GNC Corp. tries to win back franchisees buying from outside vendors

"It's an astonishing dysfunction in the GNC system if franchisees are buying increasing amounts of product from the outside. That simply should not be happening," Mr. Giblen said. He added that the prospects of GNC franchisees buying product from competitor NBTY was "even more astonishing."

Pittsburgh Business Times
January 10, 2005

GNC Corp. tries to win back franchisees buying from outside vendors
Tim Schooley

Following a fourth-quarter 2004 sales slide, GNC Corp. faces the new year with the challenge of trying to win back some of its biggest customers — its more than 1,000 franchise stores.

After years of lawsuits and conflicts between GNC and part of its franchise system over product pricing and other issues, there is mounting evidence that GNC franchisees are now simply buying their products elsewhere.

That includes franchisees buying products wholesale from GNC's biggest competitor, New Jersey-based NBTY Inc., the operator of the Vitamin World retail chain.

Exact sales figures are hard to come by, though. GNC wouldn't offer sales figures for its franchises. However, some believe franchisee purchasing from outside vendors is taking millions of dollars in revenue out of GNC's corporate coffers.

Scott Taylor, a GNC franchisee with four stores in Tennessee, was until early last year loyal to the company and a former member of its National Advisory Board, a nationwide governing group for GNC franchisees. But today, he helps lead an independent franchisee support organization, called the General Nutrition Franchise Association. Mr. Taylor also operates an Internet message board, called, on which franchisees discuss strategies for buying product from third-party supplements vendors.

He said the site resulted in hundreds of franchisees beginning to buy product from third-party vendors, giving them the chance to be profitable that he believes GNC corporate's business model doesn't provide.

"We started getting the kind of pricing GNC was getting. At first GNC kind of ignored it, telling us it was going to hurt our sales," Mr. Taylor said. "Instead, the opposite happened. You've got about 400 franchisees that are doing extremely well."

The third-party nutritional supplements suppliers include NBTY's Good & Natural line of vitamins. While its sales so far are small, NBTY is aggressively marketing to GNC franchisees, said Mr. Taylor and others. A representative of the Good & Natural line for NBTY requested anonymity, but acknowledged selling product to GNC franchisees, stating simply, "Whatever health food stores choose to buy from us, we sell to them."

Some GNC franchisees started buying their product from companies other than GNC as an act of rebellion, they said. Last year, the GNC Franchisee Association called for a boycott of GNC's annual franchise convention in Las Vegas.

According to Mr. Taylor's Web site, the value of the wholesale revenue GNC garnered from franchisees at the event shrunk from $30 million two years before to only $3 million last year.

GNC senior vice president and general manager J.J. Sorrenti wouldn't divulge figures regarding the company's franchise system, but called those provided by Mr. Taylor "completely inaccurate." He said nearly 80 percent of the company's franchisees attended the convention.

Before the convention, GNC acknowledged the ongoing decrease in wholesale buying by franchisees. In a letter addressed to them last June, Mr. Sorrenti noted that the ratio of product that GNC franchisees buy from third-party vendors had reached 66 percent, versus 34 percent for GNC brands. That compared with ratios in 1990 when franchisees bought 55 percent of their product from GNC corporate and only 45 percent from others.

At that time, GNC introduced what it described as "the most significant wholesale price reductions in the history of GNC franchising." That included wholesale price reductions averaging 15 percent on a total of 516 GNC-branded items — a measure the company claimed would improve franchisee profit margins to their greatest levels ever, according to the letter.

Since then, GNC has struggled. Apollo Management LP, the New York investment firm that bought GNC from Dutch conglomerate Royal Numico NV last year, bailed last month on its bid to take GNC public.

Projecting a decrease in fourth-quarter 2004 sales of 17 percent, CEO Lou Mancini resigned a few weeks ago and was replaced by former Zales CEO Robert DiNicola as interim CEO until a permanent one is named.

