VITC is ripe for the pickings! What seperates VITC from all of its competitors? It is not carrying any long term debt. Most of the Nutritional companies are heavily debt ridden right now. VITC has no LONG TERM DEBT
Also, VITC will be selling their products via RETAIL/ Wholesale. They are not going to be just selling products on the internets. This is another reason VITC seperates itself from the competition. The are covering all their bases.
VITC is not a one trick pony. They will be unveiling other products to the market soon that will be their own products.
They also have LongerLiving.com longerliving.com.
This will be their full fledge mutli media sites. They are very close to finalizing some key funding to get the site fully operational where they will be doing live video via the site.
A must read for those who are considiring VITC as an investment.
SALOMON SMITH BARNEY TAPS ZONE!!!!!!
SALOMON SMITH BARNEY Internet— Nutritional Products June 29, 2000
Gregory Badishkanian 212-816-2720 gregory.r.badishkanian@ssmb.com
Clicking on Nutrition
Can Nutritional E-tailers Become Healthy?
The high margins and compatibility of selling nutritional products on the Web has
attracted significant capital and competition.
The rules have changed. Nutritional e-tailers cannot rely on private and public capital
to build brands while sustaining losses, in our view.
As a result, we expect massive consolidation to occur. The winners in the space should
have strong cash positions, access to existing customers, and low-cost structures. In
this new e-tailing environment, the “hybrid” clicks-and-mortar retailers are best
positioned to dominate.
E-tailers that survive the upcoming carnage will be big winners, as there will be fewer
players to share the spoils.
We believe the companies with the best strategies have been NBTY through its inherent
strengths as the largest cataloger and most efficient consolidator, GNC and Wild Oats
through their strategic alliances with pure- play Internet sellers, and Healthzone via its
innovative and aggressive acquisition focus.
This is our second industry report focusing on the online nutritional products sector.
Although the sector should incur substantial growth, we believe only a few companies
will withstand the likely upcoming dot com carnage. The winners will likely be
cash-rich consolidators employing a clicks-and-mortar business model.
The attractiveness of this market could lead to the demise of nearly all players in the
space. The Internet is a highly effective means of distributing nutritional products,
particularly vitamins, minerals, and supplements (VMS). Our recent study indicates
that online sales of nutritional products will approach $800 million by 2003. Although
this is lower than our previously forecasted market size of $1.6 billion, we estimate the
market will still grow at a compounded annual rate of roughly 90%. The high margins
and compatibility of selling nutritional products on the Internet has not only attracted
significant capital, but intense competition as well.
The current e-tailer environment has a new set of rules.Internet retailers have sustained
sharp declines in market capitalization, as investors focus more heavily on questionable
business models and stratospheric Internet valuations. With less funding for pure-play
nutritional products, e-tailers will no longer have enormous marketing budgets to build
a brand and generate traffic and instead will focus more on customer acquisition costs.
Although pure-play e-tailers often possess the first-mover advantage, more innovative
content, and stronger online marketing expertise, e-tailing winners will likely be
clicks-and mortar “hybrid” retailers. Absent major equity funding, successful online
sellers will need to leverage off existing customers, brand identity, and infrastructure
(procurement and fulfillment capabilities) of traditional bricks-and-mortar retailers. As
pure-play e-tailers burn through their available cash, Internet retailers with strong
balance sheets will likely be able to acquire these companies at fire sale prices.
To the victors go the spoils. Despite the competitive pressures within the industry, we
still expect significant growth in the sector. E- tailers that survive the upcoming
carnage will be big winners, as there will be fewer players participating in the rapidly
growing online nutritional products sector.
