Vitamin Shoppe Industries, Inc.

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Vitamin Shoppe Industries, Inc.

4700 Westside Avenue
North Bergen, New Jersey 07047
U.S.A.
Telephone: (201) 866-7711
Toll Free: (800) 223-1216
Fax: (800) 852-7153
Web site: http://www.vitaminshoppe.com

Private Company
Incorporated: 1977
Employees: 2,000
Sales: $263 million (2002 est.)
NAIC: 446191 Food (Health) Supplement Stores; 454110 Electronic Shopping and Mail-Order Houses

Vitamin Shoppe Industries, Inc. operates a chain of more than 160 stores that sell vitamins, nutritional supplements, herbal products, and related goods. The company also offers its wares through a monthly direct-mail catalog and via the Internet. Vitamin Shoppe stores, which are located in nearly 20 states and the District of Columbia, offer discount prices on more than 8,000 items from over 350 brand names, including the company's own private label, with a wider selection available through mail order. The stores also feature informational computer kiosks and a free lending library of books on vitamins and alternative medicines. In 2002 Vitamin Shoppe Industries was acquired by an equity capital unit of Bear Stearns Cos.

1970s Beginnings

The Vitamin Shoppe was founded in 1977 by Jeffrey Horowitz (then going by the name of Howard) as a retail shop on the corner of 57th Street and Lexington Avenue in Manhattan. The initial outlet's success led Horowitz to open several other locations in New York City, and in 1981 he began publishing a monthly catalog from which consumers could purchase vitamins by mail. By 1987 the chain had grown to nine New York locations, and over the next several years reached 15 stores in the area. Looking for new places to expand, Horowitz subsequently opened stores on Long Island and in Westchester County, New York, and then in Connecticut and New Jersey, where the company established its headquarters in the town of North Bergen.

Much of The Vitamin Shoppe's success was due to Horowitz's strategy of discounting prices by 20 percent or more on each item. The company had also developed its own line of private label goods, which were more profitable because they were not advertised. In addition to vitamins, the firm had by now added herbal products and nutritional bodybuilding supplements, which accounted for up to a quarter of sales. More than 400 different brand names were offered, with as many as 17,000 different products available through the mail. To help customers decide what to buy, the company's stores featured a free lending library of books on vitamins and other health topics. The Vitamin Shoppe also distributed 12 million copies of its direct mail catalog each year, and mail orders accounted for as much as a third of the company's estimated $65 million in annual revenues for 1997. By this time, the chain had grown to 18 stores.

Seeking to increase the rate of expansion, in 1997 Horowitz sought outside financing and sold 70 percent of the company to investment firms J.P. Morgan Partners and FdG Associates. With the new backing, the pace of store openings was ramped up, bringing the firm to a total of 39 locations in 1998.

In April of that year the company launched a Web site from which consumers could order vitamins and supplements by mail. To promote it, The Vitamin Shoppe purchased all of the online advertising space on Time, Inc. New Media's "Ask Dr. Weil" Web site for a year. The cost of blanketing the site, which featured the advice of Dr. Andrew Weil, a well-known alternative medicine exponent, was reportedly more than a million dollars. Viewers of the Dr. Weil "Vitamin Adviser" feature who got a personalized vitamin regime prepared for them would see an on-screen button that linked them directly to VitaminShoppe.com. Similar sponsorship deals were later cut with other Web sites. For 1998, The Vitamin Shoppe's annual sales leapt to $132 million.

1999 Spin Off

In the summer of 1999, as the Vitamin Shoppe chain neared a total of 60 stores, the company decided to spin off its VitaminShoppe.com operation as a separate entity. Former Hearst Corporation HomeArts Network founder Kathryn Creech was named the unit's president and CEO, and in October an initial public offering (IPO) was made on the NASDAQ exchange. Some 4.5 million shares were sold at $11 each, which brought the new company nearly $50 million in funding to advertise the Web site and make improvements to it. More than 80 percent of the shares were held by its parent company, which was officially known as Vitamin Shoppe Industries, Inc., or VSI. In December a second Web site called vitaminbuzz.com was also launched which offered information about vitamins and nutritional supplements. Its content was largely licensed from the firm Healthnotes Online.

During the fall and into early 2000, VitaminShoppe.com spent heavily on Internet advertising as it sought to bring in new customers. In January CEO Creech departed, leaving Horowitz in charge. Though he had predicted profitability for its first full year as a public company, VitaminShoppe.com's revenues lagged far behind expenditures, and by December 2000 it had incurred net losses of $61.3 million. With its stock now selling for less than fifty cents and close to delisting by the NASDAQ, VSI offered to buy back the outstanding shares for $1 each to reacquire the unit. Earlier, attempts had been made to sell the company alone or in combination with VSI, but there had been no serious offers. While the buy-back was being completed the Web unit's offices were moved from New York City to VSI headquarters in New Jersey, and its staff was cut by more than half, to 37.

