A new kind of company has come to light, charged by the rapid growth in Instagram’s popularity and the increase of spending in the wellness field, and that is personalized, direct-to-consumer vitamins!
Direct-to-consumer (DTC) vitamin startups have found their time to shine in the millenial world, what with their clean lines and vivid color schemes, and their use of Instagram influencers and targeted social advertising. Accentuated by social sharing, these startups offer a convenient form of self-care and are a big problem for brick-and-mortar retailers, such as Vitamin Shoppe and GNC, that already face struggles.
With the future of these retailers already looking dismal, one must wonder: Is the DTC trend going to continue to grow? Will GNC and other retailers be able to survive? Is there a chance of a Dollar Shave Club-like acquisition in the future?
The Market
In 2014, the global size of the vitamins, minerals, and supplements market, was valued at $68B, according to Statista. This number was expected to reach $106.2B in the year 2017. Vitamin sales (excluding dietary supplements) in the United States, in 2017, was a total of $13.5B and $2.4B of that amount was accounted for by online sales.
The global vitamin market grows at a rate of 3%, whereas the US vitamin market at 6%, however, there has been a dramatic shift towards online sales, rather than brick-and-mortar sales. Regardless of the wellness boom however, retailers, such as GNC have not been able to bear fruit.
In the past, GNC and Vitamin Shoppe have both faced lawsuits, accusing them of selling supplements which were potentially dangerous. Yet, questionable supplements is only one of the long list of problems and quite typical for an industry that is entirely unregulated. It is a mixture of factors that have given these supplement retailers a spot on almost every bankruptcy watchlist.
The wide-ranging retail apocalypse coupled with the fact that vitamins have become a commodity (even Walmart and Costco have their own ”vitamins” section) and the strong competition from online retailers, such as Amazon and Bodybuilding.com, have brick-and-mortar stores struggling.
The ”Veterans”
GNC was steady until the year 2014, when the company’s revenue growth was flat and there was a 4% decline in earnings. In 2015, revenue growth was at 1% but earnings continued to drop. In 2016 revenue declines even further, a whole 5.5% from the year before, and there is a large decrease in the foot traffic across more than 4,400 stores in the US, resulting in the company’s shares tanking by 64%. The peak for GNC’s market value was in 2013 and it has decreased by approximately $5B since then.
Although during this difficult peiod GNC has tried everything it could to come out stronger the other side, things have gone from bad to worse.
Top management has also had some shakeups with the company having had four different CEOs since 2014 and then ensued some shady tactics. GNC tried to move away from promotion stunts and instead lowered their prices, overhauled their loyalty program and began selling their products on Amazon. None of these moves were fruitful however and the possibility of a GNC and Vitamin Shoope merger came back to light, but GNC could not afford to deal with the debt. A complete sale of the company was also considered in 2016 but the Chinese suitors changer their mind.
Certainly, GNC is not the only company struggling, as we see with Vitamin World that filed for Chapter 11 bankruptcy in 2017. When Vitamin World filed for bankruptcy, it had 345 stores in operation and a workforce of around 1,500. The initial idea was for the retailer to shut down stores that were not performing well and reorganize, however, now it appears as though they will sell off their assets and their operations will come to an end.
In comparison with GNC, Vitamin Shoppe is cautiously optimistic. Between 2016 and 2017, net sales dropped by 8.6% and Colin Watts, Vitamin Shoppe’s CEO resigned in May. Vitamin Shoppe are still hopeful as they have a redesigned and modernized digital strategy, e-commerce experience and their SPARK Auto Delivery Platform. Something still needs to be done however about their Q2 2018 sales, that were still down.
Fundamental issues
From a tactical and financial standpoint, vitamin retailers have taken steps to secure their business but they seem unwilling or maybe unable to confront their underlying, fundamental issues. The brands they have created are simply irrelevant now and their business model is broken.
Revamping their brands is something that Vitamin Shoppe and GNC have both tried to do recently, however, these attempts have failed. GNC tried to make a relaunch, closing all their 4,400 company-owned stores for a day in December 2016, as ‘One New GNC’, however, it still feels like the same old GNC. One article mentioned that ”GNC is using a cosmetic fix to address basic issues”. ”Cosmetic” efforts seem to have been adopted by Vitamin Shoppe as well, as it launched a new store format that includes a kombucha bar and created 800 Instagram accounts attempting to localize their marketing efforts.
Vitamin retailers, selling a commodity product must either have the lowest price or offer an amazing experience, said a Bloomberg Intelligence analyst, Seema Sahah, to CNN. GNC and Vitamin Shoppe are both failing in this regard.
A completely new world
Luxury lifestyle is part and parcel with wellness and the veterans do not have a feel for what today’s wellness consumer requires.
Neil Saunders of GlobalData spoke to Racked about GNC, stating that the company’s stores do not gel well with the wellness trend because they do not feel calm or relaxing, in contrary they can be a tad overwhelming and even stressful for someone that is not familiar with their products. Occasional shoppers are put off by overcrowded isles of products and this presentation makes it hard for GNC to launch new innovations or ideas.
