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GNC: Store checks

June 5, 2017

We visited a handful of locations to assess sales trends and response to new initiatives at GNC locations.

Our overall impressions from store staff were positive although not as positive as those from other commentators.

The responses tended to support our financial projections of stabilizing revenues.

A store manager observed many older clients can’t sign up for the company’s new rewards program.

 

The introduction of reformative initiatives in any business invariably results in dislocations which are difficult to understand without field research. In the case of GNC (NYSE:GNC), the introduction of the One New GNC initiative (which we’ll call ONGNC herein) is a perfect example of disruptive change within a company. We therefore sought to establish a basis for our financial estimates, including our cash flow model, by performing a handful of store visits to assess whether we feel our estimates and projections are reasonable. We’ve combined our observations with those provided by other commentators making similar channel checks, and while our data points are somewhat more mixed than those of others, we generally feel that our current models are appropriate.

We provide color from our site visits in this article as well as an observation from a store manager regarding the ONGNC initiative that we’d not fully appreciated in earlier research.

First Store – Downtown Salt Lake City

The first store was visited in the late morning in a downtown urban location. We’d made prior visits to this particular location before the ONGNC program and had never seen customers entering or leaving the store during our visits. We were therefore rather surprised how busy the store was during our 10-minute visit with no fewer than five customers and four transactions. This is clearly an unscientific approach to analysis, and the activity may have been related to time of day, but it was nonetheless surprising given prior experience.

Unfortunately, the staff member at this location was relatively new and didn’t provide much insight into the business or indicate whether the recent spurt of activity was common or unusual.

However, aside from unusual customer traffic, the one other notable observation was that the store’s shelves were well organized and well stocked with only a couple noticeable out-of-stock items. In our previous visit in September, it had struck us at the time how many shelves were empty and items apparently out of stock. It’s possible that this was an aberration similar to the lack of apparent traffic observed before, but the contrast was noticeable and noteworthy.

Second Store – Midtown Salt Lake City

The second store was visited in the early afternoon in a dense residential/commercial district. The appearance of the store matched the first – a couple out of stock items but otherwise full shelves. In this case, the staff member behind the counter had been at the location before the introduction of the ONGNC initiative and was clearly positive on the program and felt that it had led to a noticeable increase store traffic. In particular, he noted that many customers who had previously come solely for the BOGO offers were now coming more frequently into the store. We couldn’t discreetly get him to give a sense of the magnitude in the change, but he did mention that he felt the new rewards program was gaining more members, especially among those who were more occasional shoppers.

Similar to the first store, we were not the only customer, and the customer ahead of us made a purchase during our 10-minute visit.

Third Store – South Suburban Salt Lake City

The third store was a visited in the last afternoon/early evening and is located in a traditional mall location in a suburban area. This visit was by far the most informative of the three on this day since I was fortunate enough to speak with the store manager.

The store manager’s general impression was one of cautious optimism – the store manager clearly liked the new program (and was a Pro member) and thought it was an improvement over the legacy program on balance but was forthright in saying that it definitely benefited more regular customers versus those who previously have come in to shop only the BOGO offers. In this sense, it was a win/lose situation – you can’t please everyone all the time. In contrast to the second location, we didn’t get the impression that this location had seen a deluge of additional customer traffic or transactions, but that the trend was mildly positive. In addition, the store manager indicated that while most people signed up for the free rewards program, which was very popular relative to the prior paid Gold Card program, only 20-30 individuals had signed up for the paid GNC Pro program.

However, it was clear why this individual was a store manager whether due to the improved training discussed by Robert Moran on the first quarter conference call or by individual initiative. The store manager clearly and succinctly walked through the various benefits of both the general rewards program as well as the Pro membership. The store manager talked about the Pro box (a sample of the latest of which was displayed next to the cash register) and discussed the value (about $36) and the individual products in the most recent personalized box received as a Pro member.

