The past few years have been rough for Cybex International. The once powerful brand, which joined with Trotter in 1997, has suffered through several failed products and lackluster financial performance. But with a new product on the horizon, John Aglialoro feels the company is ready to rise to the summit and take the industry as a whole to the next level.
Ci: Cybex has had a rough go of it over the last few years. What do you attribute that to?
I bought Trotter in 1983 from a fellow named Ed Trotter who is now retired in Florida. At that time, Trotter did about $1 million in sales and grew to about $55 to $60 million by the time of the merger in 1997 with Cybex. After the merger, we proceeded to go to number one in treadmills, Trotter treadmills.
I remember going to a branding seminar many years ago where we had six podiums, with six speakers, including Peter Haines, who was CEO at the time. All of them were talking about their products. And our product, the Trotter treadmill, was 40 percent higher priced than any other product, and yet we were the leader, because we had the service and the product quality. But since that time we've gone from number one to probably number five or six. It was disconcerting. And all we did, as well as companies in many industries over the years do — and it's a poison, a cancer that gets into the industry — is heavy discounting. It's intended to help the customer and to get the sales higher. There's pressure in getting higher revenue, there's the pressure of all of that. So sales people give free freight, because that's how they win the order. And the second time the other guy matches it. Then they say, forget free freight. If you get this order to me by the end of the year, I'll make payment terms of 90 days, and I'll even look to the side for another 10 or 20 after that. And then what you do if you're keeping your quality you lower the margin. You make 10 cents or you make 20 cents, what's the difference? You still made a profit. You can't argue with a profit. And it's that sickness that gets into an industry and it causes trouble — it almost caused our downfall. We had to stop it.
Ci: So what is the philosophy now if not just playing for price?
We just had to get back to the purpose of our existence, the nature of our existence — to make great products. And that's what people are going to pay for, whether you give them free freight or not; whether you ask for reasonable payment terms or not. If they like the product they are going to buy it. And if they don't like the product, you can give them a year to pay — that's where all this crazy zero price financing is coming into many industries — and they still won't buy it.
Ci: Speaking of products, Cybex seems to feel it has a hit with the ArcTrainer. How important is that product?
When I got here in November of 2000, we had some problems, just like a lot of companies within the industry — you know, Stairmaster, Schwinn and others. But I took stock of what our real assets were, not just bricks and mortar, but what we had. We were trying to launch the Excursion, which was a product we never launched. But from the attributes of the Excursion and the old Hiker, two products that had limited, well one had very limited success — in fact, success is probably not the right word — we combined them together, put in a little bit of salt and pepper and paprika and made the ArcTrainer.
I said one thing all the way throughout the process: we're going to test every product we make. We're not going to introduce products by show dates. We're going to introduce products by the end of the testing period. So we had a point where we would've rather shipped this thing last May or June, or even April. We had site tested it, we showed it at the IHRSA show, people got on it and we knew then we had a hit song. We just needed to fine tune it, make sure that nobody went flat in singing. Cybex can't afford another product abortion. No company can. But a product introduction is a big thing for somebody in this industry, especially when you're trying to have not just a better product, but when you're trying to introduce a new category. It's a product that we think is going to help bring us back to a point of being a leader in the industry.
Ci: It seems that people still have an affinity for that Trotter name and Trotter mentality. What played into the decision to stick with the Cybex brand?
It is a decision that a company has to make in its branding. General Motors made a decision some time ago to say “General Motors,” there's no car, General Motors. You can't find a car called General Motors, but there's a Chevy, there's a Buick, there's a Cadillac, and they went that route. Mercedes said forget it, we're going to use Mercedes only, and we'll put numbers, 190, 230, etc. on the cars. At the time we made our decision a lot of people weren't happy with it, but the fact is there is a point of no return. And Cybex is a commercial fitness products company. We shouldn't have done it. We should have kept the General Motors profile as opposed to the Mercedes. So what we did do is put the Trotter name on one of our products, so the high-end consumer and light commercial treadmill is the Trotter Elite, by Cybex International. So, we're letting people know the Trotter name that you know and love is home-based at Cybex.
Ci: Are there plans to expand that Trotter brand again?
The 50th anniversary of Cybex is September 2003. We're going to have the Cybex University in August, a month before the official anniversary, and we're going to launch the anniversary edition of our treadmills, called the Trotter Legacy. I've said that to nobody — publicly, not even internally. And there will be the consumer treadmill we're going to launch in 2004 along with other consumer products. We're not going to go back big time into the consumer market until 2004.
Ci: How important is the consumer side to the company's overall bottom line?
