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Health Club Owners Offer Advice on Surviving during the Recession

Health Club Owners Offer Advice on Surviving during the Recession

<em><strong>Hold on Tight: Veteran club operators who have survived past recessions share what they are doing to survive in today's troubled economy.</em></strong>

There's a famous Bette Davis line in the 1950 movie "All About Eve" in which she says, "Fasten your seat belts. It's going to be a bumpy night."

Fitness club owners should have heard Davis' line any night last September, October or November — or for that matter, any night leading up to what we all know is the current economic recession. Although the calendar says it's February, club owners are still tightening their belts in this troubled economy. In order to survive, they will need to hold on to their members, hold on to their staff, put a hold on their membership pricing and hold down their expenses.

Several club owners and operators have weathered the storms of past economic turbulence, such as the early 1980s and early 1990s. These veterans not only can use their experience to get through this recession, but their methods and practices can help other club owners stay in business, too. As Gainesville (FL) Health and Fitness Centers owner Joe Cirulli puts it, "I've worked for so many clubs when I started that went bankrupt, I'm always ready for a recession."

Red Lerille has operated Red Lerille's Health and Racquet Club in Lafayette, LA, for 46 years. Without bragging or boasting, Lerille says his club is doing well in this economy, largely because of the healthy oil industry in and around Lafayette. If gas prices went back up to $4 a gallon, Lerille says he'd be doing even better, and one suspects that he isn't joking.

Back in the 1980s, though, everything could have crumbled around Lerille and his club. The oil bust at that time cost Lerille 1,700 of his 6,000 members in the span of just six weeks. Lerille and his staff, many of whom also were affected by the oil bust, quickly met to hammer out details about how to keep the club afloat.

The staff decided to work harder, each putting in an extra five hours a week. The club started closing at 10 p.m., one hour earlier than normal. There were no layoffs, but when a staff member left the club, that position was not filled. The club also did some little things, such as removing the club's logo from towels and cups. It was important, Lerille says, that members did not notice that the club had made these changes.

After six months, the club had survived, and the staff went back to working normal hours. Lerille, who won the Mr. America title in 1960, even treated himself to a Lamborghini.

"Things were rolling pretty good," Lerille says. "I had a birthday coming on, and I like to buy nice gifts for myself."

From 2007 to 2008, Lerille's club increased its revenue from $10.3 million to $11 million and increased its memberships from 9,111 to 9,329. Lerille says he currently has about 16,000 active members at his 200,000-square-foot multisport club.

So yes, things are looking good these days for Lerille. But, he adds, it took the club about five years to fully recover from that oil bust.

At Your Service

Rick Beusman, president of Saw Mill Sports Management, Mount Kisco, NY, oversees four Saw Mill Clubs, three in New York and one in Connecticut. Beusman keeps tabs with other multisport operators around the country, and he says most of them have produced similar revenue figures to those of his company over the past few months.

Sales were down and retention was up at most clubs in the fourth quarter of 2008, Beusman says, producing a decrease in revenue of anywhere from 10 percent to 25 percent. In January, however, Beusman says his clubs and others hit their projected numbers.

"The bleeding stopped typically for people in December," Beusman says. "We weathered a big bump."

Cirulli says his clubs' sales and cash flow have remained strong during the recession because his retention rates have remained high.

"As we move forward, the key issues are looking for new ways to grow membership," Cirulli says.

Cliff Buchholz, owner of Miramont Lifestyle Fitness, Fort Collins, CO, also is looking at membership growth to stay afloat. To grow membership and retain current members, Buchholz is putting a greater emphasis on non-dues revenue programs at his three clubs, such as Silver Sneakers for seniors, a weight-loss program, a lifestyle nutrition program and programs that deal with arthritis and diabetes. He wants more non-exercisers to come to the club, so he has instituted six-week programs for nonmembers in which Miramont staff keeps close tabs on its customers. ("We hold their hand for six weeks," Buchholz says.)

Other clubs are emphasizing programs and wellness services more these days, too. The Dedham Health and Athletic Complex in Dedham, MA, has put as much emphasis on the "health" portion of the complex as the "athletic" portion.

Lloyd Gainsboro, owner of the Dedham complex, says his wife encouraged him to change the club's model about 20 years ago to include physical therapy and other medical services. The club partners with a local hospital and a local diabetes center and has affiliations with other medical centers in the area. Since 1996, Dedham has increased its physical therapy patient visits from 500 a month to about 4,000 a month, Gainsboro says.

Dedham has a 60/60 ($60 for 60 days) physician referral exercise program. The 60/60 program is for people who are sedentary or have specific health issues, such as diabetes, high blood pressure, heart disease and weight management problems. The medical services at Dedham also include orthopedics, as well as X-ray and MRI machines.

