In the face of existential threats, are vitamin startups a painkiller for GNC?

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In today’s Rad Perspectives we initiate our coverage of D2C Vitamin startups and add the sector to our D2C Playlist. We have identified 11 startups that compete in D2C vitamins, selling their own brands of solid vitamins both direct-to-consumer and omnichannel.

Today, we look into the D2C vitamins sector and wonder:

  1. Is there an opportunity?
  2. Will there be a vitamin category in the future?
  3. Are these startups clear acquisition targets for beleaguered GNC?

Opinions? Tweet your feedback to @radreports or send it to us here analyst@rad.report

On the one hand

On the one hand, the opportunity presented is large. The vitamin market is big, $35bn globally (see here and here). Including supplements, the opportunity is even bigger, at $106b. An incredible number — 68% of Americans — take vitamins. Our own Radicle Survey confirms that, with 46% of respondents saying they take vitamins everyday.

At the same time, the existing experience suffers from multiple pain points and opportunities for improvement:

Consumer experience: The existing consumer experience presents consumers with three challenging questions:

  1. Which vitamin type is right for me? There are 85,000 dietary supplements for sale in the US. Without having done research, most users do not know enough about the ingredients to make the right choice. Folic Acid? Helps with the formation of red blood cells. But also helps prevent birth defects. Vitamin B12 vs B6? And so on.
  2. Which brand and where is it? Given a multitude of both brands and vitamin types, the shopping aisle and experience can be overwhelming.
  3. How much do I take? If consumers identify which vitamin is right for them and find the brand they feel most comfortable with, they then need to decide how much to take. Not surprisingly, many consumers don’t know how many mg is the appropriate dose.

Replenishment and adherence: After purchasing them for the first time, consumers must remember to replenish their vitamin supplies, which can lead to adherence issues.

And so it’s not entirely surprising that there are startups looking to improve upon this experience. The digitally native vertical brand approach offers an attractive playbook for companies in this sector:

  • The rise of the on-demand economy has had substantial influence on e-commerce. Coupled with the ability to set up recurring deliveries, it improves the convenience of purchasing non-durables such as vitamins. Some startups deliver the vitamins in monthly packets with the daily dose in one blister. The subscription model has been deployed successfully in razors, food, and dog toys / treats, amongst others.
  • Mass customization, created by advancements in IT and developed as a business tool, enables digital suppliers to produce made-to-order products while maintaining low unit costs. There is evidence that customers are indeed interested in having customization options. Some startups offer the option to take a five-minute survey for a recommended pack of vitamins which could mitigate the information deficiency about vitamins.
  • Customer segmentation has been gaining ground in dietary supplements, with increasing number of products targeting women. Some startups focus on one particular group of consumers with specific demands and emphasize on the clinical evidence of the product to that group. Since there is a considerable number of brands available in the same price range, clinical evidence could be an effective marketing tool.

On the other hand, an existential debate

Big market? Check? Pain points? Check? New models that solve them? Check. Where do I send the check? (Thanks.) Vitamins startups seem like a direct-to-consumer layup.

The vitamin is itself a solution to a consumer problem. At the highest level, modern humans don’t eat well. Our diets are generally low in vegetables and fruits, which are full of vitamins and nutrients like Vitamins A, B, C and E, potassium, fiber, folic acid, and more. The benefits of vegetables and their intrinsic nutritional properties are numerous: reducing blood pressure, risk of heart disease, stroke, cancer, eye and digestive problems, and diabetes.

We should eat more vegetables. But we don’t. Why? Education, cost, and the marketing of easy, non-vegetable foods are the likely culprits. Changing consumer eating habits will be one of the major challenges of the coming generation given the accumulating costs of bad diets.

In the interim, enter the vitamin.

The vitamin is easy to market. You need to consume more vitamins. Here is a vitamin. Done.

But, it’s not quite so simple.

While consumers take vitamins thinking they will improve their health (45% by this study), many studies have found little or no evidence that vitamin supplements can prevent long term health problems (see articles from NCBI and AJCN for examples).

Googling “should I take vitamins” suggests well, “no.”

Related, the Center for Disease Control estimated that supplement-use problems cause over 23,000 emergency room visits each year. By contrast, the CRN found that the vast majority (85%) of adults have confidence in the safety, quality, and effectiveness of dietary supplements.

One is left wondering: if evidence suggests that vitamins aren’t beneficial and in some cases over-use may be harmful, will we even take them (in their current manufactured form) in the future? Will the current efficacy debate impact vitamin sales? We’ve seen what happens when consumers turn on an ingredient (see: sugar and orange juice sales). How confident should we be in the large market opportunity?

Enter GNC

Since 2014 the stock of GNC, the Pittsburgh-based retailer of vitamins, supplements and other related nutritional products has fallen 86% due to a declining traffic/sales and an increase in costs (marketing). In many ways, the company is suffering from the pain points highlighted above. To address this, the company is specifically looking to offer “simplified prices” and a “differentiated in-store experience.” Poor execution and shareholder value destruction led GNC in September 2017 to name Ken Martindale (formerly CEO of Rite-Aid) CEO. Martindale has his work cut out for him. With the existential threat over the horizon, his bigger challenge will be turning around today’s GNC.

Online is a threat and an opportunity. While today GNC’s e-commerce makes up 8.9% of GNC US and Canadian sales (through GNC.com and Lucky Vitamin), they are actually declining (vs 9.6% in the prior year). Like GNC and GNC.com, Lucky Vitamins largely takes a multi-brand ecommerce approach to vitamins. Guess who else does this, and layers on a private label brand?

Yep, them.

How do these vitamin startups fit in?

Startups in this sector are taking novel approaches to the vitamin category (e.g. Care/of builds customized vitamin packs based on questionnaire results). They are building brands that consumers trust (Ritual, for women, is a good case study in trust building). Consumers are increasingly searching for their products. They would certainly be brand accretive.

The Sector would seem worthy of investigation by GNC’s Corporate Development team.

What do you think? What is the future of the vitamin category? What should GNC do? Tweet your feedback to @radreports or send it to us here analyst@rad.report


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