Question

GNC Holdings Inc. is a leading retailer of health and nutrition products, which are sold through both company-operated (3,500 outlets) and franchised retail (3,200 outlets) stores. In addition, GNC manufactures many of the products that it sells through its company-operated and franchised channels. As such, GNC's operating segments are Retail, Franchise and Manufacturing. The Retail segment is made up of company-operated stores, and the Franchise segment is made up of franchised stores. Recent financial information from these segments is as follows (in millions):

	Retail			Franchise			Manufacturing
Sales		$1,939			$433			$486
Income from operations		349			157			90
Invested assets		1,573			512			407

Analyze the profit margin for each segment

Profit Margin = Income from Operations/Sales
Retail: $349/$1,939 = 18.0%
Franchise: $157/$433 = 36.3%
Manufacturing: $90/$486 = 18.5%

Analyze the investment turnover for each segment

Investment Turnover = Sales/Invested Assets
Retail: $1,939/$1,573 = 1.2
Franchise: $433/$512 = 0.8
Manufacturing: $486/$407 = 1.2

Analyze the Return on Investment

Return on Investment (ROI) = Profit Margin × Investment Turnover
Retail: 18.0% × 1.2 = 21.6%
Franchise: 36.3% × 0.8 = 29.0%
Manufacturing: 18.5% × 1.2 = 22.2%

Form your discussion by answering the following:

1. Differentiate between a profit center and an investment center.
2. Why might the profit margin of the Franchise segment be larger than the other two segments?
3. What is the source of revenues for the Manufacturing segment?
4. With all of the above in mind, how would you enhance retail sales, which demonstrate the lowest profit margin and return on investment?

Answer 1

A profit center is a division or a branch of a company that is considered to be a standalone entity. A profit center is responsible for generating its own results where the managers generally have decision-making authority related to the product, pricing, and operating expenses. Managers in a profit center are involved in all decisions relating to revenues and costs, except for investments.

Having profits centers makes it convenient for the top management to compare results and to identify to what extent each profit center contributes to corporate profits.

E.g. A multinational company that produces high-end cosmetic products operates in 20 countries around the world. Cosmetics are produced in manufacturing plants located in all 20 countries. Each operation in respective countries is operated as profit centers where the divisional managers are responsible for all revenue and cost related decisions.

An investment center is a profit center that is responsible for making investment decisions in addition to revenue and cost related decisions. Investment centers are business units that can utilize capital to directly contribute to a company’s profitability. Businesses have to make various decisions regarding investing in capital assets that enable long-term viability. These include decisions to purchase, dispose and upgrade capital assets.

Franchisee segment yielded more profits owing to having an asset-light model and cost-control measures which resulted in more profits over sales compared to other models.

Sources of revenue from Manufacturing involves B2B sales, advertising fees, service fees, license fees etc.

In order to boost Retail sales, the company can focus on asset - light model of renting/leasing assets rather than buying them. Further, focus needs to be placed to push sales of high margin products by focused advertisement or giving commission to retailers. Niche marketing can be undertaken to target certain class of public eg. elite class i.e. the products to be advertised in a way to create 'Status symbol' for the elite class who will buy the product at an expensive price resulting in the company earning huge margins.