The Internet is a powerful means of distributing natural products, particularly VMS. In
a previous report titled “Surfing the Internet Is Good for Your Health!,” we forecasted
sales of the online nutritional products distribution channel growing to $1.6 billion in
2003 from $34 million in 1998. Although we expect rapid growth on the Web, we
believe that growth will slow, resulting from lower marketing budgets and higher
prices of the nutritional e-tailers. Our revised forecast for 2003 is just under $800
million. This roughly 90% CAGR is based on the following trends: 1) a confluence of
consumer (e.g., convenience, personalized products, and services) and technology
(e.g., PC penetration and faster connections) trends should spur greater Internet usage;
2) consumer trends, including aging baby boomers and intensified mainstream media
coverage of natural products, should fuel natural products sales growth; and 3) natural
products are well suited to be sold via the Internet relative to other product categories
given the greater product selection and information that can be offered through the
Internet.
Stratospheric Growth — A Double- Edged Sword
The high margins and compatibility of selling nutritional products on the Web has led
to an unhealthy state, in our opinion. The inflow of private and public equity capital,
as well as lofty valuations, led to a large number of competitors entering the space.
Given that companies were valued off multiples of revenues, online sellers attempted to
build sales through mass advertising, promotions, and discounting.
This led to a very competitive landscape where numerous competitors practically give
away products to a small number of customers. We believe these customers are very
price sensitive and not loyal to any one e- tailer. As a result, we believe that the
customer acquisition costs exceed the net present value of the anticipated cash flows
from the consumer.
Nutritional Products Online Are Set to Explode
With abundant funding, nutritional products e-tailers aggressively ramped up their
infrastructures and marketing budgets. However, the investment community recently
reduced funding of e- tailing companies, and the online nutritional products sellers
were no exception. We do not believe the existing pure play e-tailing business model is
sustainable. The old Internet model, based on virtually unlimited funds fueling high
customer acquisition costs, is unsustainable. We believe that the lack of funding will
result in numerous bankruptcies occurring in the space.However, the surviving
nutritional products e-tailers will benefit.
The New Rules of the Web
Nutritional e-tailers can no longer rely on private and public capital to build brands and
sustain losses. Despite the need, very few nutritional e-tailers generate positive cash
flow from operations. As a result, we expect massive consolidation to occur. In the
new e-tailing environment, the clicks- and-mortar retailers and cash-rich consolidators
are best positioned to dominate.
Rule No. 1: Show Me the Money Internet retailers have incurred sharp declines in
market capitalizations, as investor shave focused more heavily on questionable
business models and stratospheric valuations. The equity markets (private and public)
have virtually shut down for online nutritional products e-tailers. The pure-play
e-tailers, which initially were the best funded, had built up costly marketing and
technology initiatives in anticipation of continued equity financing. Absent major
equity funding, nearly all of these companies should soon (and, in some cases, have
already) burn through their cash.
Those remaining e-tailers with strong balance sheets and a low burn rate (preferably a
profitable operation) will be able to survive the upcoming carnage, as dot-coms burn
through their available cash. This should lead to growth via market share gains, as well
as acquisitions of bankrupt dot- com companies at fire sale prices. As a result, merely
surviving implies expanding market share within a rapidly growing distribution
channel.
Rule No. 2: We Like the Bricks-and- Clicks Companies . . .and the More Bricks the
BetterBrands Are Not Created Overnight . . .
Even with Tens of Millions in Ad Spending. Although many of the leading sites like
Mothernature.com and Healthshop.com have spent millions of dollars to build customer
traffic, it takes years of marketing to build a brand. The customers who the new e-
tailers have attracted are highly price sensitive and have not shown a high propensity to
make large or repeat purchases. Absent continued equity funding, these pure plays will
no longer be able to spend massive dollars on marketing. As a result, we believe that a
clicks-and-mortar strategy is a far superior model relative to the pure- play Internet
model. Bricks-and-mortar retailers (and catalogers) have built strong brand awareness
with consumers through the visibility of their storefronts, length and quality of
advertising, and existing customer relationships. As a result, brick-and- mortar
retailers do not need to spend as much money on building brand awareness on the
Internet. The ability of an Internet retailer to leverage off this asset could be a powerful
way to enhance brand recognition and trust.
