GNC is putting more of its branded stores in the hands of franchise operators as it aims to snap out of a financial funk. The nutrition and supplements retailer has revealed that it plans to sell off:
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84 of its stores to one of its existing franchisees, Sun Holdings, for $17 million;
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As many as 200 corporate-owned stores to franchisees in 2016; and
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More than 1,000 of its 9,000 corporate-owned stores in total over the next three to four years.
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With GNC experiencing fiscal difficulties stemming from a decline in sales of its Vitapak product line, pressure to slash prices on expiring products and overall challenges in the vitamin and supplement sectors, the company is scrambling for answers as to how to bring its stores to profitability.
The move to cast off additional stores under the franchise model is striking, as Q1 same-store sales at franchises actually dipped 5.6%, more than double the 2.6% sales declines at company-owned locations and its online store.
Nevertheless, the shift to a franchise operation brings money in for the short term from the individual stores, and is designed in the long run to maximize the retailer’s capital efficiency, according to a statement made by GNC CEO Michael Archbold in February.
GNC, Ace Hardware In Largely Unexplored Territory
With the franchising business model dominated by fast food restaurants, convenience stores and fitness centers, GNC and Ace Hardware are two of the rare breed of specialty retailers operating a significant portion of their business through franchises.
At first glance, the decision to sell sites to franchisees offers numerous benefits. For example, these stores require less corporate investment to open when they are operated by individual franchisees. In the long term, the attached fees and royalties paid to the franchisor can be substantial.
The downside for GNC is that many of its domestic franchisees did not participate in all corporate promotions, including the retailer’s expanded assortment initiative, according to the Q1 earnings report.
The lack of coordination and consistency with the GNC brand could definitely have had an impact on how these stores performed from a sales standpoint. Future sales could well erode GNC’s power as a national brand even further. If GNC does in fact go through with selling 1,000 stores off, the retailer might want to introduce more stringent terms related to the usage of expanded assortments and deployment of promotions.
Whether this idea works in GNC’s favor or not, the merchant is making a bold statement by doubling down on a business model that doesn’t provide much precedent within traditional retail. The success of GNC as a franchise operation will help set the tone for other retailers interested in moving to such a business model going ahead.
