Building Brand Value

Building Brand Value
Presentation and Conference Call
Wednesday, September 14, 2011, 11 a.m.–12 p.m. (PST)

Agenda

Introduction Mike Dovbish, NCN
Investor Context David Thibodeau, PCG
Product and Positioning Rick Sterling, Sterling-Rice Group
Channel Strategy Peter Vitulli, DNA Diagnostics Center
In-Market Voice John Grubb, Sterling-Rice Group
Q&A Speakers and Audience
Conclusions and Upcoming Events Mike Dovbish, NCN

Purpose of Presentation

Introduce Nutrition Capital Network (NCN): create
context for upcoming events
Discussion on building brand value
– Investor/investment banker perspective on the value of branded
nutrition companies with scale
– The essential attributes of product differentiation
– Positioning construct: branding guardrails
– Channel strategy considerations
– Maximizing your in-market voice

September 14, 2011 2

Nutrition Capital Network Mission

The mission of Nutrition Capital Network (NCN) is to:
– Facilitate the financing and partnering process for small and
medium-sized companies
– Introduce investors to the next generation of successful brands
and technologies in the nutrition, health and wellness, natural
and organic, and green product industries
– Facilitating capital flow for the betterment of business and
society at large


Nutrition Capital Network Mission

NCN accomplishes this mission by:
– Creating a series of events and virtual tools to connect
companies and investors
• Conference Calls
– Q1 “Building a Winning Team: Tips on Hiring and Team Building
for the Entrepreneur”
– Q2 “Product Positioning in Nutrition and Health and Wellness:
Bringing Your Supplements, Medical Foods, and Pharmaceutical
Drugs to Market”
– Q3 “Building Brand Value”


NCN’s Focus
Companies in the nutrition and health and wellness industry
across the value chain, including the following sectors:

Dietary Supplements: Ingredients, Medical Foods,
VMS, H&B, Sports, LMRs Technology for OTC/Pharma
Natural and Organic Foods H&W Enabling Technology
Functional Foods Health and Fitness; Green Products
Healthy Foods, BFY Foods, N&O Personal Care, Cosmetics,
Weight Loss Household and Pet Products


Sponsors
NCN Investor Meetings are presented in
Law Firm Partner association with
Investment Banking Partner

Branding and Strategy Partner Executive Search Partner

Life Science Partner Government Trade Partner


Thanks to Our Cornerstone Investors


NCN Historical Summary
43 of 89: 48% through NCN 4; 66 of 180: 37% through NCN 6
NCN Apps/Eval. Pool Selected Secured Funding
I 98 24 12
II 84 22 13
III 78 22 8
IV 80 21 10
SSW Ing and Tech I 35 10 3
V 78 20 5
VI 85 19 5
SSW Ing and Tech II 35 8 2
VII 90 21 4


NCN Deal Flow Summary
Apparel and Textiles 3 <1%
Functional Beverages 87 12%
Functional Foods 63 9%
Ingredients 129 18%
Medical Foods 6 1%
Natural and Organic Foods 162 22%
Natural Personal Care and Household 82 11%
Packaging 5 1%
Retail and Service 50 7%
Supplements 117 16%
Technology 32 4%
Total 736 100%


NCN 2011 Calendar
NCN Seminar at Expo East: Baltimore
September 21–24, 2011

NCN at Supply Side West: Las Vegas
October 11, 2011: 8–10 companies
http://www.nutritioncapital.com/NCN_at_Supply
Side_October_2010

NCN IX Fall Meeting: Los Angeles
November 14–15, 2011: 20–22 companies
http://www.nutritioncapital.com/NCN_IX_Fall_2011

NCN X Spring East Coast Meeting
May 2012: 20–22 companies


Nutrition Capital Network
Selection Criteria
NCN and members of our screening committee use the following basic
criteria to evaluate potential presenting companies, and they believe
that similar criteria would be used by any experienced investor to
screen business ventures.

