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General Nutrition Companies, Inc.

General Nutrition Companies, Inc.

300 Sixth Avenue
Pittsburgh, Pennsylvania 15222
U.S.A.
(412) 288-4600
Fax: (412) 288-2099
Web site: http://www.gnc.com

Public Company
Founded:
1935
Employees: 13,834
Sales: $1.42 billion (1998)
Stock Exchanges: NASDAQ
Ticker Symbol: GNCI
NAIC: 551112 Offices of Other Holding Companies; 446110 Pharmacies & Drug Stores

General Nutrition Companies, Inc., is the largest specialty retailer of vitamin, mineral, and sports nutrition supplements in the world. It is also a leading supplier of personal care, fitness, and other health-related products. The holding company garners most of its earnings from its General Nutrition, Inc. subsidiary, which operates more than 4,000 retail stores internationally. Proprietary products manufactured by subsidiary General Nutrition Products account for more than half of the companys revenues. After sporadic growth since its inception in 1935, GNC turned around in the late 1980s and experienced explosive growth in the 1990s.

50 Years of Growth under Company Founder

David Shakarian, in 1935, opened the first of what would eventually become a successful chain of health food and vitamin stores called General Nutrition. His innovative health concept flourished in the steel-making town of Pittsburgh during the 1950s, prompting him to eventually open 30 other stores in that city. He also began adding vitamins and other health supplements to his product line, and expanding operations into other cities, such as New York.

Shakarians success peaked during the 1970s. Demand for vitamins and a new generation of miracle products, which claimed to improve both body and mind, emerged, and General Nutrition Inc. (GNI) experienced rampant expansion across the United States. As sales of the stores original core health food offerings continued to rise during the 1970s, shipments of vitamins and other supplements ballooned to represent about 50 percent of company sales. GNIs move into shopping malls bolstered its bottom line and gave the company a more progressive image. The lack of any competitors in GNF s niche, moreover, allowed the company to expand unfettered throughout the decade.

Shakarian profited handsomely during the 1970s by expanding the number and size of his stores, emphasizing an evolving line of trendy products, and developing and manufacturing his own proprietary products. He opened factories in Pennsylvania, North Dakota, South Carolina, and Minnesota. He also began selling his products by mail-order, substantially boosting access to less-populated areas and bolstering recognition of his specialty stores. By the early 1980s, Shakarian had grown the GNI chain from a single shop to a national network of 1,300 outlets. Although his Fortune 500 enterprise was publicly owned, Shakarian controlled about 80 percent of the stock, and he and many of his relatives amassed sizable fortunes.

Waning Profitability: 1980s

GNIs profitability began to wane in the early 1980s for a variety of reasons. GNI began to face stiff competition from supermarkets and drug stores. Supermarkets cut into GNIs food business by capitalizing on the increased demand for health food. Whole wheat bread, rice cakes, tofu, and other items popular with the health crowd became commonplace in most grocery stores, thus eliminating much of GNIs singularity. Likewise, both supermarkets and drug stores vastly increased their vitamin offerings, which diminished GNIs sales and profit margins on nonproprietary supplements.

In addition to increased competition, GNI was also hampered by questionable management decisions that it had made during the 1970s. It had over-expanded its product line to include a huge number of goods, many of which were performing poorly or were cannibalizing sales of related offerings. In addition, its stores were still dedicating a disproportionately large share of their floor space to relatively low-margin food items. In fact, many stores in the chain were unprofitable and had become a drag on GNFs bottom line. In some instances GNI had placed stores too close to one another. GNI also failed to capitalize on the emerging fitness boom that would dominate the market for health-related products during the 1980s, and it ignored younger, health-conscious consumers.

Augmenting GNFs woes were numerous lawsuits and complaints that had surfaced during the previous ten to 15 years, ranging from allegations of false claims about its vitamins to fiscal impropriety. Its public image was out of step with a more upbeat, energetic 1980s mentalityGNI was suffering from its reputation as a hard-sell, hippie-style granola shop that, on the side, pedaled a dubious mix of new-age snake oil cures. In the 1960s and 1970s, it was our classic situation, said Gary M. Giblen, industry analyst, in an August 1993 issue of the Pittsburgh Post-Gazette. You went in and everybody looked unhealthy. The biggest joke about health stores was that the help there looked like they were dying from starvation.

Shakarian died in 1984, just as the company was reaching a historic slump. Although GNFs stock price had vacillated wildly during the past few decades, often rising after the introduction of a faddish new vitamin supplement, it was selling for a pitiful $5 per share when its founder died$25 less than its price 12 months earlier. And problems continued to mount. GNFs factories were operating at only 30 percent capacity, and Shakarians will, which included much of GNFs stock, was contested by his survivors. The company fired long-time president Gary Daum and fellow manager Bart Shakarian (Davids brother) and brought in Jerry Horn in 1985 to clean up the mess.

Return to Health: Late 1980s

Analysts questioned Jerry Horns sanity when he, in 1985, accepted an invitation to serve as president of the troubled General Nutrition Inc. Horn had just performed an impressive six-year stint as president of Seattle-based Recreational Equipment, Inc. (REI), and had previously completed 20 successful years with Sears. In short order, Horn had virtually turned REI around, essentially obliterating its debt problems and boosting the companys profits 40 percent within three years, to $10.8 million. At his last assignment with Sears, moreover, Horn had revived the retailers ailing San Francisco store, increasing its sales by 23 percent and making it the top profit contributor in Sears western regionall within one year.