"Certainly, it's made us a very profitable company," Gainsboro says of his club's medical services. "We have no complaints. It's helped to increase our stability."

Services helped Orchard Hills Athletic Club in Lancaster, MA, enjoy a successful 2008. Cindy Curley, the general manager of Orchard Hills Athletic Club, says her club had a 53 percent increase in EBITDA (earnings before interest, taxes, depreciation and amortization) and improved member retention by more than 7 percent over 2007.

Curley says she has seen a shift in her club's philosophy over the past five years. The club now wants to become a destination, with a multitude of services in one location.

Orchard Hills, a 75,000-square-foot club, contracts with a local hospital for physical therapy and has a separate Pilates studio, a high-performance bike studio, a sports enhancement center, a massage therapy center and a gymnastics and cheerleading center.

"Our goal was to say, ‘What else can we do?’" Curley says. "We try to be different from the many gyms that have popped up in our area. We were careful in who we picked as our business partners. If it came down to a gym is a gym is a gym, we didn't want to be lumped into that category."

Kevin Buck, owner of the Newport Athletic Club in Newport, RI, wants his club to be different from the competition as well, but he doesn't want to differentiate just for the sake of doing so.

"We try to stay focused on what it is we do best," Buck says. "Many times, I've seen businesses try to spread themselves too thin, to be all things to all people. We recognize that we've been in business for 29 years, and we know who our market is."

As a service to its members and community, Newport Athletic Club has extended free two- and three-month memberships to those who have been laid off. The Montana Athletic Club in Bigfork, MT, last month instituted a similar free membership program for both members and nonmembers, as have other clubs.

"It's a small thing that we can do, but the good feeling that it brings out, you can't put a price on it," Buck says of the free memberships, of which he has issued about a dozen over the seven years he's made the offer. "When you do it, it's a powerful example of how important that person is to the business. They come back and use it and appreciate it. They'll always come back in the future. Then, they'll tell everybody, too, which helps."

Reinvesting in the Club

It may not seem like the best time to reinvest in a club, especially in the current credit crunch, but several veteran club operators swear by it.

Beusman says an average of 7 percent to 10 percent of gross revenues at his clubs over the last three years have gone back into the clubs.

"You now have a competitive advantage," Beusman says. "[The clubs are] current and up to date in terms of look and feel."

Cirulli says that during the last five months, he has spent about $600,000 renovating his Gainesville clubs. He adds that he has always put aside money for renovations and pays for them in cash. The company also has a $2 million credit line that remains untouched, Cirulli says.

"I believe now is a great time to do it because it shows our members we are successful," Cirulli says. "I believe that is the right message to send when the media continually reports gloom and doom. People want to be part of successful companies."

Alan Schwartz, chairman of Chicago-based TCA Holdings Inc., which runs Midtown Athletic Clubs, has also been a bank director for more than 25 years. Companies that have established good credit have a better chance of borrowing money in these times, Schwartz says.

"Banks are more careful about lending, but they're still lending, and they're lending to proven customers," says Schwartz, who adds that 2008 was one of the three best years in TCA's 40-year history.

Schwartz also says his company has not let up on capital expenditures. In fact, Midtown is in the midst of one of the company's biggest years in terms of capital expenditures.

"I believe this recession is causing us to work a bit harder, re-examine where expenses may be excessive, and in general, sharpen our whole operation," Schwartz says.

Beusman says a strong relationship with the bank is crucial for a club company in a recession. Beusman refinanced the company's debt six months ago and secured two lines of credit.

"We've always had a strong cash position in terms of money that we hold back in the bank," Beusman says. "The bank's very much behind us. We give them full disclosure of everything we do. We spend a lot of time meeting our bank covenants. That's really paid off for us now."

Cash flow also is crucial to the club's operations, Beusman says. Two years ago, Saw Mill freed up cash by selling one of its Connecticut clubs, which had become a cash drain on the company, he says.

"We've been in business for 35 years," Beusman says. "You need to meet cash flow needs in the short term. The answer is, don't lose faith, things will turn. But make sure you protect your cash flow at all costs."

Saw Mill has not raised its prices, nor has it lowered prices for memberships. The company has trimmed expenses in several ways, including signing a two-year contract with a gas and electric company that will lower energy costs by 20 percent. Even though Saw Mill had to lay off one of its staff members in the business office and consolidate two roles into one, the company still has employees who have served 10, 15 or 20 years.

Reinvesting in the club is not confined to purchases and expenditures. The member experience is as important now as at any other time, Schwartz says, and that means the industry should not get lean and mean, but lean and friendly.

"Our employees are more keenly aware of the need to go the extra step to exceed the member's expectation, knowing how important it is to keep members happy and increase their own job security in a recessionary period," Schwartz says. "That extra attention to the members is a win-win for the member, the employee and the club, and I hope that same psychology continues to prevail after the recession is over."

