GNC deal with NYAG raises troubling issues for future of industry, observers say

By Hank Schultz contact

- Last updated on GMT

GNC deal with NYAG raises troubling issues for future of industry, observers say

Related tags: Gnc, Dietary supplement

A consensus is forming around the deal that GNC entered into with New York Attorney General Eric Schneiderman.  The deal is being seen as good for GNC’s short term interests but bad for the future of the dietary supplement industry as a whole.

GNC Holdings Inc. was one of the four original retailers targeted by Schneiderman’s probe based on what has generally been seen as a misapplied DNA barcoding testing methodology to assert that herbal products on the shelf in New York state had little or none of listed main ingredient in them. Schneiderman sent letters to the retailers (the others being Target, Walgreens and Walmart) demanding that the products in question be pulled from the shelves.

Schneiderman has since expanded his effort to include more supplement retailers and manufacturers and has demanded claims substantiation and quality control information from them. 

Of the initial four companies, GNC was the one that pushed back the hardest, doing its own testing on the product lots in question and sent them out for third-party testing.  The company was adamant that the products met label claim.

Quick agreement to protect bottom line

Observers say one of the reasons GNC took the lead is that it had the most to lose.  Supplement sales are a tiny part of the overall revenue picture of Target and Walmart and represent a minority of Walgreen’s sales, too.  But supplements are the main product line of GNC.

And GNC is a publicly traded company, with all the pressure that that brings to bear on the short term earnings outlook. The company’s revenue picture has been stagnant in recent quarters, a situation that brought about a shuffle in the executive suite, with longtime CEO Joe Fortunato out and Michael Archbold in. So in some ways it makes sense that GNC took a quick out.

“As a publicly held company, they had to make this go away as fast as they could, no matter how repugnant the deal was or the repercussions for the entire industry. GNC’s store brand products are back on the shelves for sale in New York without a long, expensive battle, the exact same products the AG made them remove two months ago,”​ Suzanne Shelton, a long time PR professional in the dietary supplement industry told NutraIngredients-USA.

“I understand GNC’s desire to settle.  I understand what GNC is getting out of this.  Their stock went up almost 7% after the announcement, higher than it was before the AG started the probe in February,”​ said attorney Marc Ullman of the firm Ullman, Shapiro & Ullman.

“GNC made a business decision. If the trade organizations don’t like it, that’s tough,” ​said Jeff Nedelman, a strategic communications consultant who has worked in the past with the Grocery Manufacturers Association.

Hollow victory

In the agreement, Schneiderman does acknowledge that GNC did nothing wrong in terms of GMP compliance.  But that’s of little comfort, as the rest of the text of the agreement serves to validate the testing approach NYAG took, something that experts in the field of the testing of botanical ingredients have hotly contested.  GNC has agreed to expand DNA testing of incoming raw materials and supply the results to NYAG on a semi annual basis.  This flies in the face of the Food and Drug Administration’s and United States Pharmacopoeia’s assertions that the technology is as yet unproven for this purpose.

Shelton said the agreement now creates significant challenges for companies seeking to do business with GNC.

“Herbal ingredient companies that want to sell to GNC will now have to incorporate DNA testing, even though it adds nothing to safety or efficacy. Will GNC pay more for those ingredients?  If their short-lived requirement of NSF verification that they quickly dropped is any example, the answer is no. How will the companies make up for the additional expense? By lessening the quality of the ingredients? By forgoing the valid testing methods that actually do impact quality? There aren’t many labs that do DNA testing for herbs, and really only one with experience, so what happens if the NY AG strong arms other manufacturers into using DNA testing?”​ she said.

Ongoing damage

The agreement also serves to make the case in the mainstream media and the world of social media that Schneiderman was right: The marketers of dietary supplements and the companies that make the products don’t have their customers’ best interests at heart and can’t be trusted to mind their own store.

“The extensive media coverage of the NY AG’s actions has caused a profound shift in consumer attitudes, far beyond anything I’ve observed before. I’ve closely monitored reader comments to negative media coverage for years, and what I am seeing now indicates an overwhelming loss of confidence in all dietary supplements, not just herbs.  Comments in the past could be summed up as ‘I don’t believe this article: I’m healthier and feel better when I take my supplements.’ Now I’m seeing, ‘Those people should be in jail, those products are useless / dangerous so I will never buy them again.’ ”​ Shelton said.

Bad policy precedent

Ullman said a precedent has been set for local regulation of dietary supplements, something which has happened in other regulatory spheres before. As example is the auto industry, when California started setting its own crashworthiness and emissions standards, or closer to home, that state’s Prop 65 regulatory regime.

“This agreement is great politics personally for the attorney general. It’s horrific policy,”​ Ullman said.  “Maybe the Nassau County (NY) district attorney would like to get involved.  Then we could have three levels of government in the game.

“I have not seen this kind of bullying, facts-be-damned tactics from a prosecutor since Rudy Giuliani,” ​he said.

Power vacuum

Nedelman said that the GNC-NYAG pact shows a fundamental disagreement about whether federal regulations on dietary supplements are sufficient and whether they are being enforced vigorously enough.  That kind of issue acts as a burr under the saddle, and doesn’t just go away, he said.

“There is a perception that there are not just a few rotten apples in the barrel, there are quite a few. There is a lot of gnashing of teeth and bitching and moaning in private about what to do about it. Since 1986 what we have seen is an overburdening of FDA by additional responsibilities and and only a marginal increase in funds, which has gone mostly to the microbial contamination side,”​ he said.

“You now have FDA taking the position that unless this stuff is killing someone, they aren’t interested.  Where there is an absence of federal action, the power to protect public health is not going to remain dormant, it is going to flow.  And it has mostly flowed to the attorneys general,”​ Nedelman said.

Riding out the storm

Shelton said she expects sales of dietary supplements to take a hit in the first quarter as a result of the negative publicity fallout.  To limit the damage, brands that already have a quality positioning need to step up their game to reinforce that, she said.

“My PR advice for the rest of the industry: Companies who have been doing things right all along and have been telling their quality story to their customers will retain customer loyalty.  Proactive transparency will be crucial moving forward,”​ she said.

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