Now, having paid his dues and positioned himself to assume a number of high-profile, well-paid positions, Horn had chosen to attach himself to a lagging health food and vitamin retail chain of relatively ill repute. Indeed, national news publications of the early 1980s carried such headlines as Under Attack: General Nutrition Inc. Is Besieged with Suits Over Bold Sales Tactics, and Reliance on Fads Take Toll. The federal Food and Drug Administration (FDA) had become a regular detractor of the organizations vitamin offerings, and the Federal Trade Commission (FTC) was pressuring the organization about alleged false advertising claims related to its diet supplements. Furthermore, one of several lawsuits against GNI was filed by a group of shareholders, who claimed that the company was artificially inflating its stock price through questionable sales of faddish products.

Although GNI lost more than $15 million in 1985, Horn believed that the enterprise was a sleeper that offered excellent potential for long-term growth. He would build a new GNI based on its strengths of manufacturing and dominance of the U.S. self-care market. He also planned to change the focus of the company from products to consumers, and transform GNI outlets from health stores into health management centers. Whats happened at GNI is very normal, its classical, explained Horn in the July 1986 issue of Executive Report. We were product-driven as opposed to customer-driven.... GNI tended to seize the latest fad. It was part of the original entrepreneurial spirit that built the company... but this sort of zeal was becoming its undoing.

One of Horns first moves was to dump the chains languishing stores. He also earmarked $20 million to renovate its profitable outlets and change their layout and product mix to reflect consumer preferences. Although GNI would still emphasize the development and sale of new items, Horn eliminated 30 percent of GNFs offerings and established a system of routing out nonperformers. GNFs confusing array of food products was organized into eight major categories, defined by their health attributes; high fiber, low sodium, low calorie, and low cholesterol products, for example, were arranged in identifiable groups.

Virtually every item sold in GNI stores, including vitamins, was repackaged in an effort to streamline its products. Floor plans were changed to appear cleaner and less cluttered, and new sections were added to exploit a growing demand for nonedible health products, such as skin and hair care goods. The company also bolstered offerings to body-builders and other serious athletes with over-the-counter energy and weight-gain supplements. To generate cash for expansion, the company sold its mail-order business and spotlighted its retail outlets.

Company Perspectives:

General Nutrition strives to be the leading provider of products, services, and information in the self-care and personal health enhancement markets.

Horn also made a concerted effort to appease critical federal regulators and to clean up the companys reputation. He initiated communication with the FDA, for example, seeking to establish a collaborative relationship. In addition, the company kicked off a new advertising campaign targeted more toward fitness-conscious consumers, including body-builders. Although Horn closed nearly 200 GNI stores in 1986, he opened 30 new ones and was planning to open many more before the close of the decade. Horn also set a goal of utilizing 88 percent of the companys manufacturing capacity, a strategy that would be achieved by augmenting sales through GNI stores with shipments to third-party retailers.

Horns most prolific strategic initiative was a franchising program. Started in 1987, the program was created to help finance expansion and to infuse a new spirit of entrepreneur-ialism in the organization. GNI helped its franchisees, many of whom were former employees, by financing the stores and supporting owners with a high-quality marketing program. Existing stores that had been converted to franchises typically experienced sales increases of 60 percent during their first year of private ownership. As a result, GNI stepped up its franchising efforts throughout the late 1980s and early 1990s.

Although GNI struggled to regain profitability during the late 1980s, Horn had successfully put the company on a new path toward growth and prosperity. After closing down more than 300 stores and spending $46 million to settle lawsuits between 1985 and 1989, the GNI organization comprised over 1,100 outlets and was ringing up annual sales of more than $300 million. The streamlined nature of the new GNI reflected Horns personality and management style. Out of the gym and behind his desk by 7:45 a.m., Horn stressed effort, teamwork, and a customer orientation.

Ownership Changes and Aggressive Growth: 1990s

William E. Watts replaced Jerry Horn as president of GNI in late 1988. Horn retained his position as chief executive officer and was later elected chairman of the board. In 1989 Watts, Horn, and other GNI executives accomplished a leveraged buyout of the company with the help of Boston-based investment firm Thomas H. Lee Company. A new company, General Nutrition Companies, Inc. (GNC), was created to operate GNI as its major subsidiary.

Although GNC was saddled with $360 million in debt following the leveraged buyout, its management sustained the efforts initiated by Horn and was able to slowly boost sales. By 1992, the first year in which GNC showed a quarterly profit, GNC was operating about 1,125 stores and generating over $380 million in annual sales. After strong earnings performances in 1991 and 1992, it was decided to take the company public again. The initial public offering generated $81 million, with a secondary offering in 1993 raising another $57 million. Proceeds were applied to reducing the companys debt.

With its new cache of capital, GNC began aggressively pursuing an aggressive growth strategy. Having successfully restructured its organization and cut much of the fat from the old GNI, GNC was prepared to concentrate on replicating its proven manufacturing, distribution, and retail strategy. GNC planned to expand its retail store base and boost market share by opening stores in new metropolitan areas and by stepping up its franchise efforts. Between 1992 and 1998 it would open more than 2,000 stores, making it one of the fastest growing retail chains in the nation during the 1990s.

GNC retained its emphasis on vitamins and minerals (which represented about 40 percent of revenues) and sports nutrition supplements (30 percent of sales), but it also began adding new lines of apparel and exercise equipment. In addition, the company significantly increased its marketing budget, with expenditures on television advertising more than doubling during 1992. Among several new advertising and marketing promotions was the newly introduced Gold Card membership, which originally cost $15 annually and gave customers 20 percent discounts on the first Tuesday of each month. The Gold Card program developed into a key component of the companys marketing strategy and had a membership of 3.1 million customers by 1998.

While most other retailers struggled to retain sales and profits during a lingering recession, GNC expanded its organization to include 1,216 stores by the end of 1992 and 1,553 by the end of 1993. Revenue gains ensued, as receipts shot up to $454 million and $546 million in 1992 and 1993, respectively. Furthermore, the average total floor space and sales-per-square-foot of its outlets soared as GNC continued to emphasize the development of self-care Superstores. Superstores consisted of a series of boutiques within the shop, each of which sported separate product categories, such as herbs, vitamins, apparel, or food.