Beusman agrees that paying more attention to the club through reinvestments, such as adding services and programs, is akin to paying more attention to the members.

"The holy grail of the business is to have engaged members," Beusman says. "The more engaged members are in the club, the less likely they will leave it."

Family First

If there's one thing that successful veteran club operators have in common, it's that many of them offer a wide range of multisport activities, such as swimming and tennis, aimed at the family market.

Although low-price, fitness-only clubs have a good chance of making it through this economy, the safest haven in this economy is to have a large multisport tennis club catering to families, Beusman says. The clubs that are at the greatest risk, he adds, are the mid-priced fitness-only clubs.

Buchholz says tennis is going through a boom period at Miramont. Schwartz says that the past 12 months have been the best 12 months for tennis at Midtown. The Midtown facility in downtown Chicago exceeded $3 million in tennis lessons last year, Schwartz says. Although the number of private lessons at Midtown declined slightly, semi-private lessons, in which two or more members are in a lesson with a tennis pro, increased. The semi-private lessons cost more than private lessons but are less per person, Schwartz says.

Youth lessons at Midtown also increased, a sign that members with children want their kids to enjoy the club experience as much as they do.

"When people make decisions to cut back on expenses, they form either consciously or unconsciously a hierarchy of priorities," Schwartz says. "The club's best defense against the recession's impact against attrition at any time is to involve the member in as many club activities at a significant level as possible. The more significant the involvement, the higher that item will be on the hierarchy of what is to be retained in a recessionary period — or any period."

The Weymouth Club in Weymouth, MA, opened a 12,000-square-foot kids center last year in its 200,000-square-foot-club for children ages 8 weeks to 15 years old.

The kids center, called the Energy Center, includes rock climbing, an arts and crafts station and a dance studio. The club has added 300 family memberships since opening the center, says Jeff Linn, assistant executive director of the Weymouth Club.

At Red Lerille's Health and Racquet Club, Lerille is increasing his club's appeal to families by putting in a water park, which he expects will be completed in April.

With the unsteadiness of the current economy, Lerille says he is just glad he has a place to hang his hat after 46 years in the business.

"I'd move in here if I have to," Lerille says. "I'd do whatever I have to do to survive."

See "What Others Have to Say" sidebar for a sampling of what Top 100 club operators have to say about 2009.

What Others Have to Say

Club Industry's Fitness Business Pro recently surveyed many of the owners of clubs that appeared on the magazine's Top 100 club list in 2008. The owners were asked about subjects relating to revenue, membership and equipment purchasing for 2009. Most of the club operators expect revenues and club membership to increase or remain the same in 2009 compared to 2008 (for more details about this study, see "Industry Growth Still Anticipated"). Although many of them plan to decrease their equipment purchases compared to 2008, the majority of those surveyed do have equipment purchases planned for 2009. More than half of the club operators will be purchasing ellipticals, strength equipment and treadmills.

Here is a sampling of what club operators have to say about 2009:

"Despite the future uncertainty of the economy, I believe it is still important for clubs to continue reinvesting in their facilities and equipment. Historically, those clubs that have been able to consistently remain committed to continual improvement have outperformed their counterparts."

— Brent Darden, owner and general manager, Telos Fitness Center, Dallas

"I believe that this economy will have a negative impact on the fitness equipment suppliers in 2009. Many clubs are being faced with and have already experienced lower sales and higher attrition. I feel most clubs will be putting off their major purchases in 2009 because their money will be a lot tighter than it's ever been (payroll, supplies, utilities, etc.). It isn't the right thing to do, but unfortunately, it will be what most independent club owners will do because of money crunches."

— Jan Rubins, owner and general manager, LifeCenterPlus, Hudson, OH

"In the face of the economic situation that all America is challenged with, we are taking a close look at our spending in order to partner with the appropriate vendors and purchase the best equipment, product and services to exceed our members' expectations. By partnering with the right vendors for the right product and service, we then are not afraid to spend the necessary dollars to take care of our customer. This enables us to give our membership the best and eliminate any unnecessary spending on repairs or replacement and minimize our downtime for preventative maintenance."

— Mark Stevens, general manager, The Houstonian Club and Spa, Houston

"I do believe that it is more important than ever to make sure all your equipment is in excellent working order. While times can be tough for all of us, now is not the time to reduce service and allow equipment to go dormant. The stronger you weather the storm, the more confidence your members will have with you during the good times and bad."

— Chris Tointon, CEO, Greater Midland (MI) Community Centers

"We will most likely begin the year conservatively by waiting to see what the economy does prior to making major purchases. However, we understand how important it is to continually reinvest in our business and will not hesitate to do so if we determine it is necessary."

— Phil Wendel, owner, ACAC Fitness and Wellness Center, Midlothian, VA

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