Novelty and Unique Position
A demonstrated point of differentiation
New company or concept for investors; not “shopped around”
too much
Potential for leadership in a defined subsegment, channel, or niche
of some size


Selection Criteria (continued)
Insulation
Protectability of product or service or technology; defense
against copycats
Intellectual property: trademarks and patents

Economic Potential
Size and growth rate
Scalability; potential for economies of scale
Profitability; demonstrated gross margins
Exit potential: a variety of interested parties


Selection Criteria (continued)
The Management Team
Pertinent experience of executives: health and wellness, medical, startups,
CPG companies, a specific distribution channel, and/or marketing and sales
Demonstrated track record in early stage or returning capital
Surrounding team: investors, partners, marketing and distribution alliances,
legal team
Star power and charisma; name recognition

Tangibles
Good branding or brand name, good quality and taste, unique packaging
or presentation

Intangibles
The “WOW” factor; head-turning potential


NCN Results

Received 520 applications since October 2007
Selected 131 companies to present at seven NCN
events—five dedicated meetings and two smaller
satellite events
37% of companies (33/89) that presented up to NCN,
four had received funding by February 2010


David T. Thibodeau
David T. Thibodeau is co-managing partner of Partnership Capital
Growth Investors (PCGI). David is a seasoned corporate finance
executive within the wellness industry with a successful history of
entrepreneurship, corporate strategy, merger and acquisition, and
equity raising. He was an early player in the consumer healthy, active,
and sustainable living sector

Prior to PCGI, David spent 10 years at the investment bank
Canaccord Genuity (formerly Adams, Harkness and Hill). As the head
of the Health, Wellness and Lifestyle corporate finance group he
focused on merger, acquisitions, public and private financings. David
led the evolution of the firms’ Healthy Living practice into the broader
and more robust Health, Wellness and Lifestyle sector. David served
as transactional advisor in many important industry deals, including:
– ZonePerfect Nutrition’s and EAS sale to Abbott Laboratories
– Metagenics joint venture with Alticor
– Martek Bioscience’s purchase of Amerifit Nutrition
– Garden of Life’s sale to Atrium Innovations
– SunPure’s sale to Kerry Group PLC
– Pure World’s sale to Naturex SA
– Imagine Foods sale to Hain Celestial Group


Rick Sterling
Rick Sterling is the founding partner of the Sterling-Rice Group. For
over 35 years, Rick has been working in the area of brand strategy
and innovation. It was his very diverse marketing experience with
sophisticated, consumer packaged goods firms, coupled with his
entrepreneurial experience that shaped the beginnings of Sterling-
Rice Group. Before founding Sterling-Rice Group, Rick worked at
Stop & Shop, Quaker Oats, and Celestial Seasonings in marketing
leadership roles
Rick and Michael Rice founded the Sterling-Rice Group in 1984, in
Boulder, Colorado with the premise that both large and small firms
would be interested in the pair’s experience in both sophisticated
and entrepreneurial marketing environments. Twenty-seven years
later—with 140 professionals—Sterling-Rice Group has become one
of the country’s leading integrated brand development firms
recognized for the fusion of strategy and creativity. Clients include
Kraft, Walmart, ConAgra, Pepsi, Frito-Lay, General Mills, Horizon
Organic Dairy, Kashi, and Rudi’s Organic Bakery


Peter Vitulli
Peter Vitulli is CEO of DNA Diagnostics Center, one of the world’s
leading DNA-testing companies
He has over 34 years experience within the consumer products
and nutrition industries in both a large corporation and
entrepreneurial companies
Peter spent the first 16 years of his career at the Quaker Oats
Company, most recently as president of the North American Gatorade
Business, one of the premier functional food products in the world
He served as president and CEO of Everfresh Beverages, a private
equity-backed juice drink company and later as president and CEO of
Amerifit Nutrition, Inc., a nutritional supplement company focused on
women’s health
Peter was also president and CEO of Sciona, Inc., a pioneering
personal genetics company that provided customized health and
wellness solutions and chaired the Board of Efficas, an omega-3–based
medical food company


John Grubb
John Grubb is managing partner at Sterling-Rice Group
John’s passion for strategy runs throughout his 30 years of business
experience—half of which has been as a consultant and half in senior
executive marketing roles. He began his career with Bain & Company,
and has run marketing organizations in retail, manufacturing, and food
companies. His business development efforts include significant joint
venture, licensing, and acquisition work
At SRG, John runs the research and strategy practice area for clientele
that includes a full range of global blue-chip companies, as well as more
entrepreneurial businesses and private equity-backed brands. He has
deep experience in ingredients, medical foods, functional foods and
beverages, and natural and organic brands. He is a frequent speaker at
forums, including the Grocery Manufacturers’ Association, Natural
Products Expo, Nutracon, NBJ Summit, and others
John serves on the Advisory Board of the Yale Center for
Customer Insights


