NBJ had the opportunity to speak with GNC Chief Executive Officer Joe Fortunato on March 23 regarding the company’s impressive 2008 performance. GNC posted sales growth of 6.7% for the year, with same-store sales growth of 2.7%. Perhaps more impressive were the the revenue gains in the fourth quarter across all divisions, even in the midst of a severe consumer spending downturn. In our conversation, Fortunato talks about some of the factors that contributed to GNC’s success in 2008, as well as the the company’s outlook for 2009 and beyond.
NBJ: What were some of the main growth drivers in Q4, and for the entire year?
Joe Fortunato: We had a really strong vitamin business throughout the year and we had a reasonably strong sports business throughout the year. Our sports business really accelerated in our own brand. Our Pro Performance brand grew in strong double digits and it has started out this year extremely well. At one point [the Pro Performance product line] was more of a house brand. Today, we’ve accelerated the brand through science and innovation and new product introductions to be anywhere from an entry level brand to up to a premium brand. That brand equity and the innovation we’ve brought to the brand is really starting to pay off.
NBJ: Your manufacturing/wholesale division was up almost 14% in Q4, what led to that double digit growth?
JF: If you remember back to the [Royal Numico N.V.] days, we cut out almost all contract manufacturing. That was a Numico decision and that was a very, very bad decision on their part. At one point, without the Rexall business, we were as low as $14 million in contract manufacturing business. Today we’re doing over $125 million in contract manufacturing business. So that’s not only accelerating, but we’ve made a very pointed effort strategically to go after more contract manufacturing to get better absorption in our manufacturing facility. We’ve not only been able to get more contract manufacturing business since 2003-2004 and grow it steadily every year; we’ve also enhanced the margins coming out of that business.
NBJ: Why was it a bad decision by Numico to cut contract manufacturing?
There are two reasons. First of all, if you don’t make it, somebody else will make it for them. Second, if you have the capacity, you may as well try to absorb it. It helps control the costs of the GNC brand by absorbing that capacity.
NBJ: Same-store sales continued to improve despite a weakening economy, what factored into that growth? We've always heard that athletes are more brand/product loyal in their purchasing habits than many other market segments; do you think that's true? How does that tie in with GNC's 2008 performance?
JF: If you look back over history, we have developed tremendous brand loyalty at GNC. In the vitamin business, I think the brand loyalty is second to none. With Pro Performance developing the way it has, the brand loyalty in the sports business is continuing to accelerate. So the answer to that would be that the brand--the recognition of the brand, the loyalty from consumers and the integrity that the brand represents--has really really been the foothold that GNC has capitalized on over the past couple of years. We continue to differentiate our brand. Our mantra three to four years ago was to differentiate. The business was becoming too commoditized. I felt the way to win the game was to differentiate GNC from the rest of the field. Science and innovation is one of the ways we have done that.
NBJ: How have internet sales contributed to GNC’s business?
JF: Our web business grew about 28% in 2008. It’s growing very fast again in 2009. We plan to continue to accelerate the website and we are investing about $5 million over the next few years to redevelop the whole thing. The functionality will be redone. It will have an interactive feel to it. They’ll also be some social networking components within the next 12-18 months. Obviously we are looking at ways to get more aggressive on the web to be competitive with some of our major web competitors.
NBJ: What percentage of GNC’s business is done on the internet?
JF: Web sales are very small component, less than 3%. I think our web business in the next 3 years will be $125 million. We’ve just touched the surface there, it wasn’t a priority early on, but we’ve made it more of a priority.
NBJ: Has the economic recession helped GNC’s private label [Pro Performance brand]? NBJ has seen examples of consumers trading down to private label in the foods market to maximize value.
JF: Even with our entry level products, quality is always a strength of ours. We’ve been very conscientious of what’s going on in the economy, so what we’ve done is allowed for a good price point where people come in and they want to try things. Then, we’ve positioned the consumers into more complex premium formulations as they become acclimated with the use of supplements. The mentality of the consumer is that they always want the best. Once you get them involved in the business, that’s more price point oriented, after that it’s all about the brands and the trust and the integrity and offering the best products in the marketplace. That’s how we play our retail business.
NBJ: How has the recession impacted the company?
JF: I couldn’t sit here and say we haven’t been impacted. We’ve been conscious of the potential impact the economy could have on us. I think we’ve been more promotional because of that. We went into January and February with some very strong promotions. We are very sensitive to pricing with our consumers. We’ve absorbed raw material price increases rather than passing them along to our customers. To put a finger on how much we’ve been affected is hard to do; everybody has been affected a little bit. One thing that helps out is that this industry is less discretionary than a lot of other industries.
NBJ: What is your outlook for the rest of 2009 and 2010? You’ve weathered the economic storm pretty well; do you see more success down the road?
JF: First of all, I couldn’t be more pleased with how we performed during this economic downturn. The exciting part is that we still have tremendous opportunities ahead of us. We have more initiatives than we can handle. We are one of the few businesses that can be more selective about how we grow this business moving forward--what categories we’ll focus on more effectively, how we position our business more effectively, there are just numerous, numerous opportunities.
We’ve invested heavily in the business--we’ve put in new point of sale registry systems that have cost us somewhere in the range of $20 million. So we’ve got better training and selling tools in the stores. We have higher end sophistication in regards to technology, better communication with our employees, better cross-selling opportunities that are suggested on register systems--all things that can help advance interaction with employees and consumers. We also invested $5 million in the web business, we’ve invested a couple million dollars in WebMD for relationship over a two and a half year period, we’ve invested in a new creative advertising agency in addition to our normal marketing. That has paid off tremendously. The payoff on our advertising is the best in the 20 years I’ve been here.
The mindset here has been to over-deliver, maintain a strong performance during this downturned economy and think logically about how most effectively to do that. I think we’ve managed that very well. Then the other component has been to start investing in the business to give us upside potential for the future. We’ve been fortunate enough to do both; we’ve hit the performance numbers and beat them and we’ve invested in the business and we will continue to invest in 2009 to position ourselves in 2010, so I think we’re in a very good position right now.