.. iting place to everyone from a young high school athlete to a middle-aged mother of two. This also lead to new product market niches. Some of the more successful are the pro-performance line which is geared towards athletes, also the live well concept which promotes an overall healthy lifestyle which would be more suited for the average adult. With the change in customer preferences, GNC has the opportunity to increase market share by creating customer loyalty and trust through groundbreaking products. General Nutrition has done a tremendous job on utilizing these opportunities and in order to remain atop the competition they must continue to fine tune the and analyze the business strategy.
Definitely one of General Nutritions greater external opportunities is their franchising and long-term alliance with Rite Aid. This opportunity is so tremendous that along with 697 stores opened in 1998 they also signed an alliance with Rite Aid. The alliance with Rite Aid allows GNC to enter a new channel for marketing its supplements. With a the average American only five miles away from a GNC, there still is such a demand for the stores that they plan to open an additional 250 stores in the next year alone. This combined with a total commitment to providing customer support has helped make GNC one of the most successful franchises for the past decade. To continue to capitalize on these external opportunities the company can look to actively pursue their franchising capabilities while avoiding cannibalization of existing stores to allow them to remain the pinnacle of the health food industry.
The main reason that GNC has been and will remain the world leader in the nutrition industry is due to their ability to use technology to receive great benefits. Their greatest areas of technology that set them apart from the rest are their manufacturing and distribution. This past year the company took a tremendous leap into the 21 century with the completion of a 630,000 square foot state of the art manufacturing facility in South Carolina. Along with the new manufacturing facility, the Company was involved in a recent merger with the Dutch pharmaceutical company Royal Numico. This merger makes the Company the worlds largest manufacturer of vitamins and supplements. This merger presents the company with a great opportunity to take advantage of the world class research facilities available to them.
The Company should streamline their supply chain to fully take advantage of the new manufacturing and distribution facilities. This will increase the Companys overall efficiency. The Company should look for a strategic alliance with an established online drugstore to broaden the Companys market share. This would also allow the Company to gain entry into the world of e-commerce. Internal Strengths Internal strengths of the company include quality products emphasizing vitamins and minerals along with sports nutrition.
This product mix focuses on high margin value added products, which are sold under the GNC proprietary brand. Along with vitamins, herbal, and sports supplements the Company also offers customers the opportunity the Gold Card program. This program enables stores to add to their product line. The basis for this program charges a $15 annual fee that entitles each member to a 20% discount on all products one time each month. Sales of proprietary brands represented over 50% of total sales in 1998. Company reputation is another strength for the company.
The Company is the only nationwide specialty retailer of vitamin, mineral supplement, sports nutrition products, and herbs. Along with these products the Company is also the leading provider of personal healthcare products. The companys reputation was built on two basic principles. The first of these is strong customer service. The Company has a strong competitive advantage over competitors because of well-trained and informed employees who have knowledge of the entire product line.
The Companys employees are knowledgeable and efficient because of the strong employee-training program. The second principal that has built their reputation is a superior product line. The proprietary brands along with other strong brand names enable them to have a product line better than the competitor. Production capabilities at the Company have enabled them to become the world leader in the their industry. The Company will be able to maintain their position as a leader because of their capacity to not only meet company inventory requirements, but also enough to sell to third parties in the wholesale market. The Company is able to maintain strong production capabilities because of their emphasis on quality control.
Each product is tested from the beginning to the end until the final product meets their standard. The Company has experienced a strong sense of executive leadership. The current president has 25 years of experience within the company and the CEO has 18 years. The executive vice president has 19 years of experience and the head of logistics has 22 years under his belt. Along with this experience it is evident to see that there is an extremely low employee turnover ratio within management.
Turnover within this company as with any retail organization occurs with retail store management and part time sales positions. To keep this factor at a low level the Company started the franchise program. The Company wanted to bring strategic partners into their system that would personally invest in the Companys program. Along with strong management leadership the Company maintains a strong employee base through orientation and hiring kits that enable the new employee to adjust quickly and become an efficient employee. The company gives their employees the opportunity for tuition reimbursement, profit sharing, good medical and health benefits, and 401k and stock options.