Presentation Overview

1. Nutrition Industry Market Context
2. Product and Brand Positioning
3. Channel Strategy
4. In-Market Voice
5. Q&A


Health and Wellness Market Overview
Nutritional Products

Long-term perspective on the evolution of the nutritional products marketplace—past
25 years
Maturation of the health and wellness sector
– Consistent track record of growth
– Innovation comes from small companies
– Experienced sector entrepreneurs are doing it again
– Market rewards innovation and strong brands with attractive exit multiples
Significant sector growth ahead
– Penetration of heath and wellness very low
– Sector is the answer to out-of-control healthcare costs
– Private equity has become the de facto public market for growing companies in the sector
– CPGs are looking for long-term engines of growth
• More recently CPGs have been looking at smaller ventures for acquisition, brand, science, and technology
play a key role in CPG interest level
The role of a strong brand in enterprise valuation


Brand Strength Drives Financing
Options and Valuation
Company
Growth
Curve
- Debt
- Merger and Acquisition
- Follow-on Offerings
- Shelf Takedowns
- Take Private Trx.

Valuation Strong Brands
- Private Placement – Series B …………
- Debt
Drive Value
- IPO

- Private Placement – Series A
- Patient Debt

-Seed capital

Friends & Family Angel/Venture Private Equity Public Markets

Time


Public Markets Activity
Public markets have been rewarding growth and size
– Successful IPOs of both Vitamin Shoppe and GNC have clearly and meaningfully
increased investor interest
– Public market M&A activity highlighted by the Martek acquisition
• DSM telling its nutrition story more since Martek acquisition
– Valuation is strongly correlated with market capitalization in the supplement
sector. Bigger is better from the investor’s standpoint


Larger Cap Investors Are Thirsty
for the Sector’s Growth
Valuation is strongly correlated with market capitalization in the
supplement sector
– The five largest market cap stocks in the Healthy Living Index are up
66% vs. the total index performance of 12% this year
– The 10 largest market cap stocks in the Healthy Living Index are up
49% vs. the total index performance of 12% this year
– On a multiple of EBITDA, there is a roughly 20% premium being paid for
the midcap vs. small-cap stocks
• This data is not adjusted for growth. As opposed to almost all of our
experiences in the past, growth rates are not inversely correlated with size at
present, which we believe illustrates a lack of quality small-cap growth
stocks in the sector
– Investors are paying for the perception of quality that comes with size

Source: Canaccord Genuity.


Robust M&A Activity
Since early 2010, the supplement industry has experienced an
unprecedented wave of both strategic and financial transactions.
Mega deals are back, with ingredients taking center stage
– NBTY taken private by Carlyle for $3.8 billion in July 2010
– Royal DSM announced acquisition of Martek for $1.0 billion in December 2010.
– BASF acquired Cognis for $4.2 billion in February 2011
– DuPont announced acquisition of Danisco for $6.1 billion in January 2011
Sports nutrition is in
– Glanbia purchased BSN in January 2011
– Star Avenue Capital announced investment in Maximum Human Performance in December 2010
– TA Associates announced investment in Dymatize in January 2011
– GlaxoSmithKline announced acquisition of Maxinutrition from Darwin Private Equity in December 2010
New players from other industries looking to enter the supplement business
– Pharma
– Ingredients
– Big food

Source: CapitalIQ, Pitchbook.


