COVID-19 Supply Chain Impact and nutraceuticals including CBD: The Story So Far

The nutraceutical market has seen an uptick in demand despite the backdrop of widespread declines in global markets during March (though now largely rebounded) and a bearish outlook for global GDP. The bullish outlook for nutraceuticals is driven by consumers opting for preventive or immunity-boosting supplements believed to have medical benefits that could combat the virus Covid-19. The nutraceuticals market should continue to be attractive to investors.

In addition, there are particular growth hotspots in nutraceuticals. Cannabis or its active ingredient CBD continues to attract aggressive growth forecasts from financial analysts and market research companies. Grand View Research, a market research and consulting company estimates that the CBD nutraceuticals market will reach US $17.4bn by 2026, using a CAGR of 18.8% according to the publisher, Health Europa (unit of MCN).

Now lockdowns are being rolled back and economies are reopening will the additional demand for nutraceuticals begin to evaporate? We don’t think so, but if nutraceuticals want to capitalise on the opportunity, there are some issues to address.

Supply chain disruptions, resulting from China’s grip on the market (around  75 -80% of raw materials used in dietary supplements are sourced mainly from cities in China that were crippled with covid-19), are set to offset potential demand gains brought by the pandemic.

Investors should not underestimate the significance of the Chinese supply chain challenge – By way of example, the top 25 nutraceutical products sourced from China include garlic, potassium, juice concentrate, vitamin C and B1, botanicals and PER1 protein (produced from genes involved in the regulation of time cycles (circadian rhythms).

In our view, the nutraceutical market will continue to see a surge in demand for its products whilst Covid-19 concerns are in focus, and especially with the growing consumer suspicion that a second wave is inevitable.

The question is how nutraceutical companies will be able to maintain reliable and consistent supply to take advantage of increased demand caused by Covid-19? We expect at least some degree of market disequilibrium to persist for another quarter.

This disequilibrium is driven by China supply disruptions combined with distribution issues in full or partial lock-down countries where demand is seated.

Covid-19 has been a catalyst for change in a range of markets and we are likely to see its impact extend to logistics in the nutraceutical market. We expect Covid to force supply chain flexibility, wherein companies change away from being solely or mostly dependent on China to source raw materials.

We are confident that the nutraceutical market will grasp the challenge. We note the rapidity with which the supermarket sector was able to rearrange its supply chains. We expect nutraceuticals to deliver de-risked supply chains within the third quarter 2020. Increasing demand expectations from analysts and the market will in turn support nutraceutical equity valuations, at least in the short-term.

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