Deals

Nisha Gopalan is a Bloomberg Gadfly columnist covering deals and banking. She previously worked for the Wall Street Journal and Dow Jones as an editor and a reporter.

It's not strange that Australian vitamin group Blackmores Ltd. has tennis star Li Na as its brand ambassador. China is one of the fastest-growing markets for vitamins and supplements, and according to Credit Suisse Group AG, is now the world's second largest after the U.S. But whether that makes a Chinese company the best owner for Pittsburgh-based GNC Holdings Inc. is another matter.

GNC is massive. It has 9,000 outlets globally, many of them in high-traffic pedestrian shopping areas, and is a much bigger proposition than either Swisse Wellness Group Ltd., which was bought by Chinese infant-formula producer Biostime International Holdings Ltd. last year, or Vitaco Holdings Ltd., another Australian outfit that's in the process of being acquired by Shanghai Pharmaceuticals Holding Co.

There are few instances of Chinese companies running large bricks-and-mortar businesses outside of China, so perhaps that's why GNC is said to want a U.S. private-equity partner. As Gadfly noted previously, private equity may be just the ticket for figuring out how to make operations more efficient.

GNC could do with help. Sales are flagging and its shares have been slumping.

Lacking Vitality
Despite talk it's for sale, GNC's shares have underperformed U.S. stocks
Source: Bloomberg

Bulking up in Asia's biggest economy may help turn that around.

International accounts for less than 6 percent of the company's sales, with most of that coming from Chile and Mexico. Revenue decreased $9.5 million, or 18.7 percent, to $41.1 million in the quarter ended Sept. 30, versus $50.6 million in the same quarter of 2015. There was, at least, a $1.8 million increase in revenue associated with GNC's China business.

While the benefits of being in China are plenty -- Blackmores makes almost half its sales from health-conscious mainland shoppers -- a Chinese parent would come with some baggage.

Any vitamin producer in China, even one that's locally owned, has to deal with onerous regulations. Just getting a so-called blue hat registration (named for the registration logo) with the nation's Food and Drug Administration can take three years and cost upward of $100,000 per product. Plans for a more streamlined orange-hat registration should make things easier and take about 12 months, but even then there are lots of hurdles. Brand owners still need to produce all kinds of documentation, including overseas certifications.

Neither are GNC's mooted buyers -- from Club Med owner Fosun International Ltd. to Harbin Gloria Pharmaceuticals Co. -- particularly strong online, where a lot of the vitamin-sales growth is these days. Offline, meanwhile, China has thousands of pharmacies and health and beauty stores. Getting any scale in such a fragmented market is tough, even for a Chinese company.

Small Dose
GNC's international revenue is tiny versus overall sales
Source: Bloomberg

Being Chinese-owned could also actually erode trust in the GNC brand, crucial in a market where you're dealing with people's health and wellness. Foreign-made and owned vitamins and supplements tend to be perceived as safer and less prone to counterfeiting. Blackmores in fact makes a large portion of its China sales via so-called daigou, paid personal shoppers overseas who then send products back to the mainland.

A buyer from Beijing or Shanghai with deep pockets would be a welcome source of funding and expand GNC's horizons. But the company is right to insist on a dose of international help.

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

To contact the author of this story:
Nisha Gopalan in Hong Kong at ngopalan3@bloomberg.net

To contact the editor responsible for this story:
Katrina Nicholas at knicholas2@bloomberg.net