Are Clean-Label Demands Raising the Cost of Contract Manufacturing?

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As clean-label consumer demands increase across every aisle of the grocery and natural products store, supplement brands are expanding their portfolios to offer everything from whole-food supplements and non-GMO offerings to organic options and more. And, as many brands choose to work with contract manufacturers to meet these specialized demands, these trends have started to impact the outsourcing industry, as well. According to many industry experts, clean label and, by extension, an increased focus on transparency, are the main catalysts for change today. Though these are certainly positive changes for the industry and consumers’ health, with these changes come new challenges.

“Everybody wants a product with no filler or flow agents, that’s non-GMO and organic,” says Vincent Tricarico, vice president of sales at NutraScience Labs (Farmingdale, NY). 

The challenge, he says, is that many brands are also looking for the same lead times and costs from their contract manufacturers as before, despite the fact that new testing and certifications required to meet non-GMO and other clean-label claims increase both. As a result of this, one of the biggest challenges that NutraScience Labs and its peers face is trying to find the balance between managing these increased specifications without dramatically increasing costs and lead times. 

High Costs

The increased costs that contract manufacturers face are partially a result of consumer demands for certifications they recognize, like non-GMO and USDA Organic. Plus, says Tricarico, ingredient suppliers are refining and condensing their practices, which results in a higher-quality raw material, but less of it, which further impacts costs. Add to this rising minimum wages nationwide, and the expenses add up. But perhaps the biggest contributor to rising costs is the fact that testing is becoming a much bigger part of a contract manufacturer’s job overall.

First, explains Steve Holtby, president and CEO of Soft Gel Technologies Inc. (Los Angeles, CA), raw-ingredient suppliers are not held to the same regulatory standards as dietary supplement manufacturers. “For example, it’s common for distributors of raw ingredients to not perform all the necessary testing needed,” he says. In this case, contract manufacturers like Soft Gel Technologies pick up the tab for testing, including standard analysis on the finished product but also extensive testing on raw materials for identity, potency, and contaminants.

“The question is, how much responsibility should contract manufacturers assume for testing?” he says. “Some contract manufacturers still rely almost solely on raw-material suppliers’ stated results on a certificate of analysis.” For Holtby and others, this isn’t enough. In his view, it is vital that contract manufacturers develop their own testing protocols and qualify each individual batch of raw materials themselves, especially since they carry the biggest chunk of end-product responsibility. Of course, this increases costs.

In addition to the fact that more testing is required overall, contract manufacturers also face pressure to invest in expensive state-of-the-art testing like DNA analysis, says Shaheen Majeed, president of Sabinsa  Worldwide (East Windsor, NJ)-methods often employed to verify the source of natural raw materials. 

According to Robin Koon, executive vice president at Best Formulations (City of Industry, CA), the rise in costs related to testing started almost 10 years ago when the FDA implemented mandatory Good Manufacturing Practices for dietary supplements. Today, “most mature manufacturers and brands already have these processes and costs factored into their product,” she says. “With that being said, the regulatory environment continues to change, which adds more work and compliance; therefore, additional costs will follow.”

Higher Value

The truth of the matter is that contract manufacturers are responding to the cost issue not by trying to cut corners, but by offering unmatched value. 

If you ask John Altenberg, vice president of sales at Vit-Best Nutrition (Tustin, CA), all these added complexities and costs present not a challenge but a solution, all standing to position the contract manufacturer as “a more critical partner to the brand owner,” he says. “After all, the processes put in place by the contract manufacturer are what the brand owner relies upon to validate the efficacy of the product.” 

Indeed, many contract manufacturers are going beyond the basics to provide value.

The quality-assurance program at Vit-Best complies with two new standards for food safety-the Food Safety Modernization Act and the Foreign Supplier Verification Program-and includes full-scale, in-process testing for contaminants, heavy metals, and pathogens, as well as analytical testing to ensure purity and potency. At Soft Gel Technologies, testing for California Proposition 65 compliance has been added to the roster (“which are among the most stringent standards in place anywhere and are often far more stringent than federal standards,” adds Holtby).

Along with this, more documentation is provided to customers than ever before, says Koon, including records for product specifications, raw-material and finished-product testing, expiration-date testing, microbial testing, allergen testing, adverse-event tracking, training logs, vendor qualifications, quality agreements, and more. That’s why, for Koon, customer service and communication is paramount. “Contract manufacturing is a very thin margin business, so increases in costs do need to be shared,” she says. “In a good customer relationship, that is based on open communication. These cost increases can be overcome by seeing how the companies can work together in more efficient ways to cut other costs, as well.”

In the end, though, these high-cost tests and high-quality ingredients hopefully make a product more appealing to a consumer-who will then be willing to pay more for it. Says Altenberg: “The reality is that many of these new or expanded costs are a result of advances in the quality of the product being delivered to the consumer. This makes the product more marketable.”

Specialty Ahead

Clean-label demands will only continue to impact the contract manufacturing space, especially as the definition of clean label seems to expand by the day. 

According to Holtby, many consumers have expanded their definition to include eco-friendly corporate practices and positive social efforts. “They demand purpose-driven products, meaning they want to buy sustainable and eco-conscious products from companies whose values are most like their own,” he says. This, in turn, could lead to more documentation down the line for contract manufacturers, whether it’s to confirm that a product is made in the USA, treats animals well, reduces waste, or supports the community. The silver lining? “There is growing preference for these types of products, and consumers are willing to pay more for them,” adds Holtby.

This helps to address another issue that’ll be important to rectify going forward, which is overcoming the belief among some consumers that products that look the same are the same. Eco- and socially conscious initiatives, then, can become differentiators and substantiate the higher price tag demanded by quality products. “Value-added contract manufacturing can do something special,” says Majeed. “The contract manufacturer can overcome the failures or disadvantages that a client may not see because he believes the product is a commodity.”

Finally, as consumers scrutinize their products ever more closely, brands that utilize contract manufacturers are in a unique position to leverage their partners’ extensive testing and quality-control initiatives. “Brands will be able to differentiate themselves by the source of their ingredients, thus setting off a marketing battle not surrounding products, but the ingredients that make up the products,” Altenberg says. “The relationships between the brand and the contract manufacturer will become even more important as the contract manufacturer’s sourcing, testing, and processing will be completely transparent to the end consumer, making the contract manufacturer decision a mission-critical decision for the brand.” 

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