Franchising, Acquisitions, and Demographics Fuel Growth, 1995-99

In 1994 GNC opened 172 company and 224 franchise stores and added another 207 units by acquiring Nature Food Centers for $61 million. Sales for fiscal 1994 were $672.9 million, up from $546 million in 1993. In 1994 Success magazine named GNC the top franchise opportunity in America, and in May 1995 GNC awarded its 1,000th franchise. Nearly half of GNCs more than 2,000 stores were franchises. The format worked well, and the company was able to successfully roll out new stores.

The companys biggest international presence at the time was in Mexico, where there were 63 GNC stores in 1995. It also had franchises in numerous other countries, including the Bahamas, Peru, Guatemala, the Philippine Islands, Trinidad, and Guam. Franchising was the companys main vehicle for international growth.

GNC established a foundation for expansion into the United Kingdom in 1995 by acquiring the U.K.s second-largest, vertically-integrated self-care company, the Health and Diet Group, which operated 22 retail stores. GNC planned to open another 15 stores in the United Kingdom by the end of 1996 and saw a potential for 300-400 new locations there. In 1997, 24 GNC centers were opened in Canada.

In 1996 GNC launched the concept of Live Well stores, which were about one-third larger than traditional GNC outlets and included some of the details from prototype stores being tested in the Pacific Northwest that offered gourmet and health food products as well as upscale health and beauty products. The Live Well stores featured a different look and layout than traditional GNC stores. By mid-1998 the company had 15 Live Well stores in operation and planned to convert 55 existing stores and add another ten by the end of the year.

Continuing the Live Well theme, GNC launched Live Well as an advertising slogan in 1997 with a $50 million national television and print advertising campaign. The ad campaign was part of GNCs strategic shift from a specialty retailer to a branded retailer focused on wellness and self-care.

In August 1996 GNC acquired Natures Northwest, which sold gourmet and health food products. During the summer of 1998 GNC created new $6 million stores that added upscale health and beauty products sold by its Amphora chain in Seattle to Natures Northwest line. The first was opened in Lake Os-wego near Portland, Oregon, in August 1998; it combined a natural foods supermarket with a pharmacy, spa, salon, and resource center.

To support its growth GNC had invested some $1.9 million in advanced logistics software and integrated bar code and hardware technology in 1997. The investment resulted in a 60 percent increase in distribution capacity and improved order accuracy to an astounding 99.9 percent.

For 1997 GNC reported net earnings of $103.4 million on revenues of nearly $1.2 billion, compared to earnings of $3.9 million on revenues of $990.8 million in 1996. The company estimated that it controlled 15 percent of the $7 billion vitamin/fitness market and was the biggest player in that category.

In addition to Live Well, the company was experimenting with other niche concepts, including two natural food stores called Nature Food Centre and Natures Fresh, and Amphora, which specialized in bath and home fragrance products including aromatherapy products. The Amphora brand was also used for aromatherapy products carried in the Live Well stores.

GNC was also pursuing a strategy of partnering with outside firms to develop new health products that it would sell exclusively in its stores. It had established six partnerships since 1996. By mid-1998 only one such product was available in GNC stores, a shark cartilage extract developed by Aeterna Laboratories of Quebec, Canada. Another product, a plant oil extract linked to cardiovascular health developed by Monsanto, was due later in 1998. GNCs goal was to provide more scientifically validated proprietary products.

The strategy hit a snag in July 1998, however, when GNC filed suit against Humanetics Corporation, a Minnesota-based research company, for breaching its contract to allow GNC to exclusively market Humanetics dietary supplement, 7-Keto. GNC charged that Humanetics had entered into another agreement with a Wisconsin distributor for the product.

GNC continued to open company-owned and franchised stores during 1998, and by the end of the year it had 2,566 company-owned and 1,332 franchised stores in all 50 states and 19 foreign countries. Although the companys net profit rose at an 83 percent annual rate from fiscal 1993 through fiscal 1997, The Value Line Investment Survey noted that GNC stock was under pressure during 1998 and had lost a substantial amount of its value. This was due to several external factors, including heightened competition through the proliferation of vitamins and other nutritional supplements and a growing number of discount chains. As a result, GNC saw its same-store sales weaken during 1998, when for the first time since 1993 it reported a negative year-over-year earnings comparison. For the fiscal year ending February 6, 1999, GNC reported net revenue of $1.42 billion, up 19 percent from the previous year, but net income declined seven percent to $98.0 million.

GNCs response was to slash the prices of some of its most popular commodity products in its company-owned stores. In other cases it offered special discounts to meet store-specific competition, and it launched a chain of outlet stores carrying a full range of products at a discount.

At the beginning of 1999 GNC entered into an alliance with Rite Aid drug stores under which Rite Aid would open full-line GNC stores within 1,500 Rite Aid locations. GNC would also manufacture a new line of vitamins and nutritional supplements called PharmAssure that would be jointly marketed by Rite Aid and GNC beginning in fall 1999. Rite Aids 1,400 other stores would carry the PharmAssure product line, as would GNCs U.S. stores. Under the agreement GNC would also become the exclusive manufacturer of Rite Aids private label vitamin line, and the two companies would launch a joint consumer Web site to provide nutritional information.

In April 1999 GNC announced it was ending its experiment with wellness grocery stores. It sold its Natures Northwest, consisting of six stores located in the Portland, Oregon, area, for $57 million to Wild Oats Markets Inc., a Colorado-based chain of natural foods supermarkets. GNC was also negotiating to provide Wild Oats with a line of private label health supplements.

