Shipping With Aloha
In the 1990s, Cyanotech’s exports to China were humming. The Hawaii-based provider of microalgae products for the nutritional supplement and immunology markets had a large customer in the Middle Kingdom, a multi-level marketing company that accounted for a large share of Cyanotech’s revenues. When, in 1996, the Chinese government outlawed this type of firm, the move left the U.S. exporter with a gaping hole to fill.
“Our revenues tumbled the next year due to the loss of this one, large customer,” recalls Bob Capelli, Cyanotech’s vice president of Sales, Marketing and Materials Management. “We learned at that point the critical need of diversifying markets.”
Cyanotech’s international footprint has continually expanded and now stands at 63 countries around the globe. In part, this was driven by customers who had heard of the company and its products—particularly in the early years— but over time management developed a more concerted effort to actively target specific markets.
Its export drive earned official recognition in 2011, when the company won the Export Achievement Certificate Award from the Department of Commerce. The award, which was determined by the Hawaii Export Assistance Center of the department, recognized Cyanotech as one of nine Hawaii-based companies to have shown excellence in developing global opportunities for its products and services and expanded its operations by growing exports of Hawaiian products.
“We were the No. 1 exporter in Hawaii for a few years in a row,” Capelli says. “We got the award not only because of our export volume, but also because of the variety of markets we were in.”
This does not mean that Cyanotech is rushing to expand the list of countries where it has clients. Actually, management shifted gears last year and decided to go for depth rather than breadth in the international arena. Sensing that its position might be somewhat broad and shallow, it determined to concentrate more on some markets to achieve deeper penetration there rather than expand geographical coverage.
A key element there has been the development of closer ties with major clients. “We have chosen key customers in several different countries and allowed them to operate on an exclusive basis with our products. In turn, they have focused more efforts in marketing our products due to the protection we have given them,” says Capelli.
Another major strategic decision that shifted the company’s direction was the development of branded products. Cyanotech started out in the early 1980s as a producer of bulk ingredients on its 90-acre microalgae farm on Kona that was carved out of lava.
“For the first six years we were exclusively a bulk supplier,” recalls Capelli. During that time the realization was growing that some customers were not handling the material properly, affecting the quality of the product.
“Nutrients oxidize. They don’t become dangerous, but they lose their health effect. So in 1990 it was decided to form our own consumer goods division, Nutrex Hawaii,” he says.
This led to the development of two branded products—first Spirulina, a dietary supplement rich in nutrients, and later Astaxanthin, a powerful antioxidant used for joints, skin and immune response, which has been sold under the “BioAstin” label.
“Demand for both, especially Astaxanthin, has skyrocketed,” says Capelli. In the quarter that ended Dec. 31, 2013, retail sales of
Astaxanthin in the U.S. market went up 42 percent, as Cyanotech’s market share in this segment advanced 8.2 points to 51.9 percent. Spirulina registered 28 percent growth in sales in the period, as the firm’s market share inched up 2.3 points to 47.2 percent.
This momentum has put a strain on Cyanotech’s output, so much so that it is struggling to keep up with demand, despite the fertile growing conditions in Hawaii. A recent 33 percent increase in the lava ponds where the company grows its microscopic plants to develop and commercialize natural products has ramped up output but still could not propel it beyond demand, which has kept rising.
“It has been a fight to keep up with demand for the past three years,” says Capelli, adding that this situation is expected to continue for the foreseeable future.
One of the costliest and most time-consuming aspects of Astaxanthin production is the extraction process. There is a small number of extraction facilities, and they are not within easy reach from Cyanotech’s lava ponds in Kona. The company currently uses three facilities, which are in New Zealand, Boston and Pennsylvania. To save time, transportation to and from these facilities is by aircraft.
“One of our biggest costs now is to ship product for secondary processes,” says Capelli.
This expense should come down a bit beginning next year. Cyanotech is in the process of setting up its own extraction facility on Hawaii, which is due to come begin operation later this year. This will put the company in full control of the production process all the way to the consumer, and it is expected to generate significant improvements in costs and lead times, Capelli explains.
The branded products have been aimed squarely at Hawaii and the continental U.S. market. There, Cyanotech has phased out bulk sales except for a small number of key clients, but in the international arena the firm continues to act as a provider of bulk ingredients. “Internationally, we are still a raw material supplier,” says Capelli.
Although the branded consumer products have been the chief drivers of growth, management is determined to keep expanding its bulk sales as well, which were the foundation of its business.
“The biggest market for us is the U.S., but it is nice to be diversified,” remarks Capelli. “We want to be a strong brand in the U.S. and we want to be a strong raw material supplier internationally.” Despite the strain to keep up with demand, he is confident that the company can achieve growth on both fronts.
“Our products tend to do better in developed economies. Our main markets are in developed or developing countries,” notes Capelli. Lately a good deal of focus has been on Eastern Europe and some Latin American countries, such as Chile.
“These markets are still not huge for us, but we have found some good partners to help promote our products in these regions and we believe they could be very significant in the future. There are a few solid countries for us already in these two regions, with Chile being the best so far,” Capelli says.
Cyanotech president and CEO Brent Bailey has made it clear that outside the United States the company does not have the resources, the expertise or the cultural knowledge to blaze a trail on its own and market its consumer brands itself. Its approach varies from one market to the next, but for the most part, the company works with distributors rather than go for direct sales to local outlets. Many clients have their own brands, and some use Cyanotech’s product names and even labels.
The strategic approach to individual markets is determined on the basis of companies that Cyanotech executives meet at trade shows as well as through other means like simple e-mail inquiries. Once the market and the prospective partner have been scrutinized and found sufficiently promising, discussions are started on how best to work together in a way that will benefit both entities.
“A good example of this was in Taiwan, where we found a very promising partner to work with our bottled product,” recalls Capelli.
“They were willing to invest a good sum in personnel and marketing to launch our brand, and we decided it would be best to retire our customers for raw materials in Taiwan (with an ample time for them to consider new suppliers), and then gave our preferred customer there an exclusive distributorship.
“Some markets are more into bottled products,” he observes. “They take our packaging and put on their labels. Sometimes they use our brand but in the local language.”
Local partners also play a big role in navigating the regulatory landscape of international markets to get national certification. “The only place where we have done the regulatory process ourselves was the European Union; otherwise we use a partner first,” says Capelli.
In the United States, Spirulina Pacifica is Generally Recognized as Safe (GRAS) by the FDA for all food, beverage and supplement applications. Likewise, Astaxanthin is FDA-reviewed and allowed as a dietary supplement. Cyanotech itself is NPA-GMP certified.
The certification process is usually the most challenging and lengthiest part of a foray into a new market for Cyanotech. In some cases certification has taken six months; in China registration took more than two years and cost the company a six-digit sum of money.
“In our business, the regulatory side is always a challenge,” says Capelli, adding that it is necessary to have a sufficient buffer in terms of a market entry schedule. His advice to companies that are looking to start exporting to a new country is to allow extra time to cope with unforeseen requirements and complications.
He also emphasizes the need to allow for sufficient leeway to deal with complications and local idiosyncrasies. “Try to be open-minded and flexible,” he says. “Don’t get into the mindset that it has got the be the same one way in different countries.”
Sometimes it simply takes a while for a partnership to produce the desired results. “We’ve had one situation where a customer did not hit their sales goals for the first few years, and then became our largest customer. It is very important to not only look at the financial results when analyzing a new distributor’s initial activity, but also to fully understand what they are doing to promote and their long-term commitment to our products. Sometimes it takes a while for a marketing program to really start to click.” Capelli says.