specific mogul machines — which make the squishy confection into various shapes and sizes — as well as tremendous art: proper ingredients, blends and cook times.
In the United States, only about 80 mogul machines are operating and fewer than 10 of those are used to make gummy vitamins. Operating these machines to make gummies also isn’t a simple plug and play situation: Making gummies with mogul machines takes years of trial and error, getting the formulation, taste, texture and stability of the substance just right.
On top of that, making vitamins and supplements involves clearing some regulatory hurdles. To make gummy vitamins, a producer must receive NSF International CFR 111 certification, a non-trivial process that is a cost of doing business in the category.
The reason the market for gummies is so hot is simple: Kids and adults love their taste compared with pills.
Gummy supplements started as a way to disguise vitamins for kids. But when Irish pharmaceutical company Perrigo in 2012 started marketing gummy products to adults, a new business was born.
These days, with the average American aged 45 and older taking four prescription medications daily, a growing number favor gummy supplements as an alternative to the large pills they’re tired of swallowing. That’s why adult sales are spurring demand for gummies, especially those made with plant-based pectin rather than animal-based gelatin.
Experts predict the market will grow rapidly as all manner of new supplements are packaged into gummy pieces.
A case in point is SugarBearHair, a gummy that contains biotin, folic acid and vitamin C as a dietary supplement for hair. The hugely popular brand, especially among women, sells a six-month supply for $160, a highly profitable proposition. Anyone wondering just how hot gummies are right now only has to note that these hair supplements are endorsed by the Kardashians.
The transformation of companies like Gimbal’s from traditional candy makers to gummy-supplement makers offers a lesson for other manufacturers: Look for areas where your existing comparative advantage can be applied in a faster-growing segment. Such a move can attract investors and, at its best, can even sharply increase a company’s value.
With few manufacturers in the gummy-supplement space left to be gobbled up by PE players, those investors are turning their attention to the proliferation of branded companies that market their own supplements — a market we expect will flourish in the coming years.
Patrick Crocker is a co-founder and managing director of MHT Partners, a leading national middle-market investment bank headquartered in Dallas. He can be reached at pcrocker@mhtpartners.com and +1 415-446-9436.