With the new year, GNC corporate took a step further, establishing a rebate program to match a 25 percent off sale on its sports and weight loss lines — complemented by a new advertising push.

Mr. Sorrenti said he has seen no greater enthusiasm from franchisees at any time during his more than 10 years with GNC, and he attributes that to the new campaign.

"I cannot report to you any better enthusiasm from the franchise system than we have had in the last five weeks," he said. "Early indications from the franchisees are that things are going really, really well."

As for franchisees purchasing from NBTY, Mr. Sorrenti said: "Frankly, we're always interested in serving what our customers want in our stores."

Through the rebate program introduced this year, Mr. Taylor said, franchisees are able to use the difference between sale and full-price items as credit toward the purchase of more goods from GNC. He said the program helps level the playing field between franchisees and corporate-owned outlets, which compete indirectly with franchise stores.

"They can change us from buying direct from (third parties) if they continue to do what they're doing right now," Mr. Taylor said.

Still, many GNC franchisees who have turned to buying third-party product apparently aren't looking back. Dan Brandt, a franchisee based in Oregon who was a leader of another franchisee group, called the Independent Association of General Nutrition Franchisees, is one of them.

Mr. Brandt originally helped to assemble a catalog of third-party product vendors for use by other franchisees. He said he and other franchisees who buy from third-party vendors do so less to retaliate against what they feel are unfair corporate sales practices than to successfully manage a profitable business.

"Out of survival mode, they started buying direct-purchase products from vendors," Mr. Brandt said. "I don't know if it was necessarily a boycott per se or if franchisees saw the writing on the wall."

Mr. Brandt estimates that he buys more than half of his product from third-party vendors.

To get a sense of the buying power of GNC's franchisees, consider that out of 5,000 total stores, the company has between 1,000 and 1,300 franchise locations throughout the country. Each franchise store achieves roughly $350,000 in annual sales, franchisees said.

For Gary Giblen, who tracks the retail supplements industry for the New York firm of C.L. King, such activity among franchisees is telling.

"It's an astonishing dysfunction in the GNC system if franchisees are buying increasing amounts of product from the outside. That simply should not be happening," Mr. Giblen said.

He added that the prospects of GNC franchisees buying product from competitor NBTY was "even more astonishing."

"Usually it's job No. 1 of the franchisor to have the right product," Mr. Giblen said.

But some franchisees have complained for years that GNC wholesale product has never been offered at the right price.

A lawsuit filed by Red Bank, N.J.-based attorney Gerald Marks in October suggests that GNC is working to stop such sales. His amended complaint claims that GNC prohibits franchisees from buying products from third-party suppliers that won't sell to GNC's corporate division. The lawsuit, filed on behalf of a handful of New Jersey franchisees, accuses the company of predatory pricing and breach of contract, among other charges. Mr. Marks' amended complaint provides examples, including a recent sale of the product Trim Spa, a popular weight loss supplement. According to the complaint, GNC corporate stores advertised the product on sale for $20.46, even as GNC franchisees were charged $21 to buy it wholesale from GNC Distribution.

"It's cheaper for the franchisees to buy product from GNC corporate stores than to buy from GNC Distribution," Mr. Marks said.

Mr. Taylor remains optimistic about his sales, which are up this year, he said. He believes that GNC's lost revenue from its franchisees' new independent buying is helping to shift the company's policies.

MR. SCHOOLEY may be contacted at moc.slanruojzib|yeloohcst#moc.slanruojzib|yeloohcst.

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Risks: Boycott, Raining litigation, Franchisee revolt, Must buy only through franchisor (tied buying), Right to choose suppliers, buy from competitor, Franchisee advisory group (lap-dog), General Nutrition Franchise Association, Independent Franchisee Association, Corporate stores competing with franchisees, Encroachment (too many outlets put in territory), Predatory actions, Breach of contract, United States, 20050110 GNC Corp.

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