There Is More to an Income Statement Than Revenues. According to Nutrition Business
Journal (San Diego, California), business-to-consumer VMS sales account for only
about 1% of total industry sales. Therefore, it is virtually impossible for any pure-play
nutritional products e tailer to build critical mass through the Internet alone. Absent
equity funding, online nutritional products retailers will not be able to incur substantial
customer acquisition costs to build scale. We believe that those companies with strong
access to current nutritional products users will have significantly lower customer
acquisition costs. The existing non-Internet channels that have the greatest access to
nutritional products users include independent retailers, retail chains, multilevel
marketers, and mail order catalog sellers. We believe the mail order catalog and
network marketing channels are most similar to the Internet in their ability to take
orders via mail or telephone and ship directly to consumers’ homes.
Rule No. 3: Consolidation Is the Only Outcome
As many dot coms burn through cash and eventually go bankrupt, e-tailers with strong
balance sheets should have the opportunity to acquire these companies at below book
values. Assuming status quo with the equity markets, acquisition targets will be valued
between *x–*x sales, which is roughly salvage value:
Customer Lists. Online customers are less loyal than catalog customers, which
typically sell at slightly under 1x sales. We attribute online customers’ lowerloyalty to:
1) high promotions that are unsustainable in order to attract newcustomers; 2) lack of
buying history on the Internet; and 3) the customer is always only one click away from
a major competitor. Unlike the cash flow positive catalogers, bankrupt dot com
companies have few options but to sell.
Technology Infrastructures. Pure- plays, through significant equity funding,have
developed strong front- and back-end technology infrastructures. For companies like
NBTY and Healthzone that have minimized technology spending, this catapults their
online presence very quickly at a fraction of the cost to do so internally.
Intangibles. Certain pure plays have attained a first-mover advantage, which provides
numerous intangible advantages. Targets can provide key managementexpertise in the
marketing and technology functions, established brand identityalong with a
recognizable domain name and key strategic relationships.First mover at all costs has
not been a winning strategy for the online nutritional products sector. Instead, we
would point to those companies that took a more deliberate and cautions approach to
their Internet strategies:
Clicks-and-Mortar Retailers NBTY — King Cataloger
With roughly $766 million in estimated 2000 calendarized revenues, NBTY is the
fourth-largest pure-play nutritional products operator and largest nutritional products
cataloger. The company generates roughly three- quarters of its total revenue from
U.S. direct-to-consumer sales. We estimate that NBTY has access to several million
active customers. We believe that catalog users are the easiest and most cost-effective
bricks-and-mortar customers to migrate to the Internet. The numerous inherent
synergies associated with operating both Internet and catalog operations include an
emphasis on inventory control, discount programs, customer lists, fulfillment
functions, and direct marketing.
The company, founded in 1971, has very strong existing brand awareness through its
Puritan’s Pride catalog and Vitamin World stores. NBTY can acquire Internet
customers very cheaply by implementing cross-marketing, co- promoting programs
with its retail, wholesale, and catalog channels. As a result of the synergies associated
with its Internet business, the company is also able to attain one of the (if not the)
lowest customer acquisition costs in the nutritional products industry. It is also the
most efficient within the industry at procuring and fulfilling product. NBTY’s fully
computerized, state-of-the- art fulfillment center allows the company to handle and
process nutritional products. The capability enables the company to maintain strict
control over logistics, provide excellent customer service, and offer reliable and
prompt delivery. The company’s tremendous buying power, coupled with its versatile
integration, results in a lower cost structure and higher margins.
This is particularly important with the new accounting rules that will include shipping
and handling as part of cost of goods sold, as opposed to selling, general, and
administrative (SG&A) expenses.
Direct Sellers We believe the direct selling distribution channel is very well suited for
the Internet relative to other distribution channels (excluding catalog). Direct sellers,
including Rexall Showcase, Quixtar (Amway), and Bigplannet.com (Nu Skin), allow
individual sales representatives to sell products through their own personal website.
