Leadership strategies bolster GNC's well-being

| Sunday, Aug. 2, 2009

Underneath Joe Fortunato's finely tailored suit, there's a welterweight boxer just waiting to take on a challenge and duke it out.

Regardless of the problem at General Nutrition Centers Inc. — unprofitability because of overly aggressive store expansion, unhappy franchisees, manufacturing snafus, three owners in eight years — Fortunato's waded into the middle of every situation during his 19-year tenure, the last four as chief executive.

Fortunato has fought the problems and prevailed, and General Nutrition has grown, even thrived, analysts said. Second-quarter results due out in the next couple of weeks will show sales at stores open at least one year, a barometer of retailer strength, will increase for the 16th consecutive, three-month period, Fortunato said in a recent interview.

Fortunato, 56, a hometown guy who grew up on Mt. Washington, said, "2009 will be a great year. We're looking at how to grow the business, so you've got to invest in the business, and you've got to stay ahead of the curve with new products." He spoke in his office on the 14th floor of General Nutrition's headquarters, at 300 Sixth Ave., Downtown, which is home to about 600 company employees.

General Nutrition is a giant among the highly segmented nutritional supplement industry, with more than 5,200 company-owned and franchise stores in the United States alone, plus about 1,300 franchise locations in 44 foreign countries.

The U.S. total includes more than 1,800 "store within a store" locations, sites where General Nutrition stores are within Rite Aid Corp. drugstores, a concept pioneered by General Nutrition more than a decade ago.

Fortunato's methods and his company's results garner accolades. "Management has executed very well during the recession," said Jackie E. Oberoi, an analyst in New York who follows General Nutrition for Standard & Poor's Ratings Services. "The leadership team is strong."

S&P in June raised the company's credit rating to "B" from "B-" on the basis of strong sales growth and better margins between revenues and expenses.

"Our investment is performing very well, despite the tough economic environment," said Deborah Allan, a spokesperson for the Ontario, Canada, Teachers' Pension Plan Board. The Toronto-based pension plan, along with Los Angeles-based private equity firm Ares Management LLC, bought General Nutrition in March 2007, for $1.65 billion in a leveraged buyout transaction. "We're very happy with the investment."

A numbers guy, Fortunato began his General Nutrition career in 1990, a decade in which the company grew by adding new locations.

"We were opening 300 to 400 stores a year and the motto was 'execute, execute, execute,'" Fortunato said. "But growth masks a lot of problems."

When the 2001 recession hit, living off new store "newness" to bolster revenues slowed and stopped, and General Nutrition found itself with too many locations and not enough sales.

Franchise owners began rebelling. Fortunato admits that when sales slow in a business that franchise owners have sunk their life into, it doesn't take long for disagreements to occur.

"When I took over as CEO in 2005, the keys for us were how to get the business back on track, how to get the franchises back onboard, because some of them were leaving our operating system, even getting away from the GNC brand, and how to fix our manufacturing problems," Fortunato said.

At a 2005 meeting for General Nutrition franchise holders worldwide, Fortunato waded into the setting and began punching away. "I leveraged the good franchisee holders against the bad, telling the good ones they didn't want to be associated with the bad ones," Fortunato said. "I told them if they got away from our operating system and our brand, they were done. We closed or took back more than 300 locations over two years."

"We had some rocky years, to put it mildly, during the early part of this decade," said Nelson Fleming, a General Nutrition franchisee for more than 12 years and owner of 10 stores in the Atlanta area.

"I think the current leadership has really fostered a one-team approach," Fleming said. "Franchisees must see that something is going to work before they sign on, and GNC today is a great company to be part of. We continue to have great sales — which is unheard of in retail today."

On the manufacturing side, Fortunato said he and his team overhauled General Nutrition's supply chain management to eliminate problems. He also moved General Nutrition sharply away from the diet business which, at one time was one-third of company sales, and back to its core: vitamins and sports-related products.

"We had been too reliant on faddish diet products," Fortunato said. "We can always rely on sports and vitamins, which today comprise about 73 percent of our business."

Ownership issues haven't always been helpful to Fortunato. When the Dutch firm Royal Numico paid $2.5 billion in 1999, for General Nutrition, he thought on paper the deal was a sweet one.

"They had 50 PhDs, all these scientific people in-house, and we had nothing," Fortunato said. "They thought they could come over here and get all these products into the U.S. market. They couldn't."

In the four years Royal Numico owned General Nutrition, not one new product from the owners ever made it into the States, he said.

Numico got rid of all of General Nutrition's contract business, making products for other companies. "That was one of the dumbest moves ever," Fortunato acknowledged. "Today, we do about $125 million annually in contract business, up from zero in 2002."

The Rite Aid deal was somewhat controversial, according to Fortunato, because General Nutrition franchisees were unsure where they stood.

"We did the deal with protected territories for our franchisees, so we didn't cannibalize their businesses," Fortunato said. "The Rite Aid stores actually appeal to a different customer."

"We really believe our partnership with GNC offers unique products and services that our customers can't get anywhere else — especially any other drugstore," said Rite Aid spokeswoman Ashley Flowers.

Fortunato's always moving, he sees China as a major focus for his company, and hopes to do something there within 90 days. General Nutrition has been waiting to enter Europe until its regulatory situation became clear, but he's now preparing for an assault there. Internet business this year will probably do $45 million to $50 million in business, but Fortunato wants to triple the amount.

"Our customers are very sophisticated buyers, they're highly educated, and they don't stop buying our products once they see they work, they become part of their lifestyle," Fortunato said.

Additional Information:

General Nutrition Centers

1935: Founded as Lackzoom, a health food store specializing in yogurt, located in downtown Pittsburgh by entrepreneur David Shakarian

1960s: Shakarian changes the name of his growing chain to General Nutrition Centers to capitalize on demand for health food

1993-99: Company was publicly traded

1999: Acquired by Dutch corporation Royal Numico NV, for $2.5 billion

2003: Sold to Apollo Management LP for $750 million

2004: Apollo planned a GNC public stock offering, but canceled the plan when the diet products market began slowing

2005: Joe Fortunato, a 15-year company veteran, becomes the fourth CEO in less than a year

2006: A second attempt at a stock offering is canceled in August

2007: Apollo Management agrees to sell its 97 percent interest in GNC for $1.65 billion cash to the Ontario, Canada, Teachers Pension Plan and private equity firm Ares Management LLC

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