Consumer

Shelly Banjo is a Bloomberg Gadfly columnist covering retail and consumer goods. She previously was a reporter at Quartz and the Wall Street Journal.

Vitamin retailers need some stronger medicine. 

Shares of GNC Holdings plunged by nearly 30 percent on Thursday after the supplement seller posted a 2.6 percent drop in sales from a year earlier at established company-owned U.S. stores and a 5.6 percent sales drop at franchised locations. Its online business fell 7.5 percent in the quarter from the year before. GNC's shares are now down 47 percent for the year.  

Don't Take Your Vitamins
Shares in GNC are down 45% in the past year, compared to a 2% drop in the Russell 1000 index
Source: Bloomberg

Part of the problem was that unsold vitamins sat on GNC shelves so long the company had to discount them heavily to get people to buy them before they expired. It's almost a metaphor for the company and the industry.

GNC's sales have been falling as customers pull back on vitamin purchases. Fewer of GNC's franchisees are adopting its new product lines or participating in national promotions, causing sales to fall further. Meanwhile, the FDA and Justice Department are scrutinizing the dietary supplement industry for allegedly selling products made with illegal ingredients, which isn't helping matters.

Efforts to turn GNC's struggling business around are going so poorly that it had to revise its 2016 earnings outlook down to between $2.80 and $2.90 a share, from an earlier target range of $3.15 to $3.35. "The turnaround is taking longer than expected," CEO Michael Archbold said Thursday. Oof. 

 

Not So Nutritious
Year-over-year change in GNC sales at established, company-owned U.S. stores
Source: Bloomberg

GNC's ongoing poor performance seems to be crushing the chances of it buying Vitamin Shoppe any time soon, a long-dreamed-of deal shareholders have floated as an antidote to unhealthy sales.

A number of activist investors remain large stakeholders in both companies. More than 7 percent of GNC stock is owned by TPG-Axon Management, which was recently wounded by a bad bet on SandRidge Energy. Nearly 5 percent of GNC shares are owned by Eminence Capital, which was behind the ill-fitting merger of Men's Wearehouse and Jos. A. Bank . Eminence has recently pared its stake in GNC.

Chill Pill
Activist investors remain big stakeholders in Vitamin-maker GNC Holdings

Over at Vitamin Shoppe, Carlson Capital holds roughly 10 percent of that struggling retailer's shares, which have dropped by more than 30 percent since Carlson disclosed its stake. As my colleague Gillian Tan has written, it's hard to see exactly what Carlson is trying to achieve here.

While Carlson initially made some waves when it announced its stake in Vitamin Shoppe, the activists haven't been especially vocal -- at least publicly. Where are the calls for CEOs to step down? Where are the PowerPoint presentations with strongly-worded suggestions for boosting sales? These so-called activists see to be just sitting on their hands as they watch a sinking ship submerge.

The lack of action isn't limited to the investors, either. 

GNC's management on Thursday did say it was "moving quickly to address these challenges," but then spent a bunch of time talking about industry troubles, such as declining public perception of the safety and quality of supplements and their ingredients. GNC said it was working with a coalition of retailers, multi-level marketers, and pharma companies to "improve the narrative" after widespread claims supplement-makers were using illegal ingredients

Maybe GNC should instead spend that energy fixing its own business. For one thing, GNC needs to lower its prices to be more in line with competitors. Currently, a basket of goods at GNC costs around 12 percent more, on average, than at Vitamin Shoppe or Amazon and about 18 percent and 24 percent more than at online retailer Vitacost or Kroger, respectively, according to a Piper Jaffray analysis.

Pricey Vitamins
Customers are paying 24% and 18.5% more, on average, for a basket of vitamins and other goods from GNC than from Kroger. and Vitacost, respectively
Source: Piper Jaffray

And as the U.S. population gets older -- Piper Jaffray notes the number of Americans aged 65 and over is growing at a rate three times faster than the general population and is expected to reach 19 percent of the population by 2030 -- GNC will have to change the way it does business. It should focus less on hawking one-time deals on hot, new supplements, and more on providing nutritional products that customers feel compelled to incorporate into their daily routines. But time's running out. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Shelly Banjo in New York at sbanjo@bloomberg.net

To contact the editor responsible for this story:
Mark Gongloff at mgongloff1@bloomberg.net