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Interview with David Schnabel, CEO of Gold’s Gym International

Q: What do you bring to Gold’s Gym with your background in finance at TRT Holdings, the company that you joined in 2001 and the company that purchased Gold’s Gym in 2004?

A: I come from a different background than a lot of people in the industry. This industry attracts a lot of people who have an interest in fitness, but it’s also attracted a lot of entrepreneurs who simply built their one location up to large empires in some cases. And in more recent times, it’s attracted a lot of people from retail businesses or other service businesses.

I come from a slightly different angle that is more of a finance and investment background. If you go back in time, I had started off my career in investment banking with Goldman Sachs. I went into management consulting with McKinsey & Co. and then private equity, which is essentially buying and selling private companies or stakes in private companies.

That’s how I came into contact with Gold’s. We—and when I say “we,” I’m talking about myself and others at the holding company TRT Holdings—looked at Gold’s back at the end of 2003 and were excited about the opportunity because it’s a company with a tremendous brand. The brand had, and continues to have, a tremendous amount of untapped potential, and that’s what I saw when I was [at TRT]. Now that we’re here, we’re trying to work on it and realize some of that.

Q: What sort of changes have you implemented in the year and a half that you’ve been CEO of Gold’s Gym?

A: Obviously, there was a lot of time spent learning the lay of the land. So a lot of the changes that have been made in the last year or so aren’t the kind of changes that are incredibly visible to the outside world. It started with how we look at our business, how we evaluate our business and how we manage our business from a high level.

And as you know, our business has three different parts to it. We have the franchise side of the business, the corporate-owned locations part of the business—we own 63 locations, and we’ve been growing those quickly—and then there’s the licensing part of the business. Each of those required management tools so that we could evaluate them and run them from our central location.

Running a company the size of Gold’s is different from running an individual location out in the field because out in the field you can feel and see what’s working well and what’s not working well, but here you have to have the right reporting systems. So we started there.

We changed a lot of our reporting systems to get more accurate, timelier and more impactful information that we can manage by. We also changed a number of our senior staff to try and find the right mix of people inside the industry who have real expertise and [people from] outside the industry who bring a different perspective to the business and can help us evolve a little bit.

We’ve also reinvested in our physical infrastructure. We went back and renovated a number of our facilities and invested in some new equipment, as well as in refurbishing the actual facilities themselves.

And then we looked at some other things, including changes to compensation plans to building career paths for people inside our clubs so that we can be the employer of choice. And all of that’s from the corporate-owned side of the house.

On the franchising side, we worked hard to improve the relationship with the franchise community and continue to add more value to the franchise base, and we are going to continue to add more value and more tools for them to use for their own success.

Over the last few years, we’ve come to the realization that we need to find ways to work more effectively with the franchise leadership, and the franchise leadership was saying the same thing. So we established something called the National Franchise Council (NFC), which is kind of like a United Nations. It’s a way for us to sit down with the franchise leadership and talk through some of the most important issues that we have.

One of the things we did as part of the NFC is we defined some programs and some offerings that we can offer the franchise base to help them be more successful. So we’ve rolled out a number of tools, [including] Legacy Two, which was a groundbreaking agreement that we agreed to with the [Gold’s Gym] Franchise Association and the NFC and made available to our existing franchise base. As part of that, they get certain programs and offerings. It changes some of the terms and agreements with us, but it’s something that has led to some great growth opportunities all the way around.

Then on the licensing side, we’re looking at new opportunities for growth. We haven’t really pursued some of the avenues that we think we have available to us, but with a name like Gold’s, there are a lot of things we can do, and we are excited to do that.

Q: As Gold’s Gym grows, do you plan to build more corporate stores or do you plan to build your franchise base more?

A: I’d say the answer to both is yes. Obviously, if you look at the recent growth rates, we do want to grow the corporate-owned side of the business—and we have been pretty aggressively—and we think there are great opportunities there. But that’s not at the expense of growing the franchise side. We have grown the franchise side.

You may have heard of some closures. We actually forced a number of gyms out of the brand for the sake of making sure we had a more consistent and more valued product offering out there for the benefit of our existing franchise base. So, obviously, that came at a financial cost to us, but it was a deliberate move.

