The path forward for 24 Hour Fitness, San Ramon, California, after its June 15 Chapter 11 filing is full of many moving pieces. The company mapped out some of that path in its filing with the U.S. Bankruptcy Court in Wilmington, Delaware. Tony Ueber, CEO at 24 Hour Fitness, shared additional details about the company’s future when he spoke to Club Industry on June 15.
The Chapter 11 filing indicates that a sale of the company is still under consideration, but Ueber declined to offer a definitive statement on that possibility.
“What I can say is that we’re continuing to look at all of the options to make sure that this company is well positioned for the long-term,” he said. “Right now, we’re having very productive conversations with our creditor group. We’ve presented our plans and what we were working on prior to the COVID-19, and they are very supportive of that, so I think what’s most important right now is that we’re well funded with what we need to be able to go run the business in a very thoughtful, positive and proactive manner going forward.”
The company permanently closed 100 clubs last week and another 34 thereafter, according to its website, cutting the company’s locations by more than one-third from its previous 446 locations.
Along with those closings came the layoff of 8,300 people out of the company’s 19,200 employees.
Despite these closings and layoffs, 24 Hour Fitness continues reopening clubs that were temporarily closed on March 16 due to the COVID-19 pandemic. By the end of June, the company expects to have the majority of its remaining clubs reopened.
And 24 Hour Fitness plans to open five new clubs in the coming months in New York, New Jersey, California and Texas, Ueber said.
Shoring Up Finances
24 Hour Fitness will receive a $250 million debtor-in-possession financing, which is needed because the company had less than $10 million in cash on hand, according to its Chapter 11 filing, with no anticipation of being able to generate enough revenue during the reopening process to sustain the business without additional funding.
The company’s projected operating expenses are about $30 million for the first four weeks of the restructuring process, but 24 Hour Fitness anticipates it won’t generate weekly receipts of more than $2 million until the week ended July 24, 2020, and its total cash receipts are projected to be less than $2 million in the aggregate for the first four weeks of the Chapter 11 process, according to the filing.
The $250 million debtor-in-possession financing will allow it to continue to pay staff, vital vendors, rent and utilities, among other expenses as the 35-year-old business ramps back up.
“It’ll go towards normal operations of the business and make sure that we’re able to execute against our strategic plan that was in place prior to COVID shutting down all of our clubs,” Ueber said. “We’re excited to get back to being in a position where we can accelerate that transformation and move forward and feel like we’ve got the support that we need and the financing that we need to make that happen.”
Changes Ahead
24 Hour Fitness plans to reduce the complexity of its membership types, pricing model and club classifications, according to the filing, but the company declined to offer more details on what that would look like.
Ueber did say that 24 Hour Fitness has an opportunity to disrupt the industry as a mid-tier player, noting that the mid-tier of the industry has stood still while the industry has evolved and there are opportunities to recapture market share by being more innovative.
24 Hour Fitness has developed a pipeline of new online and in-club innovations that it was beginning to test pilot prior to the COVID-19 shutdowns.
“We feel really confident about our ability to innovate and create more opportunities for us to appeal to more consumers over time and just do a better job of meeting more people’s needs for health and fitness products and services,” Ueber said. “So I think you’ll see a lot of innovations coming out of us in the near future.”
24 Hour Fitness has accelerated work on some of the products and services during the club closures, he said, allowing the “reimagining” of the in-club experience and the structure of staff roles and responsibilities in the club.
“We’ve taken this time to be very thoughtful about how we reopen and what we look like when we reopen and used the time to accelerate a lot of the change management initiatives that were in place prior to being shut down,” Ueber said. “We feel really good about the reopening of the clubs and what we’re going to be able to do over the coming months and years for sure. We are very bullish and optimistic.”
One big change involves the sales process at the company. In April 2017, 24 Hour Fitness began implementing a series of strategic initiatives to transform its business model and save costs, including a pilot program known as the Evolutionary Model, or EVO, that cut the sales staff and allowed prospects to join the club at kiosks in-house. This model was transitioned into all clubs by July 2019.
After the implementation, memberships began dropping, causing the company to rethink the ability of the EVO model to convert potential members into dues-paying members, according to the Chapter 11 filing.
Ueber and a new management team came on board in early 2019 and re-evaluated EVO, working to improve the model in the back half of last year. Prior to COVID-19, the company had begun “to realize positive developments and expected to see growth on a year-over-year basis again once the June 2019 implementation had been lapped,” according to the filing.
As part of the new 24 Hour Fitness, the company will reintroduce selling skills to its frontline team members that were lost during the transition to EVO.
“As we’re reopening clubs, we’re moving to a hybrid-type sales and service position where we have people who have selling capabilities that can be supplemented by our online tools,” Ueber said. “We need to be flexible so that we’re meeting the guests where they want to be. We need to have our selling model be adaptive to the needs of the consumer and not make the consumer adapt to our selling model … I think it will be a lot more successful going forward.
The Chapter 11 filing noted plans to “remove inefficiencies” in its workforce. In essence, the company will be investing in higher-skilled frontline employees who will be able to both sell memberships and provide exceptional service to existing team members.
The company also is focused on renegotiating leases with its approximately 300 landlords, something it was doing during the temporary club closures, requesting from the court the right to reject leases.
The decision about which clubs to close is a complicated matter, Ueber said.
“It’s multifaceted for sure, market by market, and it depends a lot on the geographic density and where the clubs are...” he said. “Over 35 years you end up having a portfolio of clubs with some that are too old and some that are too close to each other, and this gives us an opportunity to really rationalize that portfolio in a way that makes sense going forward to be able to achieve our longer-term objectives.”
Online Offerings
The company is focused on integration of its online and offline experience, Ueber said. During the shutdown, 24 Hour Fitness saw use of virtual training on its free 24GO personalized fitness app increase. The company accelerated its app capabilities during the shutdown, offering virtual personal training sessions and virtual group training sessions through the 24 Hour Fitness YouTube channel with real time chat capability with the club community.
“I think we’ve generated a lot of innovation recently that will pay dividends going forward as we look to have more of an omni-channel experience where we’ve got better integration of our offline product with our online product,” he said. “We want to be there to meet our members’ needs whenever, wherever and however they need us. So a little bit of a silver lining to this situation is it’s really allowed us to accelerate the development of our digital offerings.”
The app remains popular even now that clubs are reopening. For now, members use the app to make advance reservations for a 60-minute workout session and for touch-free club check-in upon arrival to the club. Ninety-three percent of members are using the 24GO app to access the workout reservation system, according to a company survey of members at recently reopened clubs. Although members had concerns about the reservation system prior to the clubs reopening, they have given the new protocols a 4.5 out of 5.0 rating for ease of use and confidence in cleaning and safety.
Ueber sees even more opportunity to expand offerings to members.
“People in our club are spending money on products and services that we do not offer that we should be in a position to offer and our members would give us credit for being able to offer, and so I think that’s the primary focus,” Ueber said.
With the implementation of these initiatives, the company is counting on broadening its membership and the products and services those members will buy from it, according to the filing.