Trotter was a consumer company and it merged with a commercial company, and the result was an explosion of non-performance. We're going to launch the consumer division in 2004. It's not going to be called Cybex. If we can find some old brand name that's around, or maybe an acquisition, we may use that brand name, and it'll say “an affiliate of Cybex International.” People will know, just like they know that Trotter is a part of Cybex, but we want to differentiate for our dealers and for customers and the way we market it. Because you market differently, you go to different places. I've been trying to mold this and mush it and push it together, trying to make patty cakes or something, and it just doesn't work. Commercial is commercial, and that's essentially what Cybex International is. Consumer is consumer. Trotter is a consumer company. So we're going to separate those two for the 2004 launch.
Ci: Is being a public company, with stocks that haven't finished at $3 for a month in a couple of years, additional pressure when trying to rebuild and expand?
The stock market has not been unkind to us. In fact, in November of 2000 the stock was $2.00, and as we do this interview, it is $2.00. So it hasn't affected us as badly as other companies. But, stocks go up as a cause and effect relationship: the cause is performance, the effect is a higher stock price. And from where we were to where we are now has been a long turn around. We are at the foothills and nearing the mountain now, we believe, so I can't worry about stock price. I've got to worry about making profitable products, because without that profit we can't continue a journey of success.
We have to revisit the nature of our existence, which is to make fitness products within our price point. And we are the Mont Blanc of fitness products. We don't want to make Parker or Bic pens. I'm not saying that one should not go offshore to Taiwan and become a broker and market on price. Those companies give you a treadmill experience for fewer dollars. There's nothing wrong with that. And you can do quite well in that. What are you then? A supplier of non-innovation? We supply a product that people want today, that they understand today, and they want to buy it but they need it at a lower price. Icon is in the business, and they are at $1 billion in sales. You have to know who you are, and we are an upscale commercial fitness products company. Even when we go into the consumer business in 2004, we're not going for price. We'll have a consumer price, but performance will be consumers and its warrantee will reflect that.
Ci: How has consolidation on the club side affected business?
Cybex is a full line producer. Life Fitness is a full line. Nautilus has become one through acquisition. Technogym in Europe is a full line. Precor is not. Star Trac is not one. So we can see consolidation is taking place. The question is, now that there's a leadership of four or so large companies in the fitness manufacturing area, what will happen if in five or 10 years there are only four or five club chains? There will be a change. I don't know what it'll be. I couldn't even speculate. It'll be like the government getting a new airplane. It's going to be big bidding and it will affect pricing, innovation and perhaps quality. You know if you lose a large account, a manufacturer is going to have a problem, especially after depending on one for a number of years.
Ci: Now let's flip that around from the health club side. As you mentioned, there's basically four large major players on the manufacturing side. What impact is that having?
It's just a different way of doing business. There are small, brand new banks coming out every week and yet you've got the big mega-banks. And they market the smaller banks, smaller towns, communities and personal service vs. the big guys where people want to go because it's a brand name, it's quick, it's impersonal. They want an impersonal relationship. They ask, “is your checking account free? Fine, I'll take it.” And they have online services and all of those things that the small guy doesn't. So, I mean, it'll change, the nature of all of these mom-and-pops. But I think even if you had a Bally's, Gold's Gym and all of them, they're still a small part of the entire market. But I think that dynamic will play itself out as it has in other industries, like the banking industry.
Ci: One of the major problems, and it's a hurdle for the whole industry, is the end-user doesn't know a Cybex or a Life Fitness. Is there something that a company such as Cybex can do to help the health club owners to get the power of that name out there?
I think it's the result of the non-innovation of the industry. We could hypothetically go to a hundred different clubs and talk to the first hundred people who got on any treadmill and I think the majority won't know if it's a Trotter, a Cybex, a Life Fitness or a Precor, Star Trac, etc. And that's an industry problem. And it's the non-innovation where we have been heavily discounting, looking at price, price, price. There are so few profits left that when you have the customer rule — the customer is not always right if he's going to destroy you because he wants more at the cost of your profits. Look at the airline industry. Is the customer right? Yeah, he's right. He wants a low fare so he's going to go online. It's going to take those companies who say no to discounting. Now they have a problem in that Southwest is able to get a reasonable fare and they've worked that like a Wal-Mart. So those companies that have that cost-structure in that they could provide a reasonable product, I mean a basic product at a reasonable price, are going to succeed.
Ci: Where does that leave someone like a Cybex, that is high-end and priced that way?
We are not going to try to expand revenues as a primary response. And most companies, in any industry, are looking to expand revenues. I will expand revenues in conjunction with a margin that allows us to pay our people well and to reward our shareholders. I think dividends are coming back in style. I'd like Cybex to pay a cash dividend when it's back on its feet more. We're going to look at margins. We're going to look at R&D and go to those customers that want a great treadmill. And when we go to the consumer side — and we do want to go there — it's going to have to be at the lowest price we can get in conjunction with a good margin. It'll be by putting the ingredients into the product so it's not going to be a dog; it's going to work.