GNCs long-term strategy as it prepared for the 21st century was to position itself as the primary source of vitamins, nutritional supplements, and other health and fitness products for Americas aging population. Demographically, GNC would serve the booming market of aging Americans. By 2005 there would be 150 million people over the age of 35. The dietary supplement market had grown from around $5 billion in 1994 to over $7 billion in 1998. With an aging baby-boom generation, it was predicted that the national market for vitamins and dietary supplements might exceed $12 billion by 2002.

Principal Subsidiaries

General Nutrition, Inc.; General Nutrition Corporation; General Nutrition Products, Inc.; General Nutrition Investment Company; GNC (U.K.) Holding Company; GNC Franchising, Inc.

Principal Divisions

Natures Fresh; Amphora; General Nutrition Centres; Health and Diet Centres (United Kingdom).

Further Reading

Amphoras All-Natural Design, Chain Store Age Executive with Shopping Center Age, July 1997, p. 118.

Callan, Katherine, Success/E&Y Franchise Gold 100, Success, November 1994, p. 74.

Carlsen, Clifford, GNC Pepping Up Expansion; Bay Fit for 10 More Stores, San Francisco Business Times, October 29, 1993, p. 8.

Elliott, Suzanne, GNC President Pushing Franchise Growth, Pittsburgh Business Times, June 6, 1994, p. 9.

Franchising Program in High Gear, Chain Store Age Executive, September 1993, pp. 26-27.

Fleming, Harris, Two in One, Drug Topics, January 18, 1999, p. 15.

General Nutrition Cos. Inc., Pittsburgh Business Times, September 4, 1998, p. 33.

GNCs Horn Opts for New Marketing Plan, Pittsburgh Post-Gazette, July 22, 1985, p. 13.

Kamen, Robin, Nutrition Chain Getting Physical in New York, Grains New York Business, October 19, 1992, p. 3.

Lindeman, Teresa F., Pittsburgh-Based General Nutrition Companies Sells Wellness Stores, Knight-Ridder/Tribune Business News, April 28, 1999.

Lo Bosco, Maryellen, General Nutrition Opens its First Wellness Unit, Supermarket News, September 7, 1998, p. 41.

Marano, Ray, Saudi Venture a Go for GNC, Pittsburgh Business, August 20, 1990, p. 1.

More Than Granola as General Nutrition Revamps Merchandise and Store Design, Pittsburgh Post-Gazette, August 31, 1993, p. B8.

Reda, Susan, GNC Logistics Restructuring Achieves Dramatic Gains in Speed and Accuracy, Stores, August 1997, p. 56.

Rouvalis, Cristina, Ephedrine Scare Hits Pittsburgh-Based General Nutrition Companies Inc. Stock, Knight-Ridder/Tribune Business News, April 28, 1997.

_____, Studies Giving General Nutrition Healthy Outlook, Pittsburgh Post-Gazette, September 19, 1993, p. J8.

Slezak, Michael, GNCs to Open in Rite Aid Stores, American Druggist, February 1999, p. 35.

Slom, Stanley H., GNC to Pull More Weight in the 90s, Chain Store Age Executive, June 1992, pp. 21-22.

Tascarella, Patty, GNC Ad Campaign to Cost $30 Million, Pittsburgh Business Times, December 9, 1996, p. 1.

_____, GNC Discovers Healthy Growth with Franchise Strategy, Pittsburgh Business Times, May 29, 1995, p. 3.

_____, GNC Sues Dietary Supplement Maker, Pittsburgh Business Times, July 3, 1998, p. 3.

_____, New Softer GNC to Convert 55 More Stores to Live Well Retail Concept, Pittsburgh Business Times, April 3, 1998, p. 4.

_____, The Son Also Rises, Pittsburgh Business Times, June 2, 1997, p. 10.

_____, Will Jerry Horns Prescriptions Cure GNC?, Executive Report, July 1986, p. 20.

Varnas, Carol, General Nutrition Announces National Expansion Plan for 1993, Business Wire, September 14, 1992.

Dave Mote

updated by David Bianco

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General Nutrition Companies, Inc.

General Nutrition Companies, Inc.

921 Penn Avenue
Pittsburgh, Pennsylvania 15222
U.S.A.
(412) 288-4600
Fax: (412) 288-2099

Public Company
Incorporated:
1935
Employees: 6,400
Sales: $.55 billion
Stock Exchanges: NASDAQ
SICs: 8390 Retail Stores; 8641 Pharmaceuticals

General Nutrition Companies, Inc., is the largest specialty retailer of vitamin, mineral, and sports nutrition supplements in the world. It is also a leading supplier of personal care, fitness, and other health-related products. It garners most of its earnings from its General Nutrition, Inc., subsidiary, which operates more than 1,500 General Nutrition Center retail stores. After sporadic growth since its inception in 1935, GNC experienced explosive expansion during the late 1980s and early 1990s.

Analysts questioned Jerry Horns sanity when he, in 1985, accepted an invitation to serve as president of the troubled General Nutrition Inc. (GNI). Horn had just performed an impressive six-year stint as president of Seattle-based Recreational Equipment, Inc. (REI), and had previously completed 20 successful years with Sears. In short order, Horn had virtually turned REI around, essentially obliterating its debt problems and boosting the companys profits 40 percent within three years, to $10.8 million. At his last assignment with Sears, moreover, Horn had revived the retailers ailing San Francisco store, increasing its sales by 23 percent and making it the top profit contributor in Sears western regionall within one year.

Now, having paid his dues and positioned himself to assume a number of high-profile, well-paid positions, Horn had chosen to attach himself to lagging health food and vitamin retail chain of relatively ill repute. Indeed, national news publications of the early 1980s carried such headlines as Under Attack: General Nutrition Inc. Is Besieged with Suits Over Bold Sales Tactics, and Reliance on Fads Take Toll. The federal Food and Drug Administration (FDA) had become a regular detractor of the organizations vitamin offerings, and the Federal Trade Commission (FTC) was pressuring the organization about alleged false advertising claims related to its diet supplements. Furthermore, one of several lawsuits against GNI was filed by a group of shareholders, who claimed that the company was artificially inflating its stock price through questionable sales of faddish products.