The store manager did make one comment relative to the new program that surprised us – that older customers were not signing up for the new rewards programs since they often didn’t have email addresses which are required by the new program. It’s difficult to fathom anyone not having an email address in our overconnected day and age, but at least, at this particular location, a meaningful proportion of customers were older individuals. We’d not fully appreciated before how much of the company’s customer base, at least in certain areas, may skew to an older population. In some ways, this makes inherent sense since older individuals would of course seek supplements to offset the effects of aging. In this particular case, the store manager was also a nutritionist and felt that this prior training provided a basis for trust on the part of older clients who often called to see when the store manager would be at the location.

The observation struck us in comparison with Robert Moran’s comments on the first quarter conference call when discussing the new rewards programs:

“Our new program requires e-mail address for each member so that we can now communicate in a more cost-effective and timely manner, now that we’re using the rich data we get from our new loyalty programs to narrowly target offers, recommend regimens and solutions and incent behaviors based on customers’ specific detailed shopping habits and patterns. In an industry where consumers are looking for trusted advice, something that just can’t get online with mass competitors, personalization matters and creates significant opportunities for our business.”

Clearly, this makes sense from both a data gathering and financial standpoint, but it does inspire the question of how much of the company’s customer base may be being missed through the rewards program. It’s possible that the older population who don’t use email represent a small percentage of the company’s overall sales and are immaterial to the overall business, but at the same time, the company has a customer segment of individuals who are actively seeking health and nutritional information and solutions yet will be entirely missed by the new rewards program. We’d think it would behoove the company to understand just what portion of its customer base falls into this category and whether there may be merit to introducing a rewards program extension focused specifically on older customers (called GNC Plus, for example) that would allow the company to continue capturing this information and proactively addressing this market even if the marketing costs are marginally higher than other means. It’s an interesting question how large this potential market may be and to what extent it is being effectively served by the company and wider industry.

Fourth Visit – Central Las Vegas

The fourth store was visited in the afternoon at a location in a strip mall in a mixed commercial/residential area. The staff at this location had clearly seen an increase in traffic – “maybe six or seven more people a day” in the words of the sales clerk. In addition, while most people signed up for the free rewards program, this location had also sold a number of GNC Pro memberships and felt that adoption was picking up when people started receiving the GNC Pro Box. The sales clerk at this location had signed up “about 10” people since the introduction of the program but didn’t know how many in total had signed up at the store.

Fifth Visit – South Las Vegas

The fifth store was visited in the late afternoon at a location in a strip mall in a suburban residential area. In this instance, the staff member was not the manager but a full-time employee. He indicated that he’d seen a very strong response to the One New GNC program with the number of people coming into the store up by “several” a day and more people who came into the store actually making purchases or looking for something specific instead of browsing. Again, most people signed up for the free GNC rewards program but some had come back to upgrade to the Pro membership when friends or family had received the GNC Pro Box. His sense was that people were skeptical of the value of the membership and that the Pro Box might be just a small package of samples but, in his words, “seeing was believing” in the membership.

In each case, our visitors reported that the staff had clearly been trained on the One New GNC program, and the descriptions of the improvements in the program, the new pricing strategy, etc., were surprisingly consistent. In addition, in each case, our visitors were asked if they wanted to join the rewards program.

Summary

The information received during our five store visits was mostly positive although, of course, on a largely anecdotal evaluation, most people are likely to be positive than negative. We do not see reason to expect sudden or runaway same store sales results or operating leverage improvements. However, the overall data points were favorable with incremental adoption of the GNC Pro membership and supported our view of mildly improving revenue trends (-2%, 0%, and 2% same store sales for Q2, Q3, and Q4, respectively) for the rest of the year. We are increasingly confident that the ONGNC initiative has achieved the stated objective of bringing customers back to the store. Further, our field visits generally support management’s statements in the Q1 conference call as well as the incremental improvements seen in the company’s pilot locations. We anticipate continuing on-site visits going forward to monitor reported trends in customer traffic and transactions in the future.

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