This week Glanbia announced the acquisition of two new businesses for a combined €181m. While the first brings it into the plant-based protein category, the second is more eye-catching in that it extends its reach into the online retail channel.

Glanbia transformed itself by turning whey, a byproduct of cheese that was seen as a waste and fed to pigs, into a value-added product to become the world’s largest holder of global performance nutrition brands.

Glanbia’s expansion strategy into performance nutrition was evolutionary. It first scaled cheese, then scaled whey, then spilt cheese into protein fractions and then concentrated on the protein to become one of the biggest global suppliers of whey protein isolate (WPI).

It started selling to companies who packaged and sold the protein to consumers. But Glanbia’s strategy was to move into the branded space and so started buying its customers one after another.

This new direction moved Glanbia from a situation where its Ireland businesses represented two-thirds of total profits in 2002 to one where they represented less than 10% 14 years later.

Performance nutrition now accounts for 33% of sales and 50% of profits in its fully owned businesses.

Today, it sells performance products from whey protein powders to energy drinks and protein bars across 23 countries. Its consumers span body builders, performance athletes to on-the-go lifestyle consumers.

How was it built?

To tap into this lucrative market, Glanbia acquired seven large businesses for a total of $1.1bn over the last decade. While the early businesses such as Optimum Nutrition and BSN were bought at eight to nine times earnings, the latter ones such as Thinkthin and Isopure were much more expensive at 17 times earnings, reflecting the appetite by new competitors to get a slice of the action.

At the time of purchase, these businesses had combined revenues of $600m. Glanbia went on to build these organically where today their combined revenues are close to $1.1bn.

Between 2008 and 2014, the division experienced compound annual organic revenue growth rates of 30%. At the same time, volumes were growing at around 16% per annum. However, by 2014, volume growth started to slow to 7% and slowed further to 1.5% in 2015. In response Glanbia dropped prices (by almost 7%) in 2016 and volumes increased 16% for the first six months last year, illustrating some price elasticity in demand.

Branded revenue growth

The core focus of the group was on selling its own brands. In the early years sales of its brands grew by in excess of 20%, far outpacing growth in the US market. In recent years, branded sales growth has slowed and was less than 5% in the first six months last year, reflecting increased competition and the rise of other brands.

While brands were the focus, another core part of the business model was contract manufacturing for other brands. After all, it had the capacity, having invested €70m in its US manufacturing base.

At one stage contract manufacturing represented 25% of the performance division’s sales. However, declining contract volumes saw that fall to a share of less than 15%. This reflects Glanbia’s concentration on growing its own branded volumes. However, following significant investment in its US manufacturing sites, Glanbia still has spare capacity.

A lot of this loss of contract revenue was as a result of more dairy processors moving up the value chain and manufacturing high-end proteins such as WPI and MPI. Glanbia was an early adapter of this technology, but other companies have caught up, meaning the key ingredient has become more commoditised.

Increased competition

Glanbia has enjoyed margins in the range 10% to 16% in its performance nutrition business. Its competitive advantage has always been its own captive supply of whey, where it is not exposed to shifts in supply and demand and hence is insulated against the volatility of global whey prices. This made other large multinational food companies such as Pepsico nervous about entering the category as they didn’t have the supply hedge that Glanbia had.

However, more recently, the profitability of the sector has attracted more companies with deep pockets such as the Hut Group, which is making it increasingly competitive. To maintain market share, Glanbia has had to increase the level of promotional investment in its brands.

Expansion into new markets

While the global sports nutrition market is large, valued at more than $10bn (remember this is a supplement), North America and mainly the US account for two-thirds of the market. Americans spend three times more per head on sports nutrition products than UK consumers and 10 times that of other Europeans. Originally protein supplements developed on the back streets of America, with a cult following. As health and fitness become more important to regular consumers, performance nutrition products have become more mainstream. The big question is whether this is a long-term trend or a fad for the times we live in.

The reality is that the US and Europe are the core markets with a widespread demand for these products. Countries such as Brazil and Russia are at the early stages of entry into the category and have proved more price sensitive. The recent strong dollar has been a headwind to growth in these markets.

Channel challenges

There is significant disruption in the sales channels for sports nutrition today. When Glanbia first moved into the category, specialist stores such as GNC and Holland & Barrett were the dominant route to market.

While these specialist stores still hold 50% of the total sales channel for the category, there is a clear shift to online purchasing from consumers. Today, online sales account for 18% of the market and it is growing rapidly. Up-start companies such as MyProtein, a UK brand focused on online sales, have captured an increasing market share and Glanbia has been forced to react.

MyProtein has become the largest sports nutrition brand in Europe and has recently moved into the US. Owned by the UK online retailer, the Hut Group, MyProtein operates 21 international websites, demonstrating its global reach.

It’s hard to imagine Glanbia envisaged going so far down this route when it first set foot into the performance nutrition market almost a decade ago. When the company first considered moving from making innovative whey proteins to owning consumer-facing brands it was reassured that the sales channel was speciality health stores such as Holland and Barrett and not the Walmarts of this world.

These online companies have disrupted Glanbia’s route to market. Its move to acquire online retailer Body & Fit moves the dairy processor and whey manufacturer into the online retail market. If online becomes the dominant channel, Body & Fit complements Glanbia’s dominant position with online leader Amazon.

The strategy has proven successful for investors to date, including farmers and the co-op. However this move into online retailing further distances Glanbia from its core expertise – making high-quality innovative dairy protein ingredients. The further it moves away from its core, the risk of failure rises.

When it bought the consumer brands initially, while it was a new set of customers, it knew the whey business and the manufacturing of it. No doubt Glanbia has the whey supply, price-hedging mechanisms, manufacturing capability and strong brands. And by acquiring rather than building an online channel it can react to the changing buying trends.

However, the question for investors will be why is it necessary to own the shop to sell the brands. Would we ever see a Coca-Cola owning a Tesco in order to secure sales of its product?