M&A Valuations Attractive


Case Study:
Amerifit Nutrition

Medical Foods Amerifit Amerifit Martek sold
and Amerifit Nutrition sold Nutrition sold
Event to DSM
merge to to private to strategic
create Amerifit equity acquirer
Nutrition

Funded by Bio- Charterhouse Martek
Investor tech Venture Capital, New DSM
BioSciences
Capital York

Valuation Valuation Valuation Valuation
Value ±$10M ±$100M ±$200M ±$1.1B

1998 2005 2010 2011


Nutritional Supplement Activity
Another Cycle Occurring

After three years of strong growth in all channels, the last 18 months
have seen much higher profile corporate activity in supplements
– Successful IPOs of both Vitamin Shoppe and GNC, along with a healthy
premium paid for NBTY Inc., have clearly and meaningfully increased
investor interest
– The private equity opportunity for roll-ups in the sector has increased, as has the
rewards of broadening sector scope by public companies
• DSM telling its nutrition story more following Martek acquisition
– There will be demand for the next wave of IPOs
– Valuation is strongly correlated with market capitalization in the supplement
sector. Bigger is better from the investor’s standpoint



Branded Products Companies with
Scale are Driving Valuations Upward




3. Channel Strategy
4. In-Market Voice
5. Q&A


Building Brands Requires Preparation
and Practice

Preparation Practice
Plan to Win
Product Integrity
Brands Consumer Immersion
Brand Equity Leverage
Profit from Good Work Full of Distinct Brand Positioning
Focus on Fundamentals Life Lighthouse Identity
People Matter Creating Life’s Moments


Plan to Win
The plan should express your vision, commitment, and advantages.
Situation Analysis Strategy
– External Factors – Vision
• Competition – Objectives and Strategies
• Regulatory • Financial
• Trade • Product
• Economic • Distribution/Channels
• Cultural Shifts • Key Accounts
– Internal Factors • Awareness
• Trends • Trail
• SKU Analysis • Repeat
• Competencies • Pricing
• Supply Chain • Innovation
• Positioning – Resource Requirements
– SWOT Analysis – Financial and Activity Summary
– Keys to Success


Values

Set a foundation built on values and culture.
Our future is strongly influenced by The quality of our work will by strongly governed
the quality of our work. Customers by the imagination and innovation we apply to
will only return to SRG if they feel our client problems. To succeed, we must commit
work has been done in an excellent ourselves to creative excellence. That includes
fashion with reasonable value. doing the homework that positions us to provide
Excellence is defined as work that strategically correct creative, devoting the time
exceeds a client’s objectives, and effort to develop exceptionally creative
provides creative solutions to their products, refusing to accept only adequate ideas
business problems, and leads to out of expediency, and tapping a broad range of
new business for the client. resources with demonstrated creative talents.
We will study the art and science of creativity
and train ourselves in the techniques that
expand these skills.

What truly matters to you?
SRG will flourish in proportion to SRG will operate on only the
its professional expertise. As an highest levels of ethics. We will
organization committed to do what we say and say what we
excellence, it is essential that we mean. No legal or ethical
are at the forefront of knowledge improprieties will be tolerated
and methodology that directly among SRG employees,

What do you believe in?
relates to our business. There is suppliers, or clients.
an obligation toward aggressive,
ongoing education of all
members of SRG.

What will you expect of your people?
All personal interaction among SRG desires to be an active
employees, suppliers, and contributor to life. We will use our
customers will be of the highest successes to help those less
order. SRG employees will fortunate by contributing a
respect and treat fairly all significant portion of our income
individuals and will insist upon to charitable organizations.
similar treatment for themselves.

SRG will maintain a healthy, Every employee has a
balanced outlook on life. We will responsibility to help make SRG
work hard and do excellent work. successful …financially, socially,
But we will also work hard at and organizationally. Each
maintaining a sense of humor employee should always look for
and a lifestyle that allows opportunities to improve the
success and happiness outside quality of our work and the
of work. condition of our work
environment. To feel and act any
less responsibly will certainly fail
our clients – and ourselves.


Profit from Good Work
Gross margin, gross margin, gross margin.

Invest in productivity enhancements—information systems, process
improvements, supply chain
Spend margin back to build brand


Focus on Fundamentals

The fundamentals of sales execution always have a big impact.

Push to maximize targeted ACV
Shelve where people shop
Manage for optimal share of shelf
Right items in the mix
Manage relative pricing
Walk-by awareness


Creating Brands Full of Life Requires
Preparation and Practice

Preparation Practice
Plan to Win Consumer Immersion
Product Integrity Brands Brand Equity Leverage
Profit from Good Work Distinct Brand Positioning
Focus on Fundamentals
Full of Lighthouse Identity
Right People Life Creating Life’s Moments


Consumer Immersion

Deep insights into target consumer should ground
all brand building and strategy.

