General Nutrition Centers, Inc. is the largest specialty retailer in the world for dietary supplements. It's no secret that the company has been struggling for quite some time. The company has faced fierce competition and has continued to lose market share every year. And, as of April 28, 2020, the company announced the New York Stock Exchange had warned it of potentially being delisted. Ouch. Can GNC make it through the COVID-19 pandemic, or is this end of the 85-year-old company? Here are my thoughts.
Loss of Market Share
The dietary supplement industry has changed dramatically over the past ten years. And this change hasn't boded well for specialty retail. Two significant shifts occurred. The first is the rise of Amazon. Amazon currently owns 77% of all online purchases for dietary supplements. The only industry hit harder is the electronics industry (81%). The other shift is food, drug, and mass retailers (FDM), including Walmart, Target, CVS, Walgreens, Costco, and various grocery stores, dramatically expanded their assortment of supplements. Both of these retail channels (Amazon and FDM) provide consumers low friction for purchasing a wide variety of products. Instead of having to buy products from multiple stores, consumers can buy almost everything they need from one. GNC doesn't provide the convenience to its customers to make an additional stop at their stores. (No way you'll find me walking through a mall to get my protein powder) As a specialty retailer, you have to provide some add-value or experience that will make your customers want to come back.
Poor Customer Experience
Let's face it. GNC is a cutthroat, used car salesman culture. Poor financial performance, combined with salespeople who are incentivized to push specific brands/products, is a recipe for disaster. Oh, and if you've been to a store lately, I'm sure you've been pitched a GNC Pro Access membership that's $39.99 (that’s not worth it), and if you don't buy it, you're putting the employee's job in jeopardy. This is the type of culture that has helped fuel the loss of market share. Your experience is one that will make you want to shop somewhere else. (This is a generalized statement, as I know some great people within GNC).
Poor Financials
Declining revenue, massive amounts of debt, and few assets that are worth anything. That’s the current status of GNC financially. Having sold its manufacturing business to International Vitamin Corporation (IVC) and turned over its Chinese market to Harbin Pharmaceutical, GNC doesn't have many assets left. Its long-term debt is coming due in twelve months, and the company has already warned the SEC that it will not be able to pay it. The company needs to refinance its debt once again. Two things are working against them this time. One is the lack of assets, and the other is the loss of sales due to the COVID-19 pandemic. The company already struggles to generate cash quickly enough, and now they are suffering from limited hours of operation.
A good comparison of a specialty retailer that was dramatically affected by Amazon is Best Buy. Yes, they operate in a different industry, but it is an industry that has been hit harder than dietary supplements concerning e-commerce. Best Buy was on the brink of failure in 2012-2013 and was able to turnaround its business. The company is thriving now, and its share price is the highest in company history today. Best Buy can convert investments in inventory into cash in as little as 9.26 days. GNC, on the other hand, takes 93.23 days. This means Best Buy's management is far more effective at converting its investments into cash flow. Best Buy's debt ratio is more manageable than GNC's, as well. More importantly, Best Buy was able to create an experience within its stores to make customers shop there. This has led to better financial performance and why Best Buy is thriving in the Amazon era.
Overall
GNC has taken its blows and has continued to stay alive. Unfortunately, I think this is the blow that finishes them off. I don't have faith in the company. I'm less concerned about the financial health of the company (albeit still very concerned). It's the company's culture and lack of experience within its stores that are the issue. Even if the company makes it through the pandemic and restructures its debts, I don't see them surviving. They've been slow to adopt new technology, attempted to change the business model as the 'One New GNC' then immediately reverted to its old ways, and do not offer any experience within their stores. Their direct retail competitor, Vitamin Shoppe, did a much better job of adapting an experience-based culture. At Vitamin Shoppe, you can get a sample of a new bar or supplement and have a kombucha drink from their bar, all while being coached by a Registered Dietician at a wellness seminar. It's sad, really. GNC has always had a special place in my heart. It's where I started in the supplement industry, where I met many of my friends, and where I met my fiancé. Unfortunately, all things must come to an end.
Do you think GNC will survive?