All of these factors allow a GNC employee to be part of a team. The Company uses patents to its advantage. By having patents on their proprietary formulas, vitamins, sports nutrition, and herbal supplements, the Company creates barriers between themselves and competitors. Along with their patents the Company conducts research with other companies. One such company is Proctor and Gamble.
Recently the Company has held the patent with Proctor and Gamble on calcium (calcium citrate malate). This product was found to be more absorbent than any other type of calcium. The Company achieves economies of scale throughout the entire organization and network of 5,000 retail stores by a close arrangement of entities. These include arrangements with product suppliers, raw materials, packaging material, store supplies, retail advertising, third party advertising, insurance coverage, and credit card processing. The close surveillance and agreement of these entities allows the company to achieve greater economies of scale. The mission of the Company is to maintain quality over quantity in its products. The company typically introduces 25 to 30 new products each year and reformulates existing products on an annual basis.
An annual reset is done for the stores to introduce new vendor third party products, and new company products through expansion and deletion of retail shelf space. Weaknesses General Nutrition Companies Incorporated is the leader in health products but the company is not adverse to risk. These risks that we can find within the company are considered to be the weaknesses of the company. The first risk is that Royal Numico has acquired GNC, now being a part of a larger company they must now try to fit into the larger system and integrate themselves. With the integration of the Company into Royal Numico there will be a significant amount of cash spent, some potentially dilutive issuances of equity securities, incurrence of debt or amortization expenses, related to goodwill and other intangible assets. Any of these can adversely affect the company; its operating results and financial conditions.
In addition to the financial and operating factors we could find difficulties in the assimilation of the technologies, products and personnel of the integrated company. Another weakness that the company has is their leverage problem. This means that the company has raised much of its capital through debt financing, including loans. Based on the current level of operations and anticipated level of growth, the companys available cash flow, together with other sources of liquidity, will be adequate to meet to future needs of capital. Although it looks to be enough, there can be no assurance that the company will generate enough cash flow. Along with that uncertainty our leverage could also have these important consequences: 1.
Our ability to obtain additional financing for working capital, general corporate purposes could be impaired in the future. 2. A substantial portion of the companys cash flow from operations will be dedicated to the payment of interest. 3. Certain number of the companys borrowings will be at variable rates of interest, which will expose us to the risk of increased interest rates.
4. The companys leveraged financial position may make them more vulnerable to general economic conditions such as a downturn or recession. Along with all of the problems associated with being highly leveraged, the Company has the weakness that they will be affected by the general economic conditions in their markets. The companys results of operations are significantly affected by the overall economic trends of the companys principal geographic markets, the level of consumer spending and consumer confidence in future spending. In periods of economic slowdown, the company could experience negative pressures on sales volume and declining margins for certain number of the companys products.
A weakness that is faced by the company is that they could face product liability claims. Due to the nature of the products, it is possible that the company could be subject to individual or class action lawsuits based upon product liability laws. GNC, like other manufacturers or distributors of nutritional foods and supplements, face an inherent risk of exposure to product liability claims in the event that the use of the companys products results in personal injury. Associated with the nutrition industry, the company is also faced with the weakness of having their products subject to regulation. The companys industry is subject to regulation by national and local governmental agencies. These regulations and laws govern such matters as production requirements, quality, trade and pricing practices, labeling, packaging and advertising. Although the company believes itself to be in compliance with current legislation, there are certain areas in the future in which they could have breaches. To maintain compliance the company will incur additional costs.
The biggest weakness facing GNC in the coming years is that the company faces the challenge of protecting their workers intellectual property. In the present to protect the companys intellectual property they rely on a combination of patent, trade secret, copyright and trademark laws. However, the company cannot guarantee that these measures will be adequate to prevent the companys competitors from copying or reverse-engineering the companys products. If this would happen the company is set-up to lose millions of dollars as well as the all important market share. Business Reports.