Sources: Secondary
Syndicated
Observation
Interviews
– Qualitative
– Quantitative


Consumer Immersion

Understanding the underlying human values and emotional
needs help define unique spaces for a brand.


Consumer Immersion

Strong and memorable brands discover and own an emotional benefit.

Measured Passion

Arms’ Length Commitment
Proactive
Reactive
Narrowed
Multiple Brand Set Brand Set
Price Elastic Price Inelastic

© 1995 Sterling-Rice Group


Distinct Brand Positioning

Positioning is a process of distinctively owning a benefit space.

Target audience: Your passionate core users

Frame of reference: What you compare to/substitute for

Differentiating benefit: The distinctive, emotive benefit to your brand

Reason to believe: The reason to believe the differentiated benefit


Distinct Brand Positioning

“Baked on the Bright Side” “It’s Not Delivery...”


Lighthouse Identity

Building a “lighthouse” identity is particularly
key for a challenger brand.

Create an intensity of preference

Break from all forms of convention

Be an inspired thought leader


Life’s Moments

Building interactions between brand and users builds lasting bonds.

Cascadian Farm
First-ever in-game integration
into FarmVille
16 million users planted over 700
million CF crops in a single week
Sales up 25% during the
promotion and up double digits in
following weeks
Brand awareness up 20%



3. Channel Strategy
4. In-Market Voice
5. Q&A


Nutritional Products, in Particular, Can be
Relevant to a Wide Range of Channel Options
Food, drug, and mass offers a huge number of potential points of
distribution, but with a variety of incumbent challenges:
– Market entry costs often include some version of slotting fees, not always true
but can be a meaningful consideration
– The route to market may include specialty distribution and/or brokerage fees.
Each participant in the supply chain takes a share of the sales dollar—and can
make it very difficult to hit target manufacturer margins while maintaining an
attractive on-shelf price point
– If paying substantial market entry costs into this channel, must be prepared to
support the distribution with consumer and trade promotion
– It is not atypical to see emerging companies develop very opportunistic
distribution. We would often advise discipline in deciding which markets to enter.
Limited ACV in the large number of geographic markets can be a very difficult
proposition to successfully market against


Sales by Channel Highly Variable
by Product Type

Source: Nutrition Business Journal.


Supplement Sales by Channel Look Very
Different than Nutritional Food and Beverage



Nutritional Products, in Particular, Can be
Relevant to a Wide Range of Channel Options
The natural channel has been very friendly to the nutritional product offerings:
– The natural channel can often be entered without slotting fees or equivalent, subject to the
ingredient panel conforming to natural channel standards
Direct-to-consumer is an increasingly important option—especially for higher-priced
specialty products
– Without retail partners, it can be easier to manage at target price point while
maintaining margins
– Direct-to-consumer offers a unique engagement opportunity with your consumer
– Be mindful of the regulatory requirements and risks associated with any claims language
Multilevel marketing is a major force in this segment
– This form of selling often facilitates a much deeper conversation with the consumer about
what can be a very complex sale
The practitioner channel is also a very important channel for some specialty
nutrition products
– Practitioners act as expert endorsers
– It can be a very big investment to develop this sales channel—and remember, the
practitioners take their cut of the product sales price


Nutrition Industry Value Chain: 2010
2010 $M Consumer Retail Direct Mfgr Wholesale Supply
Vitamins 9,576 6,390 3,186 5,896 1,108
Herbs/botanicals 5,046 2,577 2,469 2,928 460

Sports nutrition 3,218 2,132 1,086 1,828 364
Minerals 2,244 1,669 575 1,384 253
Meal supplements 2,754 1,733 1,020 1,848 257
Specialty supplements 5,219 4,000 1,219 3,060 796
Supplements 28,057 18,501 9,556 16,945 3,237
Natural/organic food 39,021 36,225 2,796 22,001 5,016
Functional food 39,075 38,513 561 26,742 1,070
NPC 10,955 7,931 3,024 5,874 882
Total Nutrition Ind. 117,108 101,171 15,937 71,561 10,205



