Bob Montanari saw it coming.
The 46-year-old entrepreneur figured his old bosses at General Nutrition Companies Inc. wouldn't take lightly his leaving and launching of The Nutrition Club, a retail and online business that would compete against them in the sale of vitamins and other nutritional supplements. Montanari's new venture is targeting Pennsylvania and six other states for its initial development of company stores and plans to franchise throughout the United States, with ambitious plans for as many as 1,000 stores in the Northeast within five years.
Despite some differences in the way that The Nutrition Club, based in Robinson Township, intends to structure its corporate and franchising operations and market itself, the companies compete in the fast-growing nutritional supplements industry. And several other former GNC executives and managers followed Montanari to the new venture.
Without question, Pittsburgh-based GNC, with 1999 revenue of almost $1.4 billion and some 4,200 corporate and franchise stores, dwarfs The Nutrition Club. In fact, a merger of GNC and the Dutch company Royal Numico N.V. last year created an entity with combined annual sales of $3 billion. Nonetheless, Montanari says he had little doubt that GNC would not take the actions of its former employees lying down.
He was right.
"Yes, absolutely, we did anticipate it," says Montanari of the legal steps his former employer took.
General Nutrition Companies Inc. promptly sued Montanari, president and CEO of The Nutrition Club, and another former GNC employee, even before The Nutrition Club opened its first store in Robinson Town Centre in April. GNC alleged that the former employees took trade secrets with them and enticed other employees to work for The Nutrition Club.
The two parties settled before the case came to court, and both are restrained by the terms of the settlement from commenting on it. GNC didn't respond to SBN's inquiries about the suit, but Montanari says that the action hardly caused a blip on the radar screen of his new company, in large part because the executives expected it.
And, he says the concept for The Nutrition Club remains as originally conceived.
"We're real, real happy with the model that we've developed, and we've not had to change anything as a result of that lawsuit, not one thing," says Montanari. "The business plan is definitely intact."
A hot topic
In retrospect, it's not surprising that GNC took action against Montanari and The Nutrition Club. While there are differences, The Nutrition Club competes in essentially the same market segment as GNC.
Montanari worked for GNC for almost five years as director of sales in its franchising operations. Ultimately, six key GNC employees left to work for The Nutrition Club, all with experience in key operations areas such as real estate, construction and store operations.
Montanari was approached with the idea of starting The Nutrition Club by a wealthy investor who made his fortune in the sports nutrition field, a fast-growing slice of the nutrition products industry, and who wants to maintain a low profile. Montanari says he was attracted to opportunity for several reasons.
"First and foremost, I saw no upward growth in GNC franchising, and I've always been an entrepreneur at heart," Montanari says.
On the other hand, the nutrition products industry -- a market forecast to grow 7.5 percent a year until 2003, when sales are expected to reach $16.6 billion -- holds plenty of opportunities for a new retail concept that will aggressively pursue franchising.
Montanari won't disclose just how much investors have dished out to launch The Nutrition Club, characterizing it only as "extremely well funded." Some published reports have suggested capitalization of as much as $15 million.
The plan they put together calls for making the most of others' entrepreneurial drive, combining a bricks-and-mortar operation with an e-commerce business and creating progressive incentives for consumers that will avoid cutthroat pricing and replace it with customer loyalty.
"We spent several months making sure that we were significantly different," Montanari says. "We didn't want to get attacked on price."
The Nutrition Club spent close to $1 million to put together a package of incentives to keep customers coming back. The result is an array of enticements, including a schedule that offers bigger discounts as a customer's total purchases over time accumulate.
By providing basic information to join the "club," customers receive a 5 percent discount on purchases, up to $499.99. The discount rate increases until they reach $1,500 in purchases, at which point they get 10 percent off everything they buy. Other incentives include promotions for club members and bonuses for reaching spending levels during specified quarters.
Few company stores
The Nutrition Club is planning only a handful of company stores, mostly to demonstrate the concept and provide training for franchisees. The model puts the heaviest emphasis on franchise development, with plans to have up to 90 percent of its stores owned by franchisees.
Greg Helwig, The Nutrition Club's director of franchising, says organizations that try to split their efforts between franchise and company-owned operations inevitably face decisions that pit the interests of each against the other.
"You can't balance both and do it well," says Helwig.
The corporate entity may be able to sustain a price war with a competitor, for instance, because of its deeper pockets, but franchisees with more modest resources may not be able to stay in business for long if they are forced to operate under slimmer margins.
That contrasts with GNC's operations, with only about a third of its stores owned by franchisees. Additionally, GNC has plans to open 1,500 stores within Rite Aid drugstores.
Given the right set of circumstances, The Nutrition Club may never have gotten out of the gate. A protracted legal battle waged by an outsized competitor could have easily derailed the company. Montanari, however, maintains that the legal fight didn't distract The Nutrition Club's team.
The reason? "Quite frankly, it's called preparation. We actually had meetings prior to this ever occurring about the potential of GNC suing us," he says.
So how were they able to focus their attention on the development of a fledgling business, despite being under the pressure of a lawsuit pursued by a large public company?
Montanari says he and the other executives retained every document that came into their possession, noted every phone call and backed up and printed out every e-mail message to deliberately create an extensive paper trail of The Nutrition Club's activities. They even stapled resumes and cover letters to their envelopes and stamped them with the receipt date.
They retained documents from correspondence to inquiries about franchising and conducted meetings to prepare for depositions. Overall, they accepted the fact that they might be sued and geared up for the possibility.
Ray Marano (email@example.com)is associate editor of SBN.