Why the Vitamin Business Thrived in Recession

On Thursday, the government declared that the economy grew rapidly in the third quarter, which means it's time to figure out who won. During the past several months, I've been identifying companies that thrived during the downturn, such as McDonald's and the guns-and-ammo manufacturer Freedom Group. (Click here to follow Daniel Gross)

Another group that seems to have had the right business model for a downturn is vitamin companies.

The market for initial public offerings offers indications of what sectors are hot. Since the onset of the recession, retail has been ice cold. According to Lynn Cowan of the Wall Street Journal, the last retailer to go public was Lumber Liquidators, nearly two years ago. (Stifle your "Timber!" jokes—the stock has done well.) But earlier this week, the retail shutout ended. The Vitamin Shoppe, a company that has grown from a single New York store in the 1970s to a 434-store chain today, filed for an initial public offering in July and raised about $150 million on Tuesday.

A $25 billion industry, VMS (vitamins, minerals, supplements) stores have benefitted from the recent economic cataclysm in a few ways. First, as part of what sociologist Richard Florida calls the Great Reset, some Americans are focusing more on their health. As they kick habits that are either bad or expensive (or both), they're smoking less, buying less soda, and cutting back on calorie-laden treats at Starbucks and the convenience store. Vitamins and supplements are a key component of a healthier lifestyle. Second, as Americans lose health insurance and are confronted with the challenge of paying for prescriptions and medical treatment, many of them may be trading down to vitamins and supplements—them as substitutes or alternatives. Both Wal-Mart and Walgreen's have reported that sales of vitamins are strong.

VMS sales are also benefitting from one of the most powerful commercial forces in the history of planet Earth: the baby boomers. As they get older, the boomers—already a narcissistic bunch—are growing ever-more obsessed with their health and wellness. Just as they caused bubbles in marijuana in the 1960s and disco balls in the 1970s, baby boomers are now causing sales of vitamins to spike. (Whenever I visit the home of one older baby boomer I know, I look at the array of pills and ask whether he's recently knocked over the GNC.) According to the Nutrition Business Journal, sales of supplements rose at a 4.9 percent annual rate between 2001 and 2008. "We believe that one of the primary trends driving the industry is consumption by the over-50 demographic, including Baby Boomers … who seek to improve their health and wellness and treat and prevent disease and illness," Vitamin Shoppe notes in its prospectus. And the pace may be picking up. According to Nutrition Business Journal, sales of dietary supplements rose 6.2 percent in 2008 and should rise 5.8 percent this year. In a recent earnings release, Nature's Bounty, a large vitamin/supplement manufacturer, distributor, and retailer, cites Nielsen data showing that in the second quarter of the 2009, sales for the category were up 9.8 percent.

Nature's Bounty, which owns the 442-unit Vitamin World chain, has seen sales grow smartly. And over the past two years, its stock has easily outperformed the S&P 500. GNC's sales have been rising, too, though not as impressively.

Vitamin Shoppe, which was bought by a group of private equity investors in 2002, is not as big Nature's Bounty or GNC. But it's catching up, and it is in fine financial shape. Since 2007, while most retailers have been contracting, Vitamin Shoppe has been expanding rapidly. From 2005-08, a period in which it opened 171 new stores, sales rose from $436.5 to $601.5 million—a 38 percent increase. Same-store sales—the metric analysts use most frequently to gauge the performance of retail chains—rose by more than 6 percent annually between 2006-08. Last year, the number of active online customers rose by 15 percent. In the first half of 2009, same-store sales were up 4.7 percent, while income from operations rose by 9.5 percent. And the stores generate more than enough cash to cover the chain's debt-servicing costs.

As they prepare for the grueling (and likely to be disappointing) Christmas shopping season, other retailers might be well-advised to visit vitamin stores. Best case: Some of the mojo might rub off on their businesses. Worst case: They can stock up on some depression-fighting St. John's wort.