Lessons Learned
Gatorade’s early quest to drive point of thirst distribution
– Coke/Pepsi owned the up-and-down-the-street locations
– Essentials—strong brand, functional packaging, investment, experience
Expanding Amerifit’s retail distribution methodically to over 60K locations
– Prioritization of accounts critical
– You cannot have it all
– Ensure systems are in place (Walmart)
– Patience (Costco)
Challenges of marketing to Practitioners with innovative personal
genetics product
– Solid science only the starting point
– Solid economics for practitioners important
– Work diligently prior to testing, how product effectively fits into their protocols
Never ever take the regulatory environment for granted



3. Channel Strategy
4. In-Market Voice
5. Q&A


Cost-Effectively Developing Meaningful
Market Reach Can be a Huge Challenge—
Particularly for Early-Stage Companies
Companies with larger scale often have tremendous marketing advantages
and pricing power, particularly with more traditional media
But the power of an authentic brand voice must not be underestimated; in
many cases entrepreneurial companies outwit their larger competitors
Consumers are hungry for authentic brands, are often cynical about
advertising and skeptical about large companies
Emerging companies often have a great advantage in the intimacy of
the conversation they have with their core users and the authenticity of
their stories
– Many large CPG marketers have yet to adapt to the realities of the
digital marketplace
– Vital to be transparent with consumers and authentic with message
– A world where most brands cannot effectively send a one-way message on
mass media


Share of Voice

Paid: TV, radio, print,
outdoor, digital banners,
adwords, SEM

Owned: website, content,
packaging, stores Paid Owned Earned
Earned: PR, links,
endorsements,
testimonials, peer-to-peer

Strangers Customers Fans


Where to Best Place Marketing Sales
Support Bets
Highly dependent on knowing your target customer and
your channel strategy
– Intimately know your target consumer and her habits and do not
ask for behavior change
• Humans are creatures of habit—a bit lazy
• Very social beings; provide social cues and rewards
– Go where you know they already are
• Event sponsorship
• Class of trade (e.g., natural channel)
• Online, social media


Where to Best Place Marketing Sales
Support Bets
Highly dependent on knowing your target customer and
your channel strategy
– Carefully plan channel and distribution strategies—distribution at
retail can cut both ways
• Holy Grail for sales team to gain points of distribution
• Can also be a disaster for marketing team
– Craft your approach for success in targeted—even if very
concentrated—specific markets
• Experiment to identify the tactics that can prove your concept before
going with big bets


A Winning Media Mix Recipe
Is Not Formulaic
Solve for demonstrable and measurable ROI
Place many small bets to quickly test tactics
Some advertising and promotion tactics are inherently
difficult to measure
– Generalized print, broadcast, or outdoor campaigns
– FSIs (not redemption, but incrementality)
– Other general brand awareness-building efforts
Do not emulate big companies with bad habits
– Some categories have unhealthy competitive intensity
• Frozen meals, ice cream, vitamins all >50% of sales on-deal
– Do not follow → disrupt!


Emedia
Elaborate Ecosystem

Rich earned and owned media
opportunities with authentic brands
– Content generation, SEO, blogging
– Remember that “likes” don’t pay the rent
Many technology channel choices:
– Email, Facebook, Twitter, blogosphere,
QR codes, banners, keywords,
YouTube, others
– Focus on the already
motivated consumer
– Intersect with the consumer where she
is already going
– Disaggregate activation steps and make
call-to-action very visible and easy
Source:
JESS3 and Brian Solis.



3. Channel Strategy
4. In-Market Voice
5. Q&A


Q&A

At this point, Nutrition Capital Network principals will kick
off Q&A followed by the conference call moderator to give
instructions to the audience for Q&A.


NCN 2011 Calendar
NCN Seminar at Expo East: Baltimore
September 21–24, 2011

NCN at Supply Side West: Las Vegas
October 11, 2011: 8–10 companies
http://www.nutritioncapital.com/NCN_at_
SupplySide_October_2010

NCN IX Fall Meeting: Los Angeles
November 14–15, 2011: 20–22 companies
http://www.nutritioncapital.com/NCN_IX_Fall_2011

NCN X Spring East Coast Meeting
May 2012: 20–22 companies


THANKS FOR JOINING US
We Look Forward to Seeing You at

Supplyside West and NCN IX!

Building Brand Value

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