WHOLE EARTH 1999-01-18

CHAPIN CLARK / Additional reporting: JOEL ELSON

A multifaceted alliance between Rite Aid Corp., Camp Hill, Pa., and General Nutrition Cos., Pittsburgh, has turned up the heat in an already feverish dietary supplement market.

But such is the state of this tremendously profitable category that supermarket executives, manufacturers and industry observers told SN the agreement, while undoubtedly a boon for Rite Aid and GNC, wouldn't put a dent in supermarkets' booming vitamin and supplement sales. Indeed, they said, supermarkets might even benefit from the resulting growth in the overall market.

"That whole category is growing and will keep building. It's a category that's bigger than these two companies," said Charles Yahn, vice president of general merchandise at Associated Wholesalers, York, Pa. "There's a big opportunity for these products, and it's still out there for supermarkets."

Citing the new Web site under development by Rite Aid and GNC, gnc.riteaid.com, David Himel, health and beauty care buyer for Baton Rouge, La.-based Associated Grocers, said, "A positive offshoot is people will be able to go to the Internet for information about nutritionals, supplements and herbs, and some of them will go to the supermarket for the product."

Announced Jan. 7, the Rite Aid-GNC pact is a blockbuster.

In addition to the Web site, through which consumers will be able to access a range of free health information, as well as purchase all prescription drugs, vitamins and supplements offered in Rite Aid and GNC stores, the agreement calls for Rite Aid to install full-line GNC stores within 1,500 Rite Aid units during the next three years. The first store is scheduled to open within the next three months, said William Watts, GNC's chief executive officer.

GNC will manufacture a new line of vitamins and supplements, called PharmAssure, to be sold in GNC and Rite Aid stores starting this fall. In addition, GNC will become the exclusive producer of Rite Aid's private-label vitamins and supplements.

Rite Aid and GNC have pledged more than $30 million in advertising support for the program in the first year alone. The two companies will spend $9 million to promote the Web site.

The potential benefits for both companies are substantial. In GNC, Rite Aid will tap a cost-efficient manufacturing operation and by far the most widely recognized brand name in a field where branding is still in its infancy. In Rite Aid, the No. 3 drug chain in the country in terms of sales, GNC essentially gains 1,500 new doors -- at least, for Rite Aid has said it will go to a wider rollout if the initial locations are a success -- and the imprimatur of the pharmacy. The chain operates about 3,900 drug stores in 32 states.

"This raises the ante substantially," said Bill Bishop, president of Willard Bishop Consulting, Barrington, Ill., and an architect of the supermarket industry's whole-health marketing campaign. "Through the Web site and the promotional budget, Rite Aid is really positioning itself to become the go-to place for these products."

However, Bishop added that supermarkets, as providers of produce and other healthy foods, maintained an advantage. "[The Rite Aid-GNC deal] doesn't yet include any of the eating-for-health opportunities that make whole health so persuasive. This is not the whole enchilada."

Another whole-health proponent, J.B. Pratt, owner and CEO of Pratt Discount Foods, Shawnee, Okla., agreed. But he said the deal should serve as a wakeup call to supermarkets.

"It's a real message: you'd better get yourself a [nutrition] department, whether it's with a franchiser or not."