Photo: Vitamin Shoppe
Will Vitamin Shoppe Get Healthier as a Private Company?
Nutritional supplement retailer Vitamin Shoppe and the other retailers in Franchise Group’s portfolio will no longer answer to Wall Street’s whims as the parent company has announced it is going private.
Franchise Group has moved forward with a private equity deal including firmsf B. Riley Financial and Irradiant Partners, The Street reported. Brian Kahn, CEO of Franchise Group, said in an earnings call that the acquisition offer was initially made in March. The deal is worth $2.6 billion and the private equity partners will “pay $30 cash for all of the public common shares.” Mr. Kahn and the partners will acquire 64 percent of issued and outstanding common stock. The deal is slated to close in the second half of 2023. It comes after Franchise Group posted Q1 net losses of over $108 million despite $1.1 billion in revenue.
The move to go private comes only two years after Vitamin Shoppe shifted to a franchisee model. The chain, founded in 1977, began offering franchise relationships in 2021, according to Entrepreneur.
The chain announced in February that it had signed 58 franchise territories with 15 partners and anticipated 12 franchised stores opening throughout the U.S. in addition to the first new franchise location, which opened in Valparaiso, Indiana.
Franchise Group acquired Vitamin Shoppe in 2019, according to a press release. At the time, the owner touted the acquisition as “part of the strategic transformation of Franchise Group and its diversification of its business and operations.”
Other retail and non-retail businesses in Franchise Group’s portfolio are Pet Supplies Plus, Wag N’ Wash, American Freight, Badcock Home Furniture & More, and Sylvan Learning Center.
At one point last year, Franchise Group was on the way to having a major apparel retailer under its umbrella. The group was in acquisition talks with Kohl’s, but the prospective deal fell through at the end of June, according to a CNBC article.
Vitamin Shoppe’s primary competitor, GNC, announced bankruptcy in 2020, reaching a deal to sell itself for $760 million and close up to one-sixth of its locations.
Discussion Questions
DISCUSSION QUESTIONS: Do you think a retailer like Vitamin Shoppe has legs away from the demands of the stock market? What might it do differently as a non-publicly traded company and how will the franchise model element inform its future?
Poll
Loading …BrainTrust
Phil Chang
Podcast Host, Retail Influencer, Fractional CMO
Paula Rosenblum
Co-founder, RSR Research
Being private is a much better fit for Vitamin Shoppe. The scrutiny and often unrealistic expectations that public markets place on a company are extraordinary. Taking the company private will enable the company to focus on driving the business forward without having to worry about what Wall Street will think. As a private company, Vitamin Shoppe will be able to experiment and fail fast without these learnings being reflected in analyst reports.
For retailers in a niche market, private ownership is the only way to lasting success. Releasing Vitamin Shoppe from the short term focus on shareholders will give them more freedom to test and innovate to stay relevant to the customer, and find ways to reach mew customers. I’ll go so far as to make a bold and definitive claim – that without going private I don’t see this company surviving.
Much of Wall Street focuses on the short term, so some of that pressure will abate as Vitamin Shoppe goes private. That said, I don’t expect this will blunt the company’s ambitions to expand – the pace of which has been aided by the more flexible franchising model. Vitamin Shoppe has a solid proposition in a growing segment of the market, and has made an effort to keep ranges fresh by introducing new brands and categories like vegan-friendly products. However, the challenge comes from the continued rise of DTC and digital, both of which are doing well in the supplements space.
I think it’s a tough business no matter what, and achieving acceptable sales/sq ft is hard on a consistent basis. Turn must be slow.
I live in Florida where there are a lot of them, maybe too many, A partnership with Instacart (which they have now) could help them gradually shutter excess stores.
On paper, the franchise model is good for businesses that don’t scale well. “Free money” in exchange for product support seems great. It just involves a different kind of staffing model, and, I assume, technologies that can be sold to the franchisees for a turn-key operation.
In practice, it’s hard for me to have a vision of it, since we’re already over-Vitamin Shopped here.
I’ve often recommended and argued for the privatization of specific businesses because the short term performance pressures of being a public company can cause management teams to destroy long term value in pursuit of short term profitability. However, there are plenty of examples of companies who privatize under such claims and ultimately fail because their underlying model is not competitive or the business opportunity is overvalued. The Vitamin Shoppe operates in a tough space. If the underlying model or business opportunity is not sustainable then franchising will only shifts the risk but it will not save them. Wall Street may be short term minded but plenty of companies survive and excel under its pressure. Hopefully, with experienced investors, talented management and a strong value proposition, Vitamin Shoppe can prove successful where others have failed.
With PE at the controls, the only winners will be PE. It is likely that the investors know a whole lot about finance and little about retail turnarounds.
Being a private company allows the management more flexibility to run the company and less brings less scrutiny from the financial markets. That said, franchise versus wholly-owned businesses is a different discussion. For those operators who believe, and can demonstrate, that they know how to run a franchise operation more successfully than most, Vitamin Shoppe may be more successful as a portfolio company of The Franchise Group, but “you gotta believe.”
Vitamin Shoppe has the potential to be more than it is. Healthcare, in all it’s forms is critically important right now, so if they focus on the right things, they have the ability to sway the consumer to come back. This is a slow turning market, with lots of investment in consumer education before you see a return, so being out of the rat race of quarterly results may help them do long term things that will yield benefits.
Natural health and foods are growing right now, so hopefully these guys can right size their store density and focus on the customer to grow.
I agree with my BrainTrust colleagues that the operating pressures of Wall Street scrutiny are not often helpful. Especially, for poor-performing companies.
But, this isn’t a deal to turn the Franchise Group around. It appears to come straight out of the private equity playbook. The PE players will leverage the investment, charge exorbitant fees for managing the company that will carry the interest, and strip the companies of costs. If they can generate a positive bottom line in 24 months or so, take it public again, pay off the leverage, and bank the capital gains.
So the question is whether Wall Street or private equity is the worse option. Sounds like a tossup to me.
I’d vote for Wall Street every time. At least those shareholders are interested in the companies performing. The objectives of the PE guys have nothing to do with performance as we would define it.
Instead of being owned by stock holders Vitamin Shoppe will be owned by a private equity firm. Wall Street demands for short term stock holder returns prohibits any needed long-term strategy for a firm. But PE firms vary in their ability to identify the uniqueness and effective operations for their holdings. At this point Vitamin Shoppe is still made up of disparate functioning stores with a separately perched owner.
Going private has upsides for a company looking to re-establish itself, it’s products, and brands. Having the chance to focus on building without the public market looking over your shoulder enables more testing, make a few mistakes for the betterment of the long-term.
Vitamin Shoppe is in a good spot to leverage it’s product and knowledge to re-invent what wellness looks like. With a franchise model, locally owned stores can get a little closer to the customer and build long-term loyalty.