GNC 2012 Annual Report Download - page 12

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Table of Contents
Franchise
Our Franchise segment is comprised of our domestic and international franchise operations, and generates revenues from franchise activities primarily
through product sales to franchisees, royalties on franchise retail sales and franchise fees.
As of December 31, 2011, there were 2,514 franchise stores operating, including 924 stores in the United States and 1,590 international franchise stores
operating in 53 international countries (including distribution centers where retail sales are made). Our franchise stores in the United States are typically
between 1,000 and 2,000 square feet, and approximately 90% are located in strip mall centers. 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. We believe that our franchise program enhances our brand awareness and market presence and will enable us to continue to expand our store base
internationally with limited capital expenditures. We believe we have good relationships with our franchisees, as evidenced by our domestic franchisee
renewal rate of 92% between 2006 and 2011. We do not rely heavily on any single franchise operator in the United States, since the largest franchisee owns
and/or operates 12 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.
Franchises in the United States
Revenues from our franchisees in the United States accounted for approximately 62% of our total franchise revenues for the year ended December 31,
2011. New franchisees in the United States are generally 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 an initial 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 generally at our election. Franchisees must meet certain conditions to exercise the franchisee renewal option. Our franchisees in the United States
receive limited geographical exclusivity and are required to utilize the standard GNC store format.
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 locations at more cost-effective rates, which we sublease to our franchisees at cost. 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. If a franchisee
does not meet specified performance and appearance criteria, 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 2011, we terminated four
franchise agreements, all of which were converted into company-owned stores.
International Franchises
Revenues from our international franchisees accounted for approximately 38% of our total franchise revenues for the year ended December 31, 2011. In
2011, new international franchisees were required to
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