GNIs condition by 1985 followed 50 years of hard work and success achieved by the companys founder, David Shakarian. Shakarian, in 1935, opened the first of what would eventually become a successful chain of GNI health food and vitamin stores. His innovative health concept flourished in the steel-making town of Pittsburgh during the mid-1900s, prompting him to eventually open 30 other stores in that city. He also began adding vitamins and other health supplements to his product line, and expanding operations into other cities, such as New York.

Shakarians success peaked during the 1970s. Demand for vitamins and a new generation of miracle products, which claimed to improve both body and mind, emerged, and GNI experienced rampant expansion across the United States. As sales of the stores original core health food offerings continued to rise during the 1970s, shipments of vitamins and other supplements ballooned to represent about 50 percent of company sales. GNIs move into shopping malls bolstered its bottom line and gave the company a more progressive image. The lack of any competitors in GNIs niche, moreover, allowed the company to expand unfettered throughout the decade.

Shakarian profited handsomely during the 1970s by expanding the number and size of his stores, emphasizing an evolving line of trendy products, and developing and manufacturing his own proprietary products. He opened factories in Pennsylvania, North Dakota, South Carolina, and Minnesota. He also began selling his products by mail-order, substantially boosting access to less-populated areas and bolstering recognition of his specialty stores. By the early 1980s, Shakarian had grown the GNI chain from a single shop to a national network of 1,300 outlets. Because his Fortune 400 enterprise was still family owned, he and many of his relatives had amassed sizable fortunes.

GNIs profitability began to wane in the early 1980s, for a variety of reasons. Importantly, GNI began to face stiff competition from supermarkets and drug stores. Supermarkets cut into GNIs food business by capitalizing on the increased demand for health food. Whole wheat bread, rice cakes, tofu, and other items popular with the health crowd became commonplace in most grocery stores, thus eliminating much of GNIs singularity. Likewise, both supermarkets and drug stores vastly increased their vitamin offerings, which diminished GNIs sales and profit margins on nonproprietary supplements.

In addition to increased competition, GNI was also hampered by debatable management decisions that it had made during the 1970s. It had over-expanded its product line to include a huge number of goods, many of which were performing poorly or were cannibalizing sales of related offerings. In addition, its stores were still dedicating a disproportionately large share of their floor space to relatively low-margin food items. In fact, many stores in the chain were unprofitable and had become a drag on GNIs bottom linein some instances, GNI had placed stores too close to one another. Furthermore, GNI was failing to capitalize on the emerging fitness boom that would dominate the market for health-related products during the 1980s, and it was ignoring younger, health-conscious consumers.

Augmenting GNIs woes were the numerous lawsuits and complaints that had surfaced during the previous 10 to 15 years, ranging from allegations of false claims about its vitamins to fiscal impropriety. Its public image was out of step with a more upbeat, energetic 1980s mentalityGNI was suffering from its reputation as a hard-sell, hippie-style granóla shop that, on the side, pedaled a dubious mix of new-age snake oil cures. In the 1960s and 1970s, it was our classic situation, said Gary M. Giblen, industry analyst, in an August 1993 issue of the Pittsburgh Post-Gazette. You went in and everybody looked unhealthy. The biggest joke about health stores was that the help there looked like they were dying from starvation.

Shakarian died in 1984, just as the company was reaching a historic slump. Although the GNIs stock price had vacillated wildly during the past few decades, often rising after the introduction of a faddish new vitamin supplement, it was selling for a pitiful $5 per share when its founder died$25 less than its price 12 months earlier. And problems continued to mount. GNIs factories were operating at only 30 percent capacity, and Shakarians will, which included much of GNIs stock, was contested by his survivors. The company fired long-time president Gary Daum and fellow manager Bart Shakarian (Davids brother) and brought in Horn in 1985 to clean up the mess.

Although GNI lost more than $15 million in 1985, Horn believed that the enterprise was a sleeper that offered excellent potential for long-term growth. He would build a new GNI based on its strengths of manufacturing and dominance of the U.S. self care market. He would also change the focus of the company from products to consumers, and transform GNI outlets from health stores into health management centers. Whats happened at GNI is very normal, its classical, explained Horn in the July 1986 issue of Executive Report. We were product-driven as opposed to customer-driven.... GNI tended to seize the latest fad. It was part of the original entrepreneurial spirit that built the company ... but this sort of zeal was becoming its undoing.

One of Horns first moves was to dump the chains languishing stores. He also earmarked $20 million to renovate its profitable outlets and change their layout and product mix to reflect consumer preferences. Although GNI would still emphasize the development and sale of new items, Horn eliminated 30 percent of GNIs offerings and established a system of routing out nonperformers. GNIs confusing array of food products was organized into eight major categories, defined by their health attributes; high fiber, low sodium, low calorie, and low cholesterol products, for example, were arranged in identifiable groups.

Virtually every item sold in GNI stores, including vitamins, was repackaged in an effort to streamline its products. Floor plans were changed to appear cleaner and less cluttered, and new sections were added to exploit a growing demand for nonedible health products, such as skin and hair care goods. The company also bolstered offerings to body builders and other serious athletes with over-the-counter energy and weight-gain supplements. To generate cash for expansion, the company sold its mail-order business and spotlighted its retail outlets.

Horn also made a concerted effort to appease critical federal regulators and to clean up the companys reputation. He initiated communication with the FDA, for example, seeking to establish a collaborative relationship. In addition, the company kicked off a new advertising campaign targeted more toward fitness-conscious consumers, including body-builders. Although Horn closed nearly 200 GNI stores in 1986, he opened 30 new ones and was planning to open many more before the close of the decade. Horn also set a goal of utilizing 88 percent of the companys manufacturing capacity, a strategy that would be achieved by augmenting sales through GNI stores with shipments to third-party retailers.