We believe that over the next several years there will be millions of online stores
owned and operated by individuals who are able to leverage off hundreds of existing
relationships. Direct selling revenues accounted for roughly 17% of the total nutritional
products industry, and, on a going forward basis, we believe that this channel will
account for more than one-third of total online nutritional products sales.
Large Chains — Strategic Relationships
GNC and Wild Oats are two of the five most successful bricks-and-mortar nutritional
products retailers. Each avoided the temptation of spending millions of dollars on an
Internet strategy and instead partnered with successful online players
Drugstore.com and eNutrition.com. Both companies will participate on the upside if
their partners become successful on the Internet. Given the plummeting stock
valuations of online nutrition companies, we believe that their cautious approach has
prevented significant value destruction. Additionally, both company management teams
have been able to focus on their core competency, operating retail stores.
Wild Oats/eNutrition.com On January 15, 2000, Wild Oats announced that it would
invest $1.5 million in eNutrition.com, a leading nutrition e-tailer that receives several
million dollars in free advertising from seven health and fitness magazines. Wild Oats
will generate traffic to the joint online store, wildoats.com, by placing the domain
name on in-store printed materials, as well as through an in- store kiosk.
eNutrition.com books revenues from all online sales. For its investment, Wild Oats has
received roughly 4% of eNutrition.com’s equity (with the potential to earn a greater
ownership if certain sales targets are met). eNutrition.com also provides equity options
to Wild Oats based on revenues generated from the Wild Oats site, client conversion
programs, co- marketing efforts, coordinated buying programs, and by offering
products and services to eNutrition.com.
GNC/Drugstore.com GNC, the largest nutritional supplement retailer, and
Drugstore.com, a leading online drugstore retailer, formed a strategic alliance on June
22, 1999. The deal involved GNC routing users of its website to Drugstore.com’s
website. GNC also invested $2.4 million in cash for an 8% stake (but now diluted to
6.5%) stake in Drugstore.com. With a market capitalization of $400 million, GNC’s
investment is now valued at $26 million. Importantly, GNC avoided spending millions
of dollars developing its own Internet presence. Also, the GNC management team’s
focus was not diverted from its core competency, operating retail stores.
Consolidators Healthzone.com — Leading the Consolidation Trend Healthzone has
been the most aggressive consolidator within the nutritional products sector, in our
view. The company acquired three Internet companies within the past several months,
which should provide more than $2 million in incremental revenues during the six
months ended December 2000. The company should be able to achieve significant cost
saving synergies resulting in more than $500,000 in operating profit contribution from
the three acquisitions.
SmartBasics.com. From our estimates, Healthzone paid less than 1.0x revenues for the
company. SmartBasics.com has a customer base of roughly 50,000 and an e-mail list of
35,000. The company has a 56% conversion rate (converting unique visitors to
customers).
Vitamindiscount.com and Alt- Health.com. Healthzone purchased these businesses for
less than 1.0x revenues. These businesses generate approximately $2 million in annual
revenues from a customer base of approximately 130,000. Alt-Health.com is a
well-recognized health “portal” linking tens of thousands of articles on health news,
research, nutrition, fitness, etc. The sites have a customer base of approximately
130,000, but a conversion rate of only 20% (those requesting a catalog).
Healthshop.com. Healthzone very recently acquired healthshop.com, a leading online
nutritional site, for less than 1.0x sales. Although still privately held, Healthshop.com
was very well positioned to become a leader in the space before the market correction
of Internet stocks. Healthshop.com has annual revenues, based on March 2000 actuals,
of $4.2 million. The site has a repeat usage rate of 55%. Its customer base is
approximately 100,000, with an e-mail subscriber base of approximately 120,000. It
generated approximately 418,000 unique visitors in a recent month. Healthshop.com
spent millions developing leading technology and content. This high-profile
acquisition, which cost the company pennies of the dollars that it took Healthzone to
develop its Internet business, makes Healthzone a leading player in the online
nutritional products space. |
