GNC faces another push by unhappy franchisees

A group that claims to represent GNC franchisees says the vitamin retailer is trying to undermine efforts to organize an independent association that would serve as an advocate for members — a charge the Downtown-based company denies.

Pittsburgh Post-Gazette
September 16, 2005

GNC faces another push by unhappy franchisees
Teresa F. Lindeman

A group that claims to represent GNC franchisees says the vitamin retailer is trying to undermine efforts to organize an independent association that would serve as an advocate for members — a charge the Downtown-based company denies.

The General Nutrition Operators Association, which incorporated in Illinois in April and sent hundreds of recruitment letters to franchisees in August, contends that vendors who had agreed to contribute free products and offer discounts as part of a welcome deal for new association members were warned off by GNC.

"We deny all allegations," GNC Corp. spokesman Amie Ley said this week, adding that the company had not been aware of the formation of the new group until recently.

The dispute, and this latest effort to create an independent voice for franchisees that in the past have complained about being bullied and manipulated, comes at a time when GNC is pushing to make its franchise stores more consistent with company-owned stores and to boost sales by cutting prices on a core group of 100 products.

After a failed attempt at going public last year, the private investment group that bought the company in late 2003 brought in new management with a mandate for change.

GNC has long had a turbulent relationship with its franchisees and is involved in litigation with a franchise group that claims to represent more than 400 stores. The lawsuit accuses the company of running promotions on top-selling products that undercut prices they have to pay and putting unfair restrictions on their purchases of goods from other suppliers. That case is scheduled to go to mediation in New York today.

The fledgling General Nutrition Operators Association hopes to address similar issues, said Larry Beck, a contractor for the nonprofit advocacy organization American Franchisee Association who has been hired as executive director for the new GNC franchise group. Eventually, Beck said, the association would like to create a purchasing cooperative that could get lower pricing for franchisees and host vendor trade shows.

To get things rolling, the group worked out deals making franchisees who paid a $200 membership fee eligible for free products from suppliers worth much more than the fee. Beck said he received a letter from one of those suppliers that stated GNC management notified the company "continued sponsorship [of the new association] could jeopardize key business relationships."

Independent franchise associations are not uncommon, said John Tubridy, who runs a FranNet consulting office on the North Shore, working with people who want to become franchisees. Often, such groups form when a company has many divisions and franchises worry that their needs may not be heard, he said.

Earlier this year, a group of UPS store franchisees formed The Brown Board Owners Association in response to concerns over their role in the company's massive shipping business. Burger King and Kentucky Fried Chicken franchisees have long had associations.

Since these groups form on their own, they can create some confusion. The head of the 4-year-old Toasted Subs Franchisee Association, which claims to represent several hundred Quiznos franchisees, is hoping to work with a new California group of the sandwich chain's franchisees.

So far, Beck said the new GNC group has signed up only a small number of members.

Many franchisees have questions about how this organization relates to past efforts to create independent associations. In the past, he said groups faltered because the franchisees didn't have time to devote to it.

This time, Beck said, about 10 franchisees decided to work with the Chicago-based American Franchisee Association because it had helped create similar groups for other companies' franchisees.

The group is unlikely to get any support from the company. "GNC does not endorse independent associations," said Ley.

An Indiana franchisee reached yesterday is taking a wait-and-see attitude toward the group until the outcome of the litigation is resolved, saying he does not think the association can be effective unless GNC changes its policies.

To bolster its argument that the company's business model is not working for franchisees, the new organization has noted that GNC has been closing stores steadily.

As of June 30, GNC reported 1,241 domestic General Nutrition franchise stores, down 114 from December 2003. But the number of domestic company stores also is down by more than 100, from 2,748 in December 2003 to 2,638 in June.

GNC's Ley said that trend was a result of a competitive business environment that affects all stores, not efforts to close or take back franchisee stores. She said the company reacquired 59 stores between June 2004 and June 2005.

The company did tighten the rules July 1 on a sales reward program that returned money to participating franchisees who comply with its promotional pricing on key products.

Ley, who said GNC paid out $10 million through the program in the first six months of the year, said the company was trying to achieve a consistent sales experience for customers whether they go into franchise or company stores. She said the company had stepped up its focus on making sure stores meet the standard.

Franchisees argue the standards are applied unevenly and are an attempt to force them to buy quantities of GNC products that may not sell well in their particular stores, while reducing inventories of higher margin products made by outside vendors.

Certainly, the pressure is on to improve GNC's sales trends. In the first six months of the year, the company said sales in existing company stores fell 6.5 percent and in existing franchise stores dropped 7.3 percent.

Revenue for the period fell 7 percent to $669.8 million. Among other things, the company cited lower sales of diet products and a reduced store base.

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