Overall, we’ve been growing, and a lot of the agreements we’ve had over the last couple of years have led to tremendous growth. Last year was the year of our greatest growth. We opened 75 locations, and only 10 of those were corporate. When you look at our pipeline, our pipeline now is bigger than it’s ever been on the franchise side of the business. There’s tremendous opportunity out there for additional growth.

Q: Are you looking for a different kind of franchisee today than the company sought in the past?

A: There are three kinds of potential franchisees that we appeal to and like to appeal to. The first is the traditional person in the industry who is interested in health and fitness and is just looking for an opportunity to create a business for themselves. That’s the one, two-unit kind of owner. We want to be appealing to those people because we think we have the best product offering to make them successful in the business. It is a full-service model with amenities and really the most powerful brand out there. We know it’s appealing to that segment, and we want to make it more appealing to that segment.

The next group of players are existing industry people who have one, two, five, 10, 20 clubs or chains that are currently operating under a different brand. As the industry gets a lot more competitive—and I think we all see it getting more competitive—and are all fighting for the market share, more of the independents are finding it harder and harder to compete on their own. So, we think we have a unique position here as the potential brand of choice for independents who are looking for something to help them compete more effectively against the other big brands that are coming into the market. We have something unique to offer those people because we are a full-service, coed, global brand, which in terms of franchise offerings in this phase, makes us pretty compelling.

And the last group, which is pretty new to the industry, is institutional investors, which might range anywhere from someone who has had success in the past and now might be looking at opening a few franchises of McDonalds to a private equity fund that is just looking for a great opportunity to deploy some capital. So, given that the clubs that we are building today are relatively large investments with relatively large returns, we’re finding that it’s appealing to more and more groups like that, and we are getting more institutional capital and more private equity groups interested in us all the time.

Q: What kind of concerns do you have with the economy and how that might affect memberships and revenue?

A: What’s going on in the economy right now can really affect us in a couple of different ways. On the one hand, the product that the industry offers is a discretionary one. For a lot of people, going to the gym is something they feel they should do as opposed to something they really want to do every day.

The biggest concern I have is that I see some of our competitors reacting to some of those headlines by cutting prices. In the long term, I don’t think that is good for the industry, and I don’t think that’s really good for the consumers because it lessens the perceived value that a fitness club can offer to our consumers.

At Gold’s we are focusing on making sure we are increasing the value that we are delivering to our members because at the end of the day, while it’s perceived as a discretionary product, it really isn’t. It really is, particularly during stressful times, one of the most important things you can do for yourself. When you think about it, what’s the cost of a membership? Somewhere around a dollar a day. That’s pretty cheap entertainment, and it’s a lot healthier than the Starbucks that you buy. So, we’re focused on making sure we deliver that message to the consumer that this is an important product that can really help them, particularly during tough times.

Q: What do you see for the future of Gold’s clubs?

A: I think what we’re going to see down the road is more segmentation in our business because historically what you’ve seen is everybody trying to be everything. Every time a new trend popped up, everybody would try and jump on the new trend. Down the road, I think we’re going to see a little bit less and less of that. With that being said, we intend to focus on increasing or enhancing customer experience with better wellness offerings, better personalized service, and we think that’s the key to the future of the business. We’re positioned where we’re sort of a good value-oriented offering for the heart of America, and that’s kind of where we think we are. We are not going to be the cheapest product out there. We may not have the most locations where we are on every street corner where you can go in with your key card any time of day, but we will be the place that gets you to a phenomenal experience for an affordable price and we’re going to do that across America and around the world.

Q: How many facilities do you perceive opening in the next few years?

A: We think there is a tremendous opportunity for growth in terms of unit count, but it goes back to [that] we’re focused on the profitability and the unit growth, and that’s really what we try and talk about more now is that as opposed to numbers. But we think we are going to have great opportunities to grow, both by building new locations as well as by signing up more new franchisees, converting competitor gym providers as well as acquiring, and we think we’re going to be pretty aggressive down the road in all those areas.
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