Why GNC failed in the nutrition business?
General Nutrition Centers Holdings (GNC), a Pittsburgh based vitamins and nutrition company was once a household name. GNC filed for Chapter 11 bankruptcy with the Securities and Exchange Commission (SEC) this June and is planning to shutter 1200 stores out of the 8900 stores present worldwide. The company reported a humongous $200 million loss in the January-March quarter of 2020. Amid the pandemic, where nutritional products’ sales are booming, why is GNC going through such a phase?
GNC relies predominantly on the brick and mortar business model. 28% of GNC locations are located in malls that do not come under essential services and were asked to shut down by the government. GNC has a negligible online presence, and most of its business happens in the brick and mortar stores, which started facing massive competition from e-commerce websites like Amazon. Nutritional products are not things that would require you to test them or take trials and advice while buying, which makes them a suitable commodity to be sold online, but GNC clinched to its model. Many customers switched to online shopping of supplements from the comfort of their homes, and supplements were available at lower prices.
The competition from the online stores made the company cut down its expenses and made the in-store experience poorer, making the remaining customers switch to online shopping. The nutritional advice which the salespeople used to provide is readily available online, and there is just no reason to go to the store to buy your protein shakes. GNC manufactures around 50% of its products, and the rest 50% is procured from third party suppliers. There have been lawsuits against GNC earlier, like in 2015, by the state of Oregon accusing them of knowingly selling products that contained unlawful dietary ingredients. These lawsuits have badly damaged the public image of the company. Furthermore, GNC sales people become too pushy while convincing people to buy stuff that has been manufactured by them instead of what the customer is seeking. This spoils the customer experience, who then switches to other stores or e-commerce websites.
GNC has been famous for its muscle-building formulations. It clinched to them and didn’t bother to diversify properly into other similar fields to maximize profits. It didn’t focus on other aspects like wellness products, natural health solutions, and nutrition products, which made other companies like Target, Walmart, and Costco gain a larger market share. Companies like Walmart, Target, etc. had a responsive online presence, which was lacking in GNC, which made GNC lose the market share.
GNC made another blunder by borrowing incessantly. At the time of filing the bankruptcy, GNC had a debt of around $1 billion. It becomes a herculean task to repay this kind of debt when the economy becomes sluggish. For stores like Walmart and Target that sell essential goods, the cash keeps flowing in, but for companies like GNC, which faced a complete halt during the lockdown, it is next to impossible to pay such a humongous debt. This issue is not new for GNC. When in 2016, it was facing declining profits and revenues, the top executives began to borrow money to buy back shares of its stocks; this only made the company fall deeper in the pit of debt. GNC is unable to meet the upcoming debt obligations. GNC doesn’t have many assets left. It sold its manufacturing business to International Vitamin Corporation (IVC) and turned over its Chinese market to Harbin Pharmaceuticals. The company has warned the SEC that it won’t be able to pay up its long-term debt, which is maturing in 12 months. In Chief Executive Officer Ken Martindale’s words, “Covid-19 has created a difficult business environment, and slowed the process of refinancing our debt”. Though the company has seen a rise of 23% in online sales, the overall revenue for the quarter dropped to $473 million from $565 million for the same period last year.
The remunerations paid by GNC to the senior executives are also controversial. Nearly $4 million * were paid to 5 people in the C-suite barely a week before the bankruptcy filing. This means as GNC files for bankruptcy; the top executives are living lavish lives. In September, the bankruptcy court judge approved GNC’s sale to Harbin, the biggest shareholder of GNC, for $770 million. It will be interesting to see if GNC could restructure itself and emerge from the bankruptcy filing.
*Executives will have to pay back 25% of their after-tax bonuses if the company does not emerge from bankruptcy within a year
– Shivani Chauhan
