Blackmores doesn't deserve your trust
Blackmores' negligible research spending and industry-leading marketing budget show where its priorities lie. It's time to lift the lid.
Blackmores (ASX: BKL) has been voted one of Australia's most trusted brands 10 years in a row. Over the past nine decades, the vitamin and supplement maker has grown from a small health food shop in Brisbane to a $2.3bn behemoth, 'passionate about natural health and inspiring people to take control of and invest in their wellbeing'. Make no mistake, though, Blackmores is not a healthcare company.
Imagine that you were the sole owner of Blackmores. Millions of people entrust their health - or at least certain aspects of it - to your products and advice, with sales topping $600m this year. One day, your chief financial officer comes to you and lays out a spending plan for the year ahead, suggesting a combined marketing and research budget of $61m. This is discretionary spending; it's up to you to decide how much should go to testing the effectiveness of your products or developing new ones, and how much should go to promoting them.
Take a moment to really think about how you would split the $61m if you were running this company. Would it be 50/50? Maybe 80/20? Although the situation is hypothetical, the numbers are taken from Blackmores' 2018 annual report - at least one management team really did think about this question.
Whatever split you have in mind, I'm guessing it doesn't match what Blackmores decided to do. This year, the company spent $59m on sales and marketing (any expense associated with making a sale, such as store displays and advertising campaigns). Only $2m was put towards proving the efficacy of its products, old or new, and looking for new therapies.
Over the past five years, Blackmores' research spending has more than halved, while the sales and marketing budget has almost doubled. Blackmores now spends on research in a year what it spends on marketing every 29 days - just 0.3% of sales is invested in research. Compare this to Cochlear (ASX: COH), which spends 12.3% of revenue on research, or CSL (ASX: CSL) and ResMed (ASX: RMD), which manage 8.9% and 6.6% respectively. Sirtex Medical spends five times more on research than Blackmores, despite having less than half its revenue. These are respectable healthcare companies developing more effective products and therapies for their customers.
Blackmores is not a healthcare company. At its core, Blackmores is a marketing machine. Maybe this could be justified if the efficacy of its products was incontestable, and further research was unnecessary. Then it really would be just a matter of spreading the word. However, there's an embarrassing lack of evidence that many of Blackmores' products even work. Only a handful of vitamins have been found to have a positive effect, including zinc and folate, but there's no reliable evidence to show that the majority are effective - and some, including vitamin E, may even increase mortality. This is an industry in desperate need of scientific attention. (For a list of which supplements are useful - and which are bogus - check this Harvard-backed scorecard or the individual fact sheets provided by the National Institutes of Health).
Tell 'em they're dreamin'
Some companies invest in developing more effective products, others in their megaphones. If you look in the right places, you can see where Blackmores' priorities lie. On page 8 of the company's 2017 sustainability report, you'll find a list of 15 areas of materiality. Research ranked fourth on a scale of how impactful it is to Blackmores' business - and dead last on importance to employees and shareholders. The only other categories that were considered impactful from a business perspective but of little relative importance to stakeholders were anti-corruption and product compliance. The supply chain and business performance is what stakeholders cared about most.
This isn't to single out Blackmores. A preference for marketing over research is the vitamin industry norm (we're looking at you, Swisse). It isn't a blanket criticism of Blackmores' products either, and it's certainly not a recommendation to alter any supplement schedule a doctor has prescribed for you.
The trouble with Blackmores' all-marketing-no-science business model is that the value of its products is mainly perceived, not real. That doesn't mean it can't sell lots - sales are at all-time highs, after all. But offering perceived rather than real value to customers encourages Blackmores to make ever day-dreamier product claims because it's the only way to boost sales. 'Your vitamin A helps with skin disorders? Well ours will give you night vision' (no joke, check out Blackmores Vitamin A 5000).
This experiment could backfire tremendously, both for society and shareholders. If customers start to lose faith in supplement products that don't live up to expectations, it could undermine trust in Blackmores, which would affect sales and margins. And it could undermine confidence in the industry as a whole, potentially causing customers to forego those vitamins and minerals that do have scientific backing.
If Blackmores really cares about its customers' wellbeing, it should invest more in researching the efficacy of its products. The company could triple its research budget and it would shave just 4% from net profit. Not doing so can only be explained by a fear of inconvenient results. Blackmores' incredible knack for marketing has already won Australia's trust. Its next task is to deserve it.
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