300 Sixth Avenue
Pittsburgh, Pennsylvania 15222
Telephone: (412) 288-4600
Fax: (412) 288-2099
Sales: $1.42 billion (1998)
Stock Exchanges: NASDAQ
Ticker Symbol: GNCI
NAIC: 551112 Offices of Other Holding Companies; 446110 Pharmacies & Drug Stores
General Nutrition strives to be the leading provider of products, services, and information in the self-care and personal health enhancement markets.
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 company's 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.
Shakarian's 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 store's 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. GNI's move into shopping malls bolstered its bottom line and gave the company a more progressive image. The lack of any competitors in GNI'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
GNI's 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 GNI's 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 GNI's singularity. Likewise, both supermarkets and drug stores vastly increased their vitamin offerings, which diminished GNI's 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 GNI's 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 GNI's 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 mentality--GNI 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 GNI's 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. GNI's factories were operating at only 30 percent capacity, and Shakarian's will, which included much of GNI's stock, was contested by his survivors. The company fired long-time president Gary Daum and fellow manager Bart Shakarian (David's brother) and brought in Jerry Horn in 1985 to clean up the mess.
Return to Health: Late 1980s
Analysts questioned Jerry Horn's 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 company's profits 40 percent within three years, to $10.8 million. At his last assignment with Sears, moreover, Horn had revived the retailer's ailing San Francisco store, increasing its sales by 23 percent and making it the top profit contributor in Sears' western region--all 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 organization's 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." "What's happened at GNI is very normal, it's 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 Horn's first moves was to dump the chain's 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 GNI's offerings and established a system of routing out nonperformers. GNI's 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 company's 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 company's manufacturing capacity, a strategy that would be achieved by augmenting sales through GNI stores with shipments to third-party retailers.
Horn's 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 Horn's 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 company's 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 company's 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 GNC's more than 2,000 stores were franchises. The format worked well, and the company was able to successfully roll out new stores.
The company's 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 company's 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 GNC's strategic shift from a specialty retailer to a branded retailer focused on wellness and self-care.
In August 1996 GNC acquired Nature's 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 Nature's Northwest line. The first was opened in Lake Oswego 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 Nature's 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. GNC's 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 company's 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.
GNC's 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 Aid's 1,400 other stores would carry the PharmAssure product line, as would GNC's U.S. stores. Under the agreement GNC would also become the exclusive manufacturer of Rite Aid's 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 Nature's 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.
GNC's 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 America's 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: Nature's Fresh; Amphora; General Nutrition Centres; Health and Diet Centres (United Kingdom).
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