In June of 2001 VSI named former Barnes & Noble retail division president Thomas Tolworthy to the posts of president and chief operating officer, with Horowitz retaining the jobs of CEO and chairman. In August the company opened its 95th and 96th stores near Atlanta, Georgia, reflecting its strategy of locating outlets in densely populated areas which had above-average income and education levels. The company was now firmly entrenched on the East Coast of the United States, where it had stores in eleven states plus the District of Columbia. The chain's reach extended all the way south to Florida, where 13 stores had been opened over the previous year. VSI's skills in site selection were exceptional, with no store having ever been closed. One key indicator the firm looked at when adding new locations was the high level of catalog sales found in a particular area. The large number of retirees in Florida, for example, generated significant mail order business, and the new stores that were opened there did well.

Another part of the firm's strategy was saturation of the metropolitan markets it entered, which it had done in New York and had repeated in such cities as Washington, D.C., where there were now 15 locations. VSI stores were typically opened in freestanding locations, rather than the malls favored by industry leader GNC, whose stores were about one-third the size of a typical Vitamin Shoppe. The firm's stores now averaged between 3,000 and 4,000 square feet, more than triple the space of its original locations in Manhattan. VSI's goal was to be "the Home Depot of the vitamin industry," according to a company spokesperson, and each store continued to offer an extensive selection of goods at discount prices. Products were displayed in wide aisles, and employees were deployed on the floor to offer customers suggestions or refer them to the in-house lending library for additional information. The company's stores cost an estimated $405,000 to open and became profitable within a year.

100th Store Opened in 2002

In January 2002 the 100th Vitamin Shoppe was opened, in Princeton, New Jersey, and the same year saw VSI moving westward, with new stores opened in major Midwestern markets like Chicago. The company had by now outgrown its administrative and distribution facilities in North Bergen and Secaucus, New Jersey, which occupied a total of 100,000 square feet of space in four buildings. In May a lease was signed on a vacant 230,000 square foot building in North Bergen where these operations would be combined in early 2003. The company was also considering adding a second regional distribution center to serve the growing number of stores it was opening in the Midwest and West.

Company Perspectives:

Since 1977, The Vitamin Shoppe has grown into one of America's leading discount retailers of quality vitamins and nutritional supplements. What began as a single store in New York City has evolved into over 160 stores in 18 states with new grand openings planned every month during 2003. And the addition of our popular monthly catalog plus comprehensive website and online learning center allows The Vitamin Shoppe to reach thousands of visitors daily who are interested in the best products for their healthy lifestyle.

Key Dates:

1977:: Jeffrey Horowitz founds first Vitamin Shoppe store in New York City.
1981:: Company begins publishing catalog for mail order sales.
1987:: The Vitamin Shoppe has nine stores in New York City.
1997:: Horowitz sells 70 percent of firm to J.P. Morgan Partners, FdG Associates.
1998:: Web site launched; chain grows to 38 stores.
1999:: VitaminShoppe.com spun off on NASDAQ exchange.
2001:: Vitamin Shoppe Industries absorbs failing Internet unit.
2002:: 100th store opened; Bear Stearns Capital Partners II L.P. buys firm.

In August 2002 VSI announced it was expanding its use of the Healthnotes informational database, which would be made available both online and in stores via new touch-screen kiosks. November saw the debut of The Vitamin Shoppe Radio Health Series, hosted by natural health and alternative medicine guru Gary Null. The weekly show, which would cover health and nutrition topics, was initially aired on KLSX in Los Angeles, where the firm was preparing to open several stores. By now VSI's revenues had reached $263 million, as estimated by Moody's Investor Service. One-third of this figure continued to be generated by mail-order and Internet sales.

In the late fall of 2002 a deal was reached to sell VSI to Bear Stearns Capital Partners II, L.P., a unit of Bear Stearns Cos., for approximately $300 million. FdG Associates, CEO Horowitz, and President Tolworthy would retain small stakes in the firm. FdG had triggered the sale, seeking to get its investment back in the near term rather than waiting for the company to go public, which was under consideration as a way to fund VSI's ongoing national expansion. The company was now growing more rapidly than ever, with a total of 160 stores open by fall, including 17 in California and eight in Texas. A total of 500 stores were planned by 2007.

VSI had grown over the past 25 years from a single location in New York to a national presence with more than 160 "category killer" stores and a thriving mail-order business. As the American population aged and increasing media attention was given to the benefits of vitamins and nutritional supplements, the firm's growth looked assured for some time to come.