01/07 18:58 FOCUS-Rite Aid, General
Nutrition form marketing alliance
(New throughout; adds quotes and details; pvs CAMP HILL) By David
Morgan
PHILADELPHIA, Jan 7 (Reuters) - Rite Aid Corp. <RAD.N> and General
Nutrition Cos., Inc. <GNCI.O> announced a new strategic alliance on
Thursday that will make GNC's full line of vitamins and dietary supplements
available in 1,500 Rite Aid stores over the next three years.
Rite Aid, the No. 3 U.S. drug retailer, and GNC, the leading specialty retailer
of dietary supplements, also unveiled joint marketing plans for a new line of
proprietary vitamins and supplements called PharmAssure, which would
reach consumers this fall with a barrage of advertising.
Under agreement, GNC would manufacture PharmAssure products and
become exclusive maker of Rite Aid's private label vitamins.
Pittsburgh-based GNC said it would triple capacity at its plant in Greenville,
S.C.
Savings from the new manufacturing alignment were expected to fund a $30
million first-year ad budget for PharmAssure. Meanwhile, the two companies
said they also would set up the first Internet site dedicated to selling both
nutrition products and prescription medicine. The co-branded web site,
"www.gnc.riteaid.com", was expected to be launched October 1, with a $9
million advertising budget of its own.
Executives said the two companies were combining forces to capitalize on a
burgeoning $8 billion market for vitamins and nutritional supplements that is
growing at a rate of 12 percent a year.
The alliance represented a low-cost, low-risk alternative to an outright
merger, they said.
"GNC has the highest consumer brand recognition and the highest quality
products in the industry. We believe our partnership will accelerate the
growth of nutrition and fitness programs around the country," Rite Aid
Chairman Martin Grass told reporters.
Grass said the new alliance would strengthen Rite Aid's position as a
modern health-systems company following its $1.5 billion acquisition of
prescription-drug benefits manager PCS Health Systems Inc., which was
due to close January 29.
The new agreement essentially would give GNC 1,500 new outlets for
existing products, plus a share in the new mass market PharmAssure line
and access to the Internet's so-called e-commerce marketplace.
GNC stock was up $4.50 at $19.875 a share on the Nasdaq market after the
announcement, while Rite Aid shares rose $1.625 to $50.375 a share on the
New York Stock Exchange.
GNC Chairman William Watts said the deal posed little threat of
cannibalizing existing sales because the selected Rite Aid stories were not
located near GNC outlets. He noted that GNC's 3,650 U.S. outlets are
located in shopping malls, while Rite Aid stores are mainly free-standing
units.
"Long term, when you look at the combination of the retail stores, the
PharmAssure business, the e-commerce site and the incremental business
we pick up at our manufacturing site, this alliance has the potential to be
significantly accretive to earnings," he said.
Under the alliance, Camp Hill, Pa.-based Rite Aid will allow GNC to set up
full-line GNC stores of up to 1,000 square feet within 1,500 of its 3,900
outlets. The "stores within stores" will be staffed by specially trained Rite
Aid employees with access to the chain's powerful pharmacy system.
Rite Aid stores, which average 14,000-15,000 square feet, would cede floor
space now devoted to less profitable housewares and general merchandise
items.
Grass said the first reformatted Rite Aid outlet would open by April 1,
probably on the East Coast, and predicted that the chain's dietary
supplement sales would double during its first full year of the alliance.
PharmAssure products would be sold at all Rite Aid stores and GNC stores.
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