Horns most prolific strategic initiative was a franchising program. Started in 1987, the program was created to help finance expansion and to infuse a new spirit of entrepreneurialism in the organization. GNI helped its franchisees, many of whom were former employees, by financing the stores and supporting owners with a high-quality marketing program. Existing stores that had been converted to franchises typically experienced sales increases of 60 percent during their first year of private ownership. As a result, GNI stepped up its franchising efforts throughout the late 1980s and early 1990s.

Although GNI struggled to regain profitability during the late 1980s, Horn had successfully put the company on a new path toward growth and prosperity. After closing down more than 300 stores and spending $46 million to settle lawsuits between 1985 and 1989, the GNI organization comprised over 1,100 outlets and was ringing up annual sales of more than $300 million. The streamlined nature of the new GNI reflected Horns personality and management style. Out of the gym and behind his desk by 7:45 a.m., Horn stressed effort, team work, and a customer orientation.

William E. Watts replaced Horn as president of GNI in late 1988. Horn retained his position as Chief Executive Officer and was later elected Chairman of the Board. Shortly after the management change in 1989, GNI was purchased by Thomas H. Lee Company, a Boston investment firm whose holdings included Playtex Co. Lee created a new company, General Nutrition Companies, Inc. (GNC), which operated GNI as its major subsidiary. Although GNC was saddled with debt following the leveraged buyout, its management sustained the efforts initiated by Horn and was able to slowly boost sales. By 1992, the first year in which Lee realized a quarterly profit from the acquisition, GNC was operating about 1,125 stores and generating over $380 million in annual sales.

Lee eliminated much of GNCs debt burden in 1993 by making a new public stock offering. In fact, its slashed GNCs total debt from $380 million to just $180 million. With its new cache of capital, GNC aggressively pursued a new overall growth strategy. Having successfully restructured its organization and cut much of the fat from the old GNI, GNC was prepared to concentrate on replicating its proven manufacturing, distribution, and retail strategy. GNC planned to expand its retail store base and boost market share by opening stores in new metropolitan areas and by stepping up its franchise efforts.

GNC retained its emphasis on vitamins and minerals (which represented about 40 percent of revenues) and sports nutrition supplements (30 percent of sales), but it also began sporting new lines of apparel and exercise equipment. In addition, the company significantly increased its marketing budget and initiated several new advertising promotions. For example, customers who signed up for the companys Gold Card membership, which cost $15 annually, received 20 percent discounts on the first Tuesday of each month. Expenditures on television advertising more than doubled during 1992.

GNCs cash position and revised growth strategy allowed it to become one of the fastest growing retail chains in the nation during the early 1990s. As most other retailers struggled to retain sales and profits during a lingering recession, GNC expanded its organization to include 1,216 stores by the end of 1992 and 1,553 by the end of 1993. Revenue gains ensued; receipts shot up to $454 million and $546 million in 1992 and 1993, respectively. Furthermore, the average total floor space and sales-per-square-foot of its outlets soared as GNC continued to emphasize the development of self care SuperStores. SuperStores consisted of a series of boutiques within the shop, each of which sported separate product categories, such as herbs, vitamins, apparel, or food.

As it prepared to enter the mid-1990s, GNC was hoping to increase its already brisk rate of growthit planned to open 225 new stores in 1994. Still unchallenged by competitors in its market niche, moreover, GNC also planned to extend its reach internationally. To this end, it created an international franchise division in 1994. It was already active in four South and Central American countries by 1994, but was awarding new franchises in Western Europe, the Far East, and the Middle East. Indeed, GNC aimed to increase sales to more than $1 billion by the end of the decade. GNC is one of the truly world class operators that is a category killer, Giblen said about GNCs prospects in the August 31, 1993 Pittsburgh Post-Gazette article. Its like Toys R Us is the place to get toysIts totally dominant in the vitamin industry.

Principal Subsidiaries

General Nutrition, Inc.; General Nutrition Corporation; General Nutrition Products, Inc.

Further Reading

Carlsen, Clifford, GNC Pepping Up Expansion; Bay Fit for 10 More Stores, San Francisco Business Times, October 29, 1993, Sec. 1, p. 8.

Franchising Program in High Gear, Chain Store Age Executive, September 1993, pp. 26-27.

Kamen, Robin, Nutrition Chain Getting Physical in New York, Grains New York Business, October 19, 1992, Sec. 1, p. 3.

Maraño, Ray, Saudi Venture a Go for GNC, Pittsburgh Business, August 20, 1990, Sec. 1, p. 1.

Rouvalis, Christina, Studies Giving General Nutrition Healthy Outlook, Pittsburgh Post-Gazette, September 19, 1993, p. J8;

More Than Granóla as General Nutrition Revamps Merchandise and Store Design, Pittsburgh Post-Gazette, August 31, 1993, p. B8.

Securities and Exchange Commission Form 10-K; General Nutrition Companies, Inc., Washington, D.C.: Securities and Exchange Commission, 1994.

Slom, Stanley H., GNC to Pull More Weight in the 90s, Chain Store Age Executive, June 1992, pp. 21-22.

Tascarella, Patty, Will Jerry Horns Prescriptions Cure GNC?, Executive Repon, July 1986, Sec. 1, p. 20; GNCs Horn Opts for New Marketing Plan, Pittsburgh Post-Gazette, July 22, 1985, Sec. 1, p. 13.

Varnas, Carol, General Nutrition Announces National Expansion Plan for 1993, Business Wire, September 14, 1992.

Dave Mote

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General Nutrition Companies, Inc.

