Last week, the nutritional supplement retailer GNC announced that, as part of an ongoing initiative to improve its business, the company will be closing 200 stores. This move can be attributed to a larger narrative in retail that has become known recently as the “retail apocalypse.” The term retail apocalypse refers to the closing of a large number of North American brick-and-mortar retail stores starting in the 2010s and continuing through the present day of 2018. Truth is, most brick and mortar retailers have way too many stores and need to close down locations to scale back on overhead costs like rent in favor of focusing on e-commerce strategies.
GNC has about 9000 stores around the world, with about 3400 locations in the US alone (and that number doesn’t even include franchise stores or the store-within-a-store partnerships it has with Rite-Aid I believe). On top of the bloated real estate portfolio, the company’s revenue has been down over the past two years, from about $2.68 billion in 2015 to $2.45 billion as of 2017. All of the losses can be attributed to the US/Canada side of the operations, as international (non-Canada) revenue has seen an increase over the same two years (but it’s a small proportion relative to overall business >10%).
So, what is going on here? Is it that the nutritional supplement market is shrinking?
On the contrary, as there are projections that customers globally will spend about $160 billion in 2018 and is projected to accelerate at a CAGR (compounded annual growth rate) of 9.6% from 2018 to 2024.
This shows, that globally, consumers are buying nutritional supplement products as they take an interest in their health and wellness and become more educated through the information overload superhighway (aka the Internet).
So why would GNC be closing store locations? Is it the Amazon Effect?
Again, not so fast on blaming the “Death Star” that is Amazon.
- Yes, Amazon has started to focus efforts on the nutritional supplement CPG category
- Yes, Amazon now demands almost 50% of every $ spent online in the US
- Yes, the nutritional supplement CPG category is very mature in its e-commerce buying behavior
But…when it comes down to it, Amazon is not even 5% of the overall retail sales in the US in 2018. (Note: some analysts believe that can double in next 2 years though!)
What do I think the real reason is for the store closures?
GNC’s timing and aggressiveness for adaptability.
1. GNC has a brand image issue in the US/Canada market (and will also have the same issue in about 5-10 years internationally as those markets mature). GNC is a very masculine brand and sells in an environment more suited to men with a deep interest in fitness. This hurts them as the fastest growing category of buyers to nutritional supplements are women.
2. The GNC retail experience is very sterile compared to an e-commerce world with increasingly targeted offerings. Customers only see “what data shows they will like” by companies like Google/Facebook/Twitter/Snap/Amazon. That hurts brick and mortar retailers that want to be everything to everyone. To try and be like that, you now need less retail footprints to service those customers.
3. The GNC culture is focused more on “pushing” than creating “pull.” Anyone that knows GNC knows the associates are compensated by brands and GNC to sell certain products or product categories. This is a fine model and its worked for decades but it’s not ideal in a world with lower switching costs from increased competition. In 2018, if you push to hard, customers will simply go to an option where they get more value for their individual set of expectations. This cultural shift is likely an overhaul in having the company provide value over profits.
4. The GNC merchandising cycle is too long for today’s product and brand life cycles. This one is a bit tricky because I understand GNC’s exposure with allowing for too many upstart and emerging brands into the cycle. Truth is, the regulation side on nutritional supplements is murky and with GNC’s size they have to weigh risk and reward. My suggestion though is setting up a 3P marketplace style program for upstart and emerging brands to get familiar with GNC and GNC get familiar with the brands in a nimbler way. This is what Walmart/Jet seems to be doing and I would guess Amazon/Whole Foods Market does in the near future.
So, is 200 store closures it?
I believe it will only be a fraction of the amount needed in the next 18 months. Regardless of the Chinese investment from Harbin Pharmaceutical, GNC needs to get lean in this new environment of business. The potential good news for GNC is that wellness isn’t going away anytime soon, as the industry reports show. There’s still time to adapt, whether by continuing to revamp its brand image, giving its stores a much-needed face-lift aesthetically and technologically, or perhaps even starting to stock these up-and-coming emerging vitamin brands with a shortened supply chain like 3P marketplace sellers.