Pricing strategies get back into shape

Drug Store News, May 2, 2005 by Michael Johnsen

To hear interim chief executive officer and executive chairman Robert DiNicola tell it, 2005 will be the year that GNC gets its act together, as the largest vitamin retailer turns its focus inward to re-establish the dominance of a retail brand that recently has fallen on hard times.

GNC historically has been positioned to capture all three key supplement users: the aging baby boomer, the gym rat and the hardcore dieter. But those users have been migrating elsewhere for their supplements of late. "Unfortunately, [GNC] is seen as overpriced and undervalued by the average consumer," DiNicola acknowledged.

GNC hopes to flex its coast-to-coast muscles with a national pricing strategy that will bring the chain more in line with industry norms. "This doesn't mean that we will be the lowest price in town across the board in every single item," DiNicola said. "But what it does mean is that we will be competitively priced on those most highly recognizable items that the customers want the most."

The commoditization of the supplement business, along with the chain's reputation for high prices, has made the GNC business even more vulnerable to industry trends, such as the recent downturn in low-carb products in the past year, as well as the loss of ephedra business the year before. (The ephedra ban could be lifted, as a federal judge last month ruled that the Food and Drug Administration failed to prove certain low-dose ephedra supplements are unsafe before implementing the restrictions. The ruling could open the door for some ephedra-based weight-loss products, once a big money maker for GNC and other specialty retailers, to make a comeback.)

For GNC, it has been one bad year followed by another.

Sales at GNC fell 5.9 percent to $1.3 billion in 2004, including a 4.2 percent drop in corporate-owned same-store sales and a 4.1 percent drop in same-store sales across its franchise base. The chain operates 3,797 locations in the United States: 2,507 corporate stores and 1,290 franchisees. In addition, the company also operates GNC/Live Well store-within-a-store departments in 1,027 Rite Aid stores, under its wholesale/manufacturing division. While GNC executives have noted the company would focus on improving operations over further expansion, Rite Aid is contractually obligated to add 258 additional GNC departments by the end of 2006. In a conference call last month, Rite Aid announced plans to open some 100 GNCs this year.

Royal Numico sold GNC in 2003 at a fraction of its original price, and, to be sure, Numico wasn't selling a healthy business. DiNicola pointed to that sale and the housecleaning and unrest that followed as a contributor to GNC's poor performance, but assured analysts that GNC would be returning to retail basics in the near term and would focus on growing again in the long term.

For customers, the refocus on marketing, merchandising and customer service will be for the most part invisible, with the exception of more competitive pricing and a new TV ad campaign it kicked off earlier this year to entice people back into its stores.

GNC

Headquarters: Pittsburgh

2004 sales: $1.1 billion * ([dagger])

% change vs. 2003: -5.2% *

No. of stores: 3,797 ([dagger])

Avg. store size: 1,500 sq. ft.

Sales per store: $380,753 ([dagger])([dagger])

* Drug Store News estimate ([dagger]) Reflects combined U.S.-based retail and franchise operations ([dagger])([dagger]) Reflects average U.S.-based, corporate-owned store