The retail experience in GNC is sterile and overly masculine, something that puts the company at odds with the rest of the wellness movement that is distinguished by physical, spiritual and emotional self-care, Racked continued. The veterans are being outplayed by the new generation of DTC vitamin companies in the new game that is Wellness.
Magical Pills
The retail landscape is being disrupted by the direct-to-consumer vitamin companies, with their use of vivid colors and humorous messaging breaking through the clutter of the vitamin industry. The brands that have been created by DTC companies such as Ritual, Care/of, Goop Wellness and Hum attract hoards of millenials that cannot and do not want to miss out on their products.
These companies approach brand identity, customer experience and digital storytelling in a way that could be described as obsessive, using social media platforms and their influencers to reach a specific target audience. The competition in retail have proven incapable of maintaining meaningful or genuine relationships with their customers, but these companies have managed to build these strong relationships and maintain brands that go beyond just vitamins.
When the strategies of these companies are properly executed, the results are clear. Their brands provide inspiration to their customers and they are able to identify with them. One of the oldest and effective methods in the book, word-of-mouth, is what social sharing achieves. The brands that already rely on visual content make that user-generated content creation a massive part of their marketing efforts. A study by Deloitte Digital points out that user-generated content is crucial for a company’s success as it increases conversion twice whereas retailer-generated content alone, such as the images of stock used by Vitamin Shoppe and GNC, only deters buyers.
Cashing in
Subscription models, unit economics and product personalization are other important factors that win over customers, along with the essential branding. This has caught the attention of venture capitalists who invested over $200M worth of funds into vitamin and supplement startups in 2017. Top of the list of investments are companies like Care/of, Elysium Health and hims that have raised hundreds of millions of dollars in funding in the last few years, collectively.
Care/of is a perfect match for the personalized, subscription-based DTC vitamins category and they received funding ammounting to $29M from Goldman Sach’s venture arm and RRE Ventures. The company, although only being around for two years is now valued at $156M. If this number is compared to GNC and Vitamin Shoppe who are valued at $254M and $203.5M respectively, it is very clear that a big shift in the market is occuring. Adding to the wide gap in the comparison is the fact that GNC has a workforce of approximately 6,400 and 9,000 stores and Vitamin Shoppe boasts a number of 3,860 employees and almost 800 stores. Care/of only has a workforce of around 100 employees. Isn’t it easy to predict how vitamin retailers can fail?
Another player in the wellness trend is hims, that many refer to as Glossie for men. Instead of jade eggs and moon dust, hims offers penis pills and hair loss treatments that are branded perfectly and of course, subscription-based. Hims was backed by Forerunner Ventures and Thrive Capital (that also backed Warby Parker, Dollar Shave Club, Glossier and Outdoor Voices), for their launch and has been outpacing their DTC peers ever since. Hims earned a $200M valuation, in early 2018, when the company raised $40M in funding. Reports say that the company is meeting with investors with the goal to raise $100M at an $800M valuation in order to launch a vertical aptly named ”hers”, dedicated to women.
Elysium Health, strongly entered the scene making the bold claim that their subscription-based supplement can help you live longer. Their formula is a mixture of nicotinamide riboside (NR) and pterostilbene, which has not been proven in humans, neither is it proprietary, however the company has still managed to receive over $30M in venture funding. Companies like Elysium Health do not need to gain FDA approval for their products, as the supplement industry is completely unregulated, so it is entirely possible for them to simply rely on advice from scientists and glossy branding and advertising to win their customers over.
The Elephant in the Room
Not everything is rosy however for either side of the supplement world, as the entire vitamin and supplement industry, both DTC and retail, have to grapple with some painful truths.
Most importantly, the giant that is Amazon! Realistically speaking, companies like Vitamin Shoppe and GNC ,that we aforementioned, are not going out of business because of companies like Care/of or Elysium Health, they are under so much threat because they simply cannot compete with Amazon. A study was made recently, comparing prices in GNC and Amazon that found that the former’s prices were 11% higher than those of the latter, regarding 30 identical brands. Amazon is not only ahead due to it’s convenience but also because of its prices, that have earned it a whopping 77% of the overall online vitamin and supplement market.
Pillpack is an online pharmacy that is primarily a direct-to-consumer pharmaceuticals company. Amazon acquired Pillpack and although prescription medicines are their essential business, they also provide consumers with supplements, vitamins and other over-the-counter medications that might just make the new wave of DTC vitamin companies completely irrelevant.
In conclusion, the hardest truth for the industry to accept is that there is accumulating evidence proving that there is no health benefit to many of the popular vitamins and mineral supplements on the market. Even worse, is the possibility that they might in fact be dangerous. However, as consumers, if we carry on buying the products that wellness lifestyle companies are selling, these expertly crafted brands will carry on providing us with the products we believe we need. And, in turn, venture capital will carry on funding the vitamin and supplement industry, hoping to cash in on the next unicorn.