Ci: How do you justify that pricing?
By using that same analogy of someone getting on a treadmill and saying, “that's nice.” But there isn't any kind of excitement. That wasn't the problem when StairMaster came out. It was an innovation when it came out and people branded it as a StairMaster. Trotter had that kind of brand name — Trotter meant treadmills.
Ci: So innovation and profits are related in your opinion?
The only innovation around the last few years is the EFX. Precor has maintained that product and people, in my opinion, know the EFX. They will use it, know it when compared to other brands, and know the name. That is what we are going to do with the ArcTrainer. People are going to know that they are not on an elliptical. This is the next generation. People are someday going to make a better product than the ArcTrainer — hopefully it will be us, but it'll be somebody. That's why the industry needs profitability not instability and bankrupt companies like we have had. The market leader, Life Fitness's previous management's value was that ‘we're the big boys. We're the king of the mountain. We're the market leader.’ But rather than being a market leader like Microsoft that fought for that market share by offering newer products and more innovations, they were king of the mount, but they just sat up there shooting everyone else. They had a no deal will beat us and we will beat every price mentality. A leader can't do that. That is the tactic of a small guy or a new company, not a market leader, because he can't compete with innovations, so he competes on price, I can understand that.
Ci: You said Cybex is at the foothills looking up at the mountain. What's it going to take to climb that mountain and how long of a climb do you think it's going to be?
I don't know how long it's going to take, but we have the ball now. We've got products, people are ordering, and we're backlogged in ArcTrainers for months. I had said to our folks some time ago that 2001 was a dark year, an uncertain year for our future and we needed to go back to basics and reclaim some part of this industry by its innovation and not by other stuff. So 2001 was the year of uncertainty. 2002 has been the year of survival. 2003 will be the year of growth. I think in 2004 we're going to dominate a part of the industry because of the innovation that we bring. Not because we're nice guys, not because we're smart guys, not because we're good sales guys, not because we discount better, but because we give innovation to a market that hungers for innovation; and I don't know any industry that doesn't hunger for innovation.
Ci: Fitness does hunger. You can't walk a show floor without hearing the, “see anything new?” question a thousand times.
People say that and as soon as a customer comes up they say, “Let me quote you a price here.” It's a dichotomy. You're looking for the new, but without profitability within that industry there will be no new.
Ci: How do you convince the club buyers that innovation costs and they should pay for it when they are used to those discounting practices for so long?
Well, I feel that the industry is healthier. I've met with the CEO of Life Fitness and of Brunswick. They get it. They are not going to fulfill an empty promise that the former management had unfortunately proceeded upon. George Buckley is a sensible CEO. He wants [Life Fitness parent] Brunswick to succeed. He did mention to me that he's going to bring in a pretty sharp engineer that he's worked with before to put innovation into their products. Life Fitness president, Kevin Grodsky, is a sharp manager. He will fulfill their mission. Nautilus CEO, Brian Cook, is a hero to this industry, literally. He gathered up the courage to take tired, failed brand names like Nautilus, StairMaster, Schwinn and Quinton. He's bringing vitality and a common sense approach to the industry. I think he's doing something very few people would do — to take a winner, like the Bowflex, and rather than cash out, he's staying within and expanding and I think he is also going to be very successful. Paul Byrne of Precor is a strong leader. It's a little more uncertain there, because of who the new owner may be, but under his management we've got the EFX. I think that given that the new parent or owner will have the same essential values as the current Precor management does. I think Precor will probably expand its line into the strength area with the success that they've had. They are a good profitable company and they provide a value.
There are still questions: What's its next answer to the EFX? What's Brian Cook going to do now with the current technologies of the four categories he has? He has to put innovation there. You can't go on price forever with the same generation of products — it gets stale. Look at Life Fitness. They had that Lifecycle bike forever. They got the cost of manufacturing down, down, down. But there's a point where you've got to come up with new innovation, new products, because that will tire. Even giving it away, people won't take it. So is that low enough? I'll give it to you. This is the nonsense that we have encountered in the industry.
So now we are a better industry. In terms of our team, we get it. We know what we need to do. Now all of us are going to be different. We're going to go for the part of the market that is the Mont Blanc. Each company will do it in their own way. But no one will survive long term without innovation. And the interesting thing is when you have an industry with those values, whether it is four, five or six companies, somebody coming in on price can't get in. It can't happen. It's only until one of the band reneges, is disloyal and plays on price that opens the door. So now a brand name loses its value, they betray the code of innovation, of energy and genius and intelligence to their day-to-day way of doing business. I'm feeling encouraged. As long as we maintain the leaders in the industry where we are, it's going to be a better industry. Club members will have better products, have more fun, they will exercise, and club owners will prosper. The users, whether it's club members in our industry or whatever the product is, the beneficiaries of innovation are the customers, the shareholders and the employees.