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DONALD TRUMP IS NOT THE ISSUE. WE ARE.

February 15, 2017

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It’s Bowl Season: Retail is 4th and Long

January 23, 2017

The Super Bowl used to be the biggest event of the year for the sports and advertising community. From 2006 through 2015, the game generated $2.38 billion of advertising sales and anticipation to see the ads was equal to (or greater than) which team would win the game. As a “marketing person,” I was always on high alert for those 30-60 second increments of air time. (Like seeing Jake Gyllenhaal at the stage door after his performance of “Sunday in the Park With George” high alert...In other words, pretty high.)

While ad costs have increased over the years, their impact has been increasingly irrelevant. With all the new ways people consume media and buy products, the “moment in time” approach can’t compete with today’s “always on” demands. Oreo’s 2013 “Dunk in the Dark” audible created a groundswell of cultural significance and was probably the last substantial brand “win” for a Super Bowl spot.  But did it sell more cookies? Should that even matter anymore?

Well, if you’re GNC it should, especially since the brand is staring at 3 years of domestic comp sales declines while 2016 proved to be its worst year since going public in 2011. The brand is clearly throwing a Hail Mary hoping for divine intervention with its first Super Bowl ad in the company’s 80-year history.

It’s 4th down with :14 to go in 4th, guys, or as Bloomberg put it, “The company’s shares have plunged by more than 64 percent in 2016 as foot traffic fell at its more than 4,400 U.S. stores and customers cut down on buying vitamins and nutritional supplements…GNC’s market value has dropped by about $5 billion since its peak in 2013 as it battled slumping sales and aggressive competition from online sellers and Wal-Mart Stores Inc.” Yeah, like I said…

 

The challenge is that GNC operates in category that basically sells generic products and, to win, retailers like that have to (a) deliver a dazzling, differentiated retail experience, while (b) recapture its fair share of business that is steadily migrating to online and subscription-based channels. Well, they recently announced a new “dramatically improved store experience” One New GNC, does that count? iPad checkout, sampling, and a loyalty sweepstakes should help the largest specialty retailer of health, wellness and performance products gain more than 8 percent of the market, right? Right. #ONEnewGNC  

What the hell went wrong, GNC? (Don’t answer that).  We have a thought that might get some traction at the “functional and performance water” cooler. Franchising.

 

Before Private Equity started getting into the retail game, franchising was a fast expansion strategy. GNC franchised its first store in 1988. The franchise landscape has changed dramatically since then as evidenced by the fact that we no longer wear acid washed jeans and consumers demand more than lowest priced convenience. In a way, franchising is a lot like unions (stay with me): not universally bad, but many serving more of a bygone need that has not evolved with the times. It’s “out of fashion” so to speak.

 

Franchised businesses commonly have a huge challenge because of an inherent conflict between corporations and franchisees, and it goes way beyond royalties and rent/service fees.   In many cases, the attributes of a successful franchisee are at odds with the attributes of people who become franchisees.

 

Many become franchisees because they want to be “shopkeepers.” They want be an operator, follow a playbook and execute the company’s (hopefully winning) plan.  Even if they don’t know anything about the industry, all is good as long as they follow the playbook.  On the other hand, too many people become franchisees because they have entrepreneurial spirit but do not want the associated risk of doing something on their own.  This group is less focused on executing the playbook and more interested in building a better playbook.  Especially when comp sales are in decline.  So, in tough times, this group has their own ideas for increased sales, better marketing, and operational improvements – and they are reluctant to follow anything prescribed by the company, you know, the entity that got them into this mess in the first place. And this behavior, is inherently opposed to establishing and maintaining a successful franchised system.

To make matters worse, many franchisees are in long-term leases and likely do not have a lot of leverage and/or capital to change that, even as sales fall off a cliff, so they are sort of stuck in time with limited ability to make change.

 

Plus, in the case with GNC, as business moves to online, franchisees tend to be wary of allowing the company to chase these revenues, (i.e., how do they know that they are getting their fair share?)  There are simply too many “what-if’s” to reconcile online sales with a franchise retail location on Main Street.  Tracking orders by zip code helps but doesn’t get close to solving the “white space” problem, e.g., do you go by zip code of order or of delivery address if different? In larger cities, there are multiple franchisees per zip code and may even be some overlapping corporate stores. What about people who work in one zip code but live in another and their loyalty card has one of those addresses? Which store gets the sale?

Too much of GNC’s massive global system is franchised. In the U.S, roughly 1,100 stores are franchised (around 30% of its traditional retail locations). On top of that, GNC’s formats are all over the place, including kiosks, malls, and stores-within-a-store in both urban and suburban locations.

If we look at Vitamin Shoppe by comparison, there’s more to the story than ye olde tyme charm of spelling “shop” “shoppe.” Vitamin Shoppe has 700 company-owned stores (100% of its system).

 

GNC ($11) stock off 65% from same time last year.  P/E is 4.

V/S ($24) stock off 29% from same time last year.  P/E is 14.

 

As a result, while we are fairly certain Vitamin Shoppe is holding plenty of meetings to address their sales softness, the simple fact that they operate all of their stores puts them in a bit more of a driver’s seat to be able to control their own destiny.  

 

So, on February 5, at 6:30pm, Vitamin Shoppe may already have a 30-year growth plan underway, while GNC will be queuing up its 30-second Super Bowl ad.

 

Hail Mary full of grace…

 

 

 

 

 

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