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GNC reaps benefits of franchisees’ efforts to grow

Tribune-Review
| Saturday, April 16, 2016 9:00 p.m
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Stephanie Strasburg | Tribune-Review
Dane Morris, owner of a GNC franchise in Brentwood Towne Square south of Pittsburgh, on April 4, 2016. The 31-year-old recently opened a second store in Morgantown, W.Va. GNC Holdings Inc. is opening more franchises and converting more corporate-owned stores to franchises as the company seeks to boost profits.
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Stephanie Strasburg | Tribune-Review
Dane Morris, owner of a GNC franchise in Brentwood Towne Square south of Pittsburgh, discusses his experience as a new franchisee on April 4, 2016. The 31-year-old recently opened a second store in Morgantown, W.Va. GNC Holdings Inc. is opening more franchises and converting more corporate-owned stores to franchises as the company seeks to boost profits.
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Stephanie Strasburg | Tribune-Review
Mike Dzura, executive vice president of operations for GNC Holdings Inc., said franchise owners bring a 'unique passion' to the business, which translates into strong sales. Dzura discussed GNC's strategy to open more franchises and convert corporate-owned stores to franchises at a GNC store in Brentwood Towne Square south of Pittsburgh on April 4, 2016.

When Dane Morris goes to his local L.A. Fitness gym or I Love Kickboxing studio, he’s looking for more than a workout.

The young GNC franchise owner is searching for potential customers as he works to build up business for the vitamin and supplement store he opened in Brentwood Towne Square, a shopping plaza south of Pittsburgh, in December 2014.

“It’s important to get your name out there,” Morris, 31, told the Tribune-Review during an interview at his store. “You’re coming to them (in the gym), so it’s easier to have a conversation.”

He talks to fellow fitness buffs about nutrition, hands out free samples of protein drinks and passes along coupons for GNC products. The extra work is paying off. Morris boosted sales 15 percent in the first quarter this year and has impressed corporate managers, who tapped him to open a second store near Morgantown, W.Va.

Downtown-based GNC Holdings Inc., the nation’s largest specialty retailer of vitamins and supplements, is on the hunt for more franchise owners like Morris, who put in extra effort promoting their stores and can generate stronger revenue and better profits for the company.

GNC’s corporate-owned stores had revenue of $1.9 billion last year, flat compared to the previous year, and produced operating income of $308 million, down 12 percent from the prior year. In the same period, GNC franchises generated revenue of $458 million, up 6 percent, and operating income of $165 million, up 5 percent.

Franchises also are less costly to operate, making them more profitable for GNC.

To take advantage of those trends, GNC is encouraging new and existing franchise owners to open stores and buy corporate-owned stores for conversion to franchises. The strategy, announced last year by CEO Mike Archbold, started in earnest this year with the goal to convert 1,000 company-owned stores by 2018 or 2019.

The company also will primarily open franchises rather than corporate stores, reversing a trend in the past five years in which about three-quarters of GNC’s new stores were company-owned.

GNC’s goal is to have half its U.S. stores be franchises in three to four years. Less than a quarter of its 4,700 domestic stores were independently owned and operated as of the end of last year.

Franchises are a more efficient way to run retail or restaurant chains because the parent company doesn’t have as much money tied up in inventory and it doesn’t shoulder other expenses related to running the stores. Plus, franchise companies receive consistent revenue through fees and royalties on sales.

It’s a strategy that’s been favored by fast-food chains in recent years. Burger King has been hailed for boosting profits by selling off nearly all its restaurants. Fellow burger chains McDonald’s and Wendy’s have followed with similar refranchising strategies.

GNC expects to boost its stock price because it will have more money to return to shareholders through dividends and stock buybacks — all while maintaining profits, Archbold told the Tribune-Review in an interview this year.

“We sell them (the stores) off at a profit, and more importantly, we make the same money owning them as selling them off,” he said. “It’s a cash-flow generator … They pay us a franchise fee for the store, royalties (on sales) and they buy a lot of the product we make at a margin.”

It’s a plan that’s been cheered by investors and praised by analysts.

GNC’s stock price jumped 13 percent when it announced the plan in July. The shares have given back those gains over the past six months after Oregon’s attorney general sued GNC for allegedly selling illegal drugs as supplements, which GNC denies, and a Department of Justice probe of the industry, which didn’t involve GNC.

Joseph Edelstein, an analyst at Stephens Inc. in Chicago, estimates that GNC will add 3 cents to 4 cents to annual per-share profit for every 100 corporate stores it converts to franchises.

“Refranchising concepts tend to be high margin due to the recurring revenue and the modest expense in managing franchises,” Edelstein said.

New franchisees pay $40,000 for a franchise license from GNC and existing store owners pay $30,000 for additional licenses, according to the company’s financial disclosures. Franchisees also pay a 6 percent royalty on sales, contribute 3 percent of sales to a national advertising fund, and lease their stores from GNC.

Franchise stores accounted for 17 percent GNC’s $2.6 billion in revenue last year – which includes sales from its stores and revenue it gets from making products for other companies.

Morris has so far exceeded expectations for a first-time franchisee at his Brentwood store, GNC said, and was tapped for a second location. Morris opened the store in Morgantown, near his alma mater, last month.

Michael Dzura, GNC’s executive vice president of operations, said the company tracks franchisees on sales performance, staff knowledge of products, customer service and other factors. Morris is beating those metrics, Dzura said.

“The proof is in the pudding. Dane’s sales comps are trending ahead of both the local market and the company broadly,” he said.

Morris said he’s already applying lessons he’s learned from his first store in Morgantown. He’s being selective in his hiring for sales associates and making connections with sports programs at West Virginia University.

“It’s the people who make it the best,” he said.

Hiring the right employees is the primary way that Christopher DuBois improves GNC stores when he buys corporate locations and converts them to franchises. DuBois owns 13 stores in the Minneapolis metropolitan area, including three existing stores he bought from GNC in December and January. When he takes over a corporate store, DuBois said he interviews all the workers but typically only keeps about one-in-five existing employees.

“Some employees get it and some don’t,” said the 52-year-old, who’s owned GNC franchises for 21 years. “I do not need cashiers. They can go work at Target.”

He looks for confident, mature and outgoing people who have a passion for fitness and nutrition, he said. “I have a lot of kinesiology majors, personal trainers — people who live the lifestyle.”

DuBois also spends time meeting people in nearby businesses, especially the gym owners, nutritionists, chiropractors and hair stylists in the community.

“You have to build an outside sales force” that will refer customers to the store, he said. “You can only do so much in the store.”

Alex Nixon is a Tribune-Review staff writer. Reach him at 412-320-7928 or anixon@tribweb.com.

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