GNC 2011 Annual Report Download - page 15

Table of Contents
operating in 46 countries (including distribution centers where retail sales are made). Approximately 89% of our franchise stores in the United States are in
strip shopping centers and are typically between 1,000 and 2,000 square feet. The international franchise stores are typically smaller and, depending upon the
country and cultural preferences, are located in mall, strip center, street or store-within-a-store locations. In addition, some international franchisees sell on the
internet in their respective countries. Typically, our international stores have a store format and signage similar to our U.S. franchise stores. To assist our
franchisees in the successful operation of their stores and to protect our brand image, we offer site selection, construction assistance, 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 franchise
store opening, and actual on-site training during the first week of operations of the franchise store. We believe we have good relationships with our
franchisees, as evidenced by our franchisee renewal rate of 91% between 2005 and 2010. We do not rely heavily on any single franchise operator in the
United States, since the largest franchisee owns and/or operates 10 store locations.
All of our franchise 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 franchise stores are offered a more limited product selection than our franchise stores in the United States with
the product selection heavily weighted toward proprietary products. Products are distributed to our franchise 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 franchise stores are
delivered to the franchisee's freight forwarder at the United States 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 63% of our total franchise revenues for the year ended December 31,
2010. In 2010, 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 of
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 franchise
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. In 2010, we terminated
44 franchise agreements, 26 of which were converted into company-owned stores.
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