*Disclaimer – I am not a stock analyst and anything stated in this article should not be construed as advice or be viewed as anything more than personal opinion. I do not own The Vitamin Shoppe ($VSI) or GNC Holdings ($GNC) and have no insider information. This article is written from the viewpoint of being a CPG management consultant that focuses mostly on the categories of dietary supplements and functional food & beverage.

The Vitamin Shoppe vs. GNC…King Kong vs. Godzilla…in the world of dietary supplements, these are the two biggest pure-play brick and mortar retail partners. For decades, the goal of any dietary supplement company was to land one or both of these accounts. These accounts were the North Star of your sales strategy and you built your product development map and marketing initiatives towards creating sales velocity at these locations.

In 2018, things are a bit different with many brands not even thinking about these accounts when they launch their brands. They are focused on social media storytelling, direct to consumer websites, and Amazon. They are focused on being the ones that speak directly to their customers, so they can control their brand in the age of the Internet. But is there a place still for The Vitamin Shoppe and GNC? Is there enough room for the both of them in the US in 2020, 2025, or beyond? Let’s assume this is a zero-sum game, who wins? Lets explore below.

International Operations – GNC Wins

The last time I looked, The Vitamin Shoppe had less than 25 locations internationally in North and Central America. They also moved into China late last year but that was purely digital D2C and through 3P on the likes of Alibaba. Alternatively, GNC has around 2000 locations worldwide with its strongest areas of locations being in North America (Canada and Mexico), Central & South America, and Asia. The area that should see the biggest boost in international operations (likely digital and manufacturing) will be in China after the $300M investment GNC received earlier this year from Harbin Pharmaceutical (to hear more of this investment, please WATCH THIS VIDEO). China is the new North Star for businesses looking to capture customers in nutritional supplements so this strategic investment was very interesting by GNC and something I think could be a home run if its executed on effectively over the next few years.

International Brand Equity – GNC Wins

The GNC brand is very strong in international markets. If you have spent anytime in international sales of nutritional supplements you know this to be true. I believe part of the reason is the strong international operations but also the GNC brand name connecting to the private label products. GNC is to supplements in some international geographies as we in America say “I need a Kleenex or Google it.” The brand name takes on a life of its own.

Private Branded Profits – GNC Wins

Vitamin Shoppe’s private branded products were roughly only 24% of revenues compared to GNC’s 45%. Anyone in retail knows that private label, if done right, can be a powerhouse of profits. As an example, GNC or Vitamin Shoppe buys a 2# protein from a 3P seller for maybe $20 to keep it simple, it then doubles that price to $40 to sell. That makes them $20. Alternatively, if they manufacture themselves or through a contract man as a private label, that cost may go down to $11-12 or more. That gives them a ton of additional space to pay additional commissions, marketing, or other conversion/demand levers. I actually thought when The Vitamin Shoppe bought Nutri-Force that it would ramp up its private label creation but those halo brands did not perform to the level pre-acquisition. Overall, I believe the GNC private brands are better positioned than the different Vitamin Shoppe ones. That statement is personal opinion based on by ideologies on different brand development standards.

Cost Structure – GNC Wins (for now…)

There are two reasons why GNC wins here; rent/real estate exposure and franchising model. The first point is that the footprint for GNC might be larger in terms of store locations but the sq footage of GNCs are usually much lower than the larger format Vitamin Shoppes. That creates less rent exposure for the company. I saw “for now…” above because that might end up being a negative for someone like Amazon that could look to grab The Vitamin Shoppe for a discount. Amazon is all about creating micro shipping points and those larger format boxes are great for that. The nutritional supplement categories are already a huge part of Amazon and they have started to dabble in private label production. I am not saying this happens but it does have some merits. The second point is around franchising and how GNC has that ability to sell stores to create a less capital intensive model. According to previous CEO, “We sell them [the stores] off at a profit, and more importantly, we make the same money owning them as selling them off. It’s a cash-flow generator. … They pay us a franchise fee for the store, royalties (on sales) and they buy a lot of the product we make at a margin.” The Vitamin Shoppe is about corporate-owned stores (except for international) so they have to carry the cost load for their 750+ locations.

Overall Thoughts – Competition, Shifts, and Outlook

If you play out the logic of the GNC bears that Amazon and the Mass channel have destroyed the business model of GNC then that logic has to also apply to Vitamin Shoppe. Vitamin Shoppe’s gross margins, same store negative comps and negative operating margins are not looking good, and I would argue that the only way Vitamin Shoppe makes it is if it stops the race to the bottom pricing wars with GNC. That is the only way for them to materially get margins up. However, if we to play out that logic then this also greatly helps GNC.

If this is a zero-sum game, I have to go with GNC but things change fast in this environment and I could see a number of lifelines being extended to either party to really make one a winner over another.

As a reminder, these are just my opinion and should not be construed as investment advice. I do not own either stock at the writing of this article. I do not have any insider information and though I personally have done business with both customers, I was not paid or had bias in writing this article. I am a digital-first management consultant but I believe retail still plays a large role in CPG sales so I was compelled to write this article to create discussion after The Vitamin Shoppe and GNC’s last quarterly results. If you are interested in this topic, please comment to discuss more.