What do you do when your company is hamstrung by a pile of debt and shrinking margins in an industry rattled by price fixing, bad publicity and sluggish growth? If you're Gale Bensussen, you reach for the stomach medication. Then you turn it into a hot-selling product.
The president of Carson-based Leiner Health Products Inc., one of the world's leading manufacturers of vitamins and supplements, is now moving the firm aggressively into over-the-counter medications. The company's generic version of the heartburn reliever Zantac, for example, posted $50 million in retail sales in its first six months on the market, according to company figures.
Analysts applaud this diversification as a quick response to slow sales in the company's traditional vitamin business. But big challenges remain for a company known for its high-quality products and competitive prices. With margins and market share shrinking in key categories, Leiner is under pressure to find lucrative new niches and pare its massive debt to remain competitive in an industry being reshaped by consolidation.
"I wouldn't bet against Leiner," said Matthew Patsky, analyst with Boston-based Adams, Harkness & Hill Inc. "But they've got to find a way to get consumers to pay premium prices for premium quality."
The company's roots date to 18th century Budapest, where a clan named Leiner ran a rendering plant. Over the centuries, they perfected gelatin technology eventually used to make soft gel capsules. Today, Leiner manufactures more than 900 different dietary supplements and OTC medications. It employs more than 3,000 people and has facilities in the United States, Canada and China. Locally, the company has its headquarters, a research center and a packaging plant in Carson, along with a tablet-making facility in Garden Grove and a vitamin E soft gel plant in Valencia. With fiscal 2000 sales of $662.3 million, the company is one of the world's largest manufacturers of supplements.
Still, Leiner is far from a household name. The family is no longer actively involved, but the company remains privately held and you won't find the Leiner moniker on most items it produces. That's because Leiner specializes in store brand or private-label products manufactured for the nation's largest grocery chains, drugstores and mass merchants. Their client list reads like a who's who of retailing and includes such behemoths as Wal-Mart, Costco, Rite Aid, CVS, Albertson's and Safeway.
All told, the company controls about half of the $1-billion-plus U.S. private-label market for vitamins and supplements. The company also performs contract manufacturing for well-known companies such as Bayer Corp., whose One-A-Day vitamins are among the nation's leading brands. In addition, Leiner makes its own Your Life brand of vitamins, which can be found alongside the private-label and national brands on retailers' shelves.
That's some valuable real estate considering that mass market sales represent the largest slice--37%--of the $15.4-billion U.S. market for vitamins, minerals, herbs and other supplements, according to the San Diego-based Nutrition Business Journal.
Trouble is, private label is the least profitable segment of the business. Retailers own their store brands and can change manufacturers on a whim. And it's a category whose market share has slipped as nationally branded products backed by big advertising budgets have gained ground.
Profit margins are higher on Leiner's proprietary Your Life vitamins, a so-called broadline brand priced above private-label products and lower than national brands. But sales of Your Life have declined 13% over the last four years to about $100 million after one retailer dropped the line and competitors such as Florida-based Rexall Sundown Inc. swiped market share with innovative products and lower prices.
"[Leiner is] in a tough position with Your Life, no question," said Adam Ismail, financial analyst with Providence, R.I.-based Health Business Partners.
Your Life's decline has helped to deflate Leiner's gross profit margins, which shrunk to 19.6% in the first quarter of fiscal 2001 compared with 25% in the same period a year ago. Margins are also getting squeezed in its bedrock vitamins E and C, which account for about 30% of company sales.
In the case of vitamin E, the principal culprit is industry overcapacity. Vitamin C margins are shrinking in the wake of the much-publicized price-fixing scam in which manufacturers such as Leiner were overcharged by raw-material suppliers. Rather than join one of the class-action suits filed against the vitamin cartels, Leiner sued its suppliers on its own. Early settlements have yielded the company $21 million, and with more than 20 suits still pending, it will likely reap millions more.