General Nutrition Companies, Inc.

also known as: gnc founded: 1935



Contact Information:

headquarters: 300 6th ave. pittsburgh, pa 15222 phone: (412)288-4600 fax: (412)288-2099 toll free: (888)462-2548 url: http://www.gnc.com/

OVERVIEW

General Nutrition Companies, Inc. (GNC) is a specialty retailer of vitamin and mineral supplements, sports nutrition products, and other health-care items. As of January 1998, the company had 3,435 retail outlets, of which about 60 percent were owned by the company and 40 percent were franchised. The stores are located in all 50 states, Puerto Rico, and 18 foreign countries. Most of the company's stores are called General Nutrition Centers; its other retail outlets are variously named Health & Diet Centres, Amphora, Nature's Fresh Northwest, and GNC Live Well. The company makes many of its own products at its Greenville, South Carolina, plant. According to the company's management, in 1998 GNC held about a 14.2 percent share of the total retail supplement market, which includes the vitamins, minerals, herbs, and sports nutrition categories. In 1993, its share was 9.7 percent.




COMPANY FINANCES

Sales in fiscal 1997 (ended January 31, 1998) totaled almost $1.2 billion, up more than 20 percent from fiscal 1996. Operating earnings (as adjusted by the company to make comparisons meaningful) were $195 million, up from $152 million in fiscal 1996. Between May 1997 and May 1998, the company's stock traded in a range of $22 to $41. The stock did not pay a dividend.

For the first quarter of fiscal 1998 (ended April 30, 1998) the company reported continued strong results. Compared with the first quarter of fiscal 1997, revenues were up 20 percent and net income rose 27 percent. In fiscal 1998, the company planned to open 525 new U.S. stores and 80 new Canadian stores.



HISTORY

In 1935, company founder David Shakarian opened his first health food store in Pittsburgh, Pennsylvania. During the next three decades, he continued to open outlets in Pittsburgh and expanded the concept to other cities, including New York. He also added vitamins and other health food supplements to the product line. In the 1970s, Shakarian opened factories in Pennsylvania, North Dakota, South Carolina, and Minnesota to manufacture his own products. By the early 1980s, the company had more than 1,300 stores.

In 1984, Shakarian died, and the following year Jerry Horn was brought in to run the company. A franchising program started in 1987. In 1989, the company was purchased by Thomas H. Lee Company, a Boston investment firm. GNC made a new public stock offering in 1993. In the mid-1990s, the company became more active in overseas markets, expanding operations to western Europe, the Far East, and the Middle East.



STRATEGY

GNC offers consumers vitamins, minerals, herbs, health foods, and similar products to promote a healthier, more active life. The company tries to capitalize on the latest health trends—some might say "health fads"—and merchandise them to the public in innovative ways. For instance, when herbal supplements became popular in the early 1990s, GNC put them into gel-coated capsules and they became best-sellers. Additionally, in 1995 there was positive press coverage (including a cover story in Newsweek) about the possible benefits of melatonin to promote sleep and fight jet lag. GNC, which was already making small amounts of the hormone, quickly ramped up production sevenfold and had the product in its stores within two weeks.

The medical benefits of many of the products GNC sells remain unproven, however. As Christine Rosen-bloom, a professor of nutrition at Georgia State University, told The Wall Street Journal, "If Vitamin C cured the common cold, do you think anyone would have one?" The company therefore tries to give shoppers a great deal of information about its products without making claims that can't be defended. Indeed, GNC had to be careful; as of 1996 it operated under three consent decrees with the Federal Trade Commission because of false advertising claims on some products. Each item in its stores has a carefully worded sign describing the product—an unusual strategy for a retailer.

There were several other aspects to GNC's strategy in the mid-1990s. First, as indicated earlier, GNC made many of its own products, which eliminates middlemen and thereby increases profit. In fact, GNC brands, such as Ultra Mega, Solotron, and National Brand, dominated the company's product mix, although some national labels were also available.

Second, the company has vigorously pursued its franchising program. Much of GNC's growth has come from its franchised stores, where sales increases have been better than for company-owned outlets. Franchising has also helped the company expand its operations to other countries, which offer new, untapped markets for GNC products. The growth in both company-owned and franchised stores has been dramatic. The total number of GNC stores at the end of January 1998 was 3,435, more than double the level of four years earlier.




INFLUENCES

During the 1970s, more Americans began buying health foods, as well as vitamins and other supplements to their diets. GNC grew strongly during this period and greatly expanded its product line. It also started to open outlets in malls, which bolstered sales and gave the company a more upscale image.

By the early 1980s, however, the big retail chains were giving GNC serious competition. Items like rice cakes and tofu, which were once a rarity in supermarkets, became commonplace, and the large drug chains vastly increased their vitamin offerings. Thus GNC's product mix became less unusual, and profitability fell. Moreover, the company had made some decisions that in retrospect seemed unwise. It was offering too many products that cannibalized one another; in other words, additional sales of one item merely stole sales from another. GNC had too many stores—about 1,300—that were too close to each other. The space dedicated to low-margin foods was disproportionately large. The company was also a regular target of federal regulators who accused the company of making false claims about its products.

Perhaps most detrimental, GNC had a healthy, earthy image that was out of place in the 1980s. As industry analyst Gary Giblen told the Pittsburgh Post-Gazette, "You went in and everybody looked unhealthy. The biggest joke about health stores was that the help there looked like they were dying from starvation." By the time founder David Shakarian died in 1984, the company was in bad shape.

GNC's fortunes improved when Jerry Horn took over as president in 1985. He closed stores, streamlined and reorganized the product mix, spruced up packaging, and changed floor plans for a cleaner and less cluttered appearance. He added sections to exploit a growing demand for nonfood health products, such as skin and hair-care items. Horn also beefed up offerings for body builders and other serious athletes with over-the-counter energy and weight-gain supplements. He also tried to appease federal regulators by cleaning up the company's reputation for false advertising.

