GNC 2010 Annual Report Download - page 14

Table of Contents
accounting services, and a three-part training program, which consists of classroom instruction and training in a company-owned location, both
of which occur prior to the franchised store opening, and actual on-site training during the first week of operations of the franchised store. We
believe we have good relationships with our franchisees, as evidenced by our franchisee renewal rate of 93% between 2004 and 2009. We do
not rely heavily on any single franchise operator in the United States, since the largest franchisee owns and/or operates 13 store locations.
All of our franchised stores in the United States offer both our proprietary products and third-party products, with a product selection
similar to that of our company-owned stores. Our international franchised stores are offered a more limited product selection than our
franchised stores in the United States with the product selection heavily weighted toward proprietary products. Products are distributed to our
franchised stores in the United States through our distribution centers and transportation fleet in the same manner as our company-owned
stores. Products distributed to our international franchised stores are delivered to the franchisee's freight forwarder at the U.S. port of
deportation, at which point our responsibility for the delivery of the products ends.
Franchises in the United States
Revenues from our franchisees in the United States accounted for approximately 68% of our total franchise revenues for the year ended
December 31, 2009. In 2009, new franchisees in the United States were required to pay an initial fee of $40,000 for a franchise license.
Existing GNC franchise operators may purchase an additional franchise license for a $30,000 fee. We typically offer limited financing to
qualified franchisees in the United States for terms up to five years. Once a store begins operations, franchisees are required to pay us a
continuing royalty of 6% of sales and contribute 3% of sales to a national advertising fund. Our standard franchise agreements for the United
States are effective for a ten-year period with two five-year renewal options. At the end of the initial term and each of the renewal periods, the
renewal fee is generally 33% of the franchisee fee that is then in effect. The franchisee renewal option is at our election for all franchise
agreements executed after December 1995. Franchisees must meet certain conditions in order to exercise the franchisee renewal option. Our
franchisees in the United States receive limited geographical exclusivity and are required to follow the GNC store format.
Franchisees must meet certain minimum standards and duties prescribed by our franchise operations manual and we conduct periodic
field visit reports to ensure our minimum standards are maintained. Generally, we enter into a five-year lease with one five-year renewal option
with landlords for our franchised locations in the United States. This allows us to secure space at cost-effective rates, which we sublease to our
franchisees at cost. By subleasing to our franchisees, we have greater control over the location and have greater bargaining power for lease
negotiations than an individual franchisee typically would have. In addition, we can elect not to renew subleases for underperforming locations.
If a franchisee does not meet specified performance and appearance criteria, the franchise agreement outlines the procedures under which we
are permitted to terminate the franchise agreement. In these situations, we may take possession of the location, inventory, and equipment, and
operate the store as a company-owned store or re-franchise the location. The offering and sale of our franchises in the United States are
regulated by the FTC and various state authorities. See Item 1, "—Government Regulation—Franchise Regulation."
International Franchises
Revenues from our international franchisees accounted for approximately 32% of our total franchise revenues for the year ended
December 31, 2009. In 2009, new international franchisees were required to pay an initial fee of approximately $25,000 for a franchise license
for each full size store and average continuing royalty fees of approximately 5% of retail sales, with fees and royalties varying depending on the
country and the store type. Our franchise program has enabled us to expand into international markets with limited capital expenditures. We
expanded our international presence from 746 international franchised locations at the end of 2004 to 1,307 international locations as of
December 31, 2009 without incurring any capital expenditures related to
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