Product and Service

Companies included in VMHS& sport nutrition stores sector in natural products industry are primarily

Retailers of vitamins, minerals, and herbal supplement products (“VMHS”) and sports nutrition products.

Demand for Product and Service

While it is not clear whether the real demand for nutritional supplements has been shrinking as indicate by continued decrease in comparable sales, the direct competition from increasing selling channels of VMS products and slowing down mall traffic seem to have played a role in the decrease in sales of stores and increasing pressure on price, which significantly hurt companies’ profitability.

The Sector

Sector’s current, trend, causes behind trend, and future

Current and Trend

  • Demand for nutritional supplements has probably been shrinking in developed markets as indicated by decreasing sales volume from store-based manufacturers and direct selling manufacturers, while there is a signal indicating that online sales may be picking up.
  • Comparable stores sales have decreased straight for three years due to increasing competition in price from other retail channels such as massive merchandiser and club warehouse or e-commerce.
  • Companies’ profitability decreased significantly due to huge pressure on price and inability to pass on increased costs to consumers.
  • Because companies’ profitability has also suffered from the acceleration of new store growth in the past several years because of the poor performance in sales for those stores, they have been slowing down pace of opening new stores in the past two years.


Causes behind the trend

  • We think that there are many reasons that may contribute the downward trend in demand for nutritional supplement including those factors from demographics and products’ distribution channels. However, the changes in consumer’s concepts on health and nutrition may play the major role. The increasing awareness for more natural and healthier lifestyle may make consumers to turn to intake nutrition naturally such as from foods instead of eating nutritional supplement.
  • This is another example of sales shifting from specialty stores to massive merchandisers or club warehouse when some small markets have been cultivated and grown bigger for massive selling channels to make profits by taking advantage of their traffic of stores, economy scales, and price advantages.


Industry Future

  • Demand for nutritional supplement products will continue to exist but probably experience increasing downward pressure from shrinking demand as consumers in mature market re-think the alternative ways for them to intake nutrition.
  • Companies in this sector as specialty retailers will continue to face challenging market situation and jeopardized financing performance.  And their store coverage is not able to compete with their competitor from massive merchandisers or e-commerce.
  • Consumers’ loyalty and focusing on primary products may be some places for the companies to compete with their competitors.


General Financial Performance of Companies In the Sector

Generally, while we do not have direct data, our company data of sale volume from store-based manufacturers and direct selling manufacturers indicate that the US domestic demand for nutritional supplement products including VMHS may have been shrinking in the past several years. However, the poor performance in manufacturers’ comparable sales number may come from the increasing competition, resulted from larger availability for VMHS products from alternative sales channels such as massive merchandise and club warehouse, which have made the situation even more unfavourable to specialty stores. We see that comparable store sales of companies have decreased at an annual rate of as fast as 3-4% cross the whole sector in the past several years. The online comparable sales presented a larger fluctuation during the same period of time but an accelerating upward trend in 2018.

With increasing competition and decreasing sales, more pressure has been added on price because companies have to lower the price or promote frequently to deal with competitors that usually have bigger economy scales. Therefore, the pressure on price, plus the increased costs that companies have difficulties to pass on to consumers in this situation, have been considered as the main reasons that caused companies’ gross margins shrink. The decreased gross margin, working together with the increase spending on selling and the diluted margin by new opened stores, resulted in more than half cut in companies’ operating margins in the past three years.

The typical gross margin is currently down to about 31% and operating margin is down to 3% in 2018.

According our analysis, companies’ enterprise price/adjusted EBI is around 14 with interest/EBITDA ratio of 52%.

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