And the Winner of the Fast Food Wars is... GNC?
Michael is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
For decades, there has been some sort of battle among consumers and investors to determine the king in fast food. Were McDonald’s (NYSE: MCD) fries tastier than Burger King’s or Wendy’s? Was Pizza Hut’s pizza under Yum! Brands, Inc. more delicious than Domino’s Pizza? Who has the juiciest burgers? Who has the most satisfying breakfast items? Who makes the crunchiest fried chicken? Who makes the hottest tacos? More importantly, which company should you invest in?
Well, instead of looking at which fast food company to profit from, look at the much bigger picture. If you look at the entire process as a whole, you should be able to put supplement companies as the true victors of the fast food wars. The supplement industry is a booming multi-billion dollar industry and you can see this clearly by the performance of stocks like Vitamin Shoppe (NYSE: VSI) and GNC Holdings (NYSE: GNC) as well as the increasing fan turnouts to bodybuilding expos like the Arnold Classic or the Mr. Olympia contest. VSI has increased over 200% since its IPO in late 2009, and GNC has increased over 100% since its IPO a little over a year ago. Bodybuilding.com has seen their membership skyrocket and their place is in the top 20 on Big Boards (a site that shows messageboard rankings by traffic and membership). Let’s look at why this is occurring.
Fast food is an industry that is profitable among many companies. It isn’t quite like the technology sector where just a few big names run everyone to the ground or out of business. McDonald’s in the past 10 years has gone up over 200% in addition to its decent 3% dividend. But other companies that can be considered fast food have done pretty well also. Yum brands include Pizza Hut, KFC, and Taco Bell all of which I’ve even seen outside the United States while traveling in 3rd world countries like Vietnam and South Korea. Chipotle Mexican Grill has soared over 800% since its IPO in early 2006. There are many others with equally successful stories.
So what does this mean for supplement companies and why are they still the winners of this fast food war?
As a person that has been bodybuilding as a hobby for over 10 years and someone that has kept up-to-date with the latest supplements, the best places to buy them, and the next best products in the industry, I can say that recent profits by companies like VSI or GNC are not surprising. It was said recently that gym memberships actually stayed steady and some franchises saw membership increases during the Great Recession of a few years ago. New gyms around where I live have been built by companies like L.A. Fitness that actually bought out a huge chunk of Bally Fitness gyms around the country. Statistics the past few years have estimated that obesity has rose nationwide to over 70%. On top of that, people have an incentive to stay away from the doctor because of health care prices and many people would rather take care of themselves thereby preventing a visit to the doctors in the first place.
Bottom line: Profits for fast food company’s results in more overweight people who then choose to go to the gym to try to stay in shape and this results in greater supplement usage. Profits for fast food companies equals greater profits for supplement companies.
Many people think going to the gym is all about building muscle through protein supplementation and becoming some huge gym rat. However, the supplement industry covers a wide range of products for everyone that include not only protein, but multivitamins, weight loss supplements, energy supplements, fiber, well-being supplements, and pretty much everything you can think of that is legal to be sold for health benefits. Also, let’s get serious, is the gym you are going to filled with a bunch of ripped people about to enter a bodybuilding contest? No. Many are your average people, young and old, men and women, you see daily on the streets that have a routine or plan of taking care of their body. How many other industries cover such a wide range of consumers?
Protein prices have gone up for supplement manufacturers and this resulted in increased prices to the consumer. This hasn't stopped people from buying protein though. It just forces some to buy something cheaper or to find a better deal to fit their budget. Supplement companies also make a fortune on many other products like pre-workout, post-workout, and every fad that comes out on the market. Many of these things work to some small degree but your typical customer is highly unaware of how cheap it is to make some of these products. Huge margins equals huge profits.
So how successful can supplement companies be in the future? I think companies like VSI and GNC can go much higher as well as any other supplement companies that might go public. Human nature by default always wants to achieve things with the least amount of work possible. Human nature also has a habit of spreading news about anything good as well as anything bad. These two qualities benefit supplement companies tremendously. People have no problem spending a lot of money on supplements if they feel it will be an investment in their greatest investment vehicle of all – themselves. They also have no problem telling everyone else they know of the best new thing they are using that they believe is working so well.
mikecart1 has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend McDonald's and Yum! Brands. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.