Horn's most important initiative may have been the creation of a franchising program in 1987. Many of the franchisees were former employees, and they helped to give the company an entrepreneurial spirit. Existing stores that were converted to franchises typically showed sales increases of 60 percent during their first year of private ownership. Although the company struggled to regain profitability, by the end of the 1980s, the company was well on its way to a turnaround.

In 1989, GNC was purchased by the Boston investment firm of Thomas H. Lee in a leveraged buyout, or LBO. In this type of acquisition, the buyer uses mostly borrowed funds that are secured by the assets of the firm to be purchased. As would be expected in an LBO, the acquisition left the company heavily in debt with large interest charges. By 1992, however, the company was again profitable. Lee made a new public stock offering in 1993, which improved the company's financial position substantially. With the new capital, GNC was able to pursue a more aggressive growth strategy. It opened hundreds of new stores, which brought the total number of outlets to 1,553 by the end of fiscal 1993. New lines of apparel and exercise equipment were introduced, and the advertising budget was increased significantly. GNC also began its Gold Star program, which for a $15 annual fee gave customers the right to a 20 percent discount on the first Tuesday of each month. By 1996, the number of Gold Card holders had grown to about 2.4 million, and 7,000 new card holders were being added each week.

FAST FACTS: About General Nutrition Companies, Inc.


Ownership: General Nutrition Companies (GNC) is a publicly owned company traded on NASDAQ.

Ticker symbol: GNCI

Officers: Jerry D. Horn, Chmn., 60 William E. Watts, Pres. & CEO, 45

Employees: 13,800

Chief Competitors: GNC's competitors include: Amway; CVS; Eckerd; Enrich; Heinz; Herbalife; Natural Alternatives; NBTY; NutraMax Products; Rite Aid; Wal-Mart; and Whole Foods.




CURRENT TRENDS

In the mid-1990s, GNC benefited greatly from the increased interest in vitamins and nutritional supplements among the country's aging Baby Boomers. As consumers of all age groups were becoming more health conscious, increasingly they were seeking out nontraditional health-care products like herbs for their medical benefits. A booming economy also meant that consumers could afford to spend more on self-care products. GNC was capitalizing on these trends by offering high-margin products in attractive stores. In 1995, vitamins and minerals accounted for 40 percent of GNC's sales, while 28 percent came from sports nutrition products and 10 percent from herbs. The balance of its sales came from diet, fitness and apparel, food, and personal care products. The product mix had therefore changed greatly from the early 1980s, when the company focused on commodity-like health foods and vitamins. The new product lineup was popular with consumers, who pushed up the company's sales from $673 million in 1994 to $846 million in 1995, $990 million in 1996, and almost $1.2 billion in 1997.



PRODUCTS

In 1996, GNC created a prototype store called Alive by GNC, featuring a new marketing concept. Customized products that are tailored to the consumer's preferences have become increasingly popular in certain retail categories, such as clothing. Alive by GNC sought to extend that trend to the personal health-care market. Visitors to the store are greeted by an information center where they are profiled by computer and receive personalized information on nutrition, exercise, and relaxation. While the store does have prepackaged "vitapaks," a visitor can also start from scratch and devise a personal vitamin regimen. In addition, shoppers can use a computer program to design their own shampoos, conditioners, and lotions. The packaging for these personalized products includes the customer's name as well as the specific ingredients. Visitors can also get fitted for their own personal insoles, have their posture checked, or take a body-fat test.

In late 1997, GNC concluded an agreement with Monsanto to develop and sell a line of nutritional supplement products. These offerings would be based on Monsanto's SeaGold Oil, an algae-derived compound rich in docosahexaenoic acid (DHA). The products would come in gel caps, powders, and food supplement forms.



GLOBAL PRESENCE

In 1994, GNC created an international franchise division to spur growth in overseas markets. As of January 1998, GNC operated 20 Health and Diet Centres and 19 General Nutrition Centres in the United Kingdom, 34 General Nutrition Centres in Canada, and 1 store in New Zealand. There are also 151 franchise stores in 15 international markets.

EMPLOYMENT

GNC is an equal opportunity employer and offers jobs in a wide variety of fields, including accounting finance, art design, construction, customer service, franchising, information systems, legal, logistics/distribution, loss prevention, manufacturing, nutritional research and development, purchasing, and retail sales and marketing. In addition to its nearly 3,500 retail outlets, GNC offers employment opportunities at its corporate headquarters in Pittsburgh, its manufacturing facility in Greenville, South Carolina, and regional administrative offices and distribution centers across the United States. Anyone interested in learning more about employment opportunities and current job openings at GNC may do so by visiting the company Job Opportunities Web page at http://www.gnc.com/index.cfm?todisplay=clients/gnc/moregnc&location=jobs.html&title=GNC%20%2D+Job+Opportunities.




SOURCES OF INFORMATION

Bibliography

"boomers boost gnc to top of the vitamin heap." stores, november 1995.

brookman, faye. "gnc's new angle: do-it-yourself beauty." wwd, 10 may 1996.

lerner, matthew. "monsanto increases stake in nutriceuticals market." chemical market reporter, 17 november 1997.

murray, matt. "gnc makes ginseng, shark pills its potion for growth." wall street journal, 15 may 1996.

tascarella, patty. "new, 'softer' gnc to convert 55 more stores to 'live well retail concept.'" pittsburgh business times, 6 april 1998.

wilson, marianne. "gnc targets health and wellness with alive." chain store age executive, april 1996.


For an annual report:

on the internet at: http://www.gnc.comor write: gnc, inc., 921 penn avenue, pittsburgh, pa, 15222


For additional industry research:

investigate companies by their standard industrial classification codes, also known as sics. gnc's primary sics are:

2834 pharmaceutical preparations

5499 miscellaneous food stores

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