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Club Industry Exchange: Mark Mastrov

As knowledgeable as they come in the health and fitness industry today, Mark Mastrov, chief executive officer of 24 Hour Fitness Worldwide, has personally overseen the company's growth to its more than 434 locations. Despite the demands of growing a multinational corporation, Mastrov is more focused than ever on using health and fitness to make a difference in people's lives around the world.

Ci Congratulations on topping the Club Industry Top 100.

Thank you. It's actually not something we ever really focused on but when it does happen it is pretty cool.

Ci Can you give us a little background on the company's beginnings and early steps toward growth?

We started in 1983 in San Leandro, CA. At that time it was a little fitness club of 5,000 square feet. We began growing from that point, either by building new or acquiring facilities that hadn't performed well, at a good price, or that fit into our portfolio over the years. Through that strategy we slowly built up a nice group of clubs in Northern California by the mid-‘90s. It was at that point we began to receive a lot of attention from a number of different investment banking groups. We eventually decided to allow a group to co-invest with us at the end of 1994 and the beginning of 1995. We raised some capital and went out to acquire chains, as well as build new products and have grown ever since.

Ci It seems that you were able to do something a lot of other companies have had trouble with when it comes to growing — acquiring capital.

The Achilles heel of our industry has always been the difficulty in raising capital. It had gotten much better in the late ‘90s when there was a lot of capital invested in this industry. I'd say there was more invested in the last five years than the prior 30. But as you know, the capital markets are pretty weak right now. So what it boils down to is that when those firms look at the list of who is going to get that capital our industry is never near the top — it is usually near the bottom. So right now a lot of us in the industry are sitting and waiting to raise capital. But in the next few years that capital will open up and we'll go back out and raise capital to grow as appropriate for our portfolios.

Ci What have been the biggest challenges in growing from a one-club operator to the number one position on the Club Industry Top 100 list?

A lot of it is really staying within yourself and building a platform, systems and team. We've always tried to focus on growing only when we have the people to grow. There are peaks and valleys in that growth pattern where you have the depth of people to grow and do so, while at other times you have to slow down a little when you don't have that depth of personnel. It takes years to train people to run clubs, to run districts and to run regions. That kind of training doesn't happen overnight and that's one of the things that a lot of people seem to miss out on. It is a finite, difficult business that is a ton of fun, but to train and develop somebody takes a while to build in your culture and your foundation with then.

Ci How important has the move to the global community been?

It depends on the angle you are looking at. If you look at it from our team, it was important in that it provided the opportunity to travel abroad and work in Europe and Asia. That opportunity for our people was important to us. As far as the importance to our organization, it really is run as three separate platforms: Asia, Europe and the United States. We have invested in each of those appropriately and had a lot of fun doing so. It has also opened up a lot of the ways the United States operates in those other markets. When we went in, we felt they were 10, 15 even 20 years behind in the process. We've been able to speed that up and advance the offerings available in these other countries. It is important to us because it is a challenge and we love challenges. It is important for us because it adds a lot of energy inside the organization and it is a ton of fun. But at the end of the day, I don't know if it is something we would rate as vital to the existence of the company.

Ci As — or when — the economy shows signs of recovery, does 24 Hour Fitness have plans to continue growing and, perhaps, moving eastward?

Absolutely. We currently have in the United States and in construction for the year about 26 boxes. We'll probably do more than that this year with a bang in the third and fourth quarters, but for now that is what we have opened or in construction. We definitely have the East Coast in our sights and at some point we will get there. We have three clubs open in Florida, but I wouldn't say that is a heavy presence on the East Coast. We have in excess of 50 clubs in Texas. We have broken into Kansas City and St. Louis and begun dropping boxes in there. What really is important to us is to cluster as many clubs as possible to gain critical mass in a marketplace. So we need to make sure we do a good job in the markets we are in and continue to grow those markets before we explore new opportunities.

Ci How has the economics within the industry, primarily the importance of ancillary profit centers, changed over the years from your perspective?

Years ago we focused on comp-store sales, which a lot of public companies focus on. We said we have to focus there and get used to each year comping at a reasonable level. One of the ways to do that is through the ancillary profit centers. We brought in personal training in the early ‘90s and what we found when we dropped it in was that it was a great fit. It brought more service, better personnel and more revenue for the clubs. It brought profits not only to the bottom line but revenue to the top line as well. The big challenge was the cost of hiring, training, developing and training staff. We developed our own certification program and have built that into one of, if not the premiere, personal training and certifying program in the industry. We also bundled in nutrition and built that into our model about five years ago where people can come in and get information through our computerized programs and learn how to eat and supplement correctly to help reach their goals. The supplement and ancillary sales that are generated from that are just growing at leaps and bounds every year. It is just wide open and a lot of people are doing a great job with ancillary profit centers.

Ci Is a public offering likely for 24 Hour Fitness?

There is no doubt that at some point at the size we are right now we are going to have to get to the public market to raise cheaper capital. I see that happening at some point down the road. But unfortunately with the markets where they are now we are going to have to sit tight and continue to grow. We have a lot of cash on the balance sheet right now, we are doing extremely well this year — we are having a bang up year. We will continue to grow at the pace that is comfortable for our team and that the cash flow allows us to grow.

Ci Attracting public money has been difficult for the industry so far. Do you see that changing?

The issue for all of us on a go-forward basis is getting more visibility in the public markets. Right now you have The Sports Club Company and Bally's out there, that's it. Lee Hillman and his team at Bally's do a fantastic job talking to the Street. The problem is that there just aren't enough players to create the interest in our category. At some point you have to get three, four, five or more companies in the public sector. When that happens it will allow our industry to grow at a greater rate and garner that interest from the financial communities. I think that is going to happen in the next three to five years.

On the member side the industry is doing a phenomenal job in a number of ways. The awareness is there and with the push by President Bush it is coming from a higher point then ever before. I think that the small operators and the regional players are really doing a great job. I have to take my hat off to them. It is a pleasure to see what has evolved. We just have to get that awareness on the financial side.

Ci You mentioned President Bush's recent urging for Americans to get fit. Is this something the industry can really use?

That is a tough one. I think awareness is extremely high in this country. I also think participation is higher than perceived. There is a statistic that says a little more than 13 percent of the population exercises. I think that in markets like California and other coastal markets you have participation around 20 percent. It is my, and our belief that the nation is underclubbed. The reason it is underclubbed is that we haven't been able to raise the necessary capital to develop the product line across the scope of the United States. You have dense fitness populations along the East Coast and the West Coast and it is starting to build up in the middle of the country. But the reality is that there just aren't enough fitness facilities of quality and stature to really dent the usage issue. There are probably a lot of people scratching their heads over that statement. But I tour facilities all the time and there just aren't enough. In some instances, I see one of our clubs and two competitors on the same block and we are all thriving. There is a tremendous opportunity ahead for us as an industry. It is just going to take the patience to raise the capital necessary to meet the demands of the population.

Ci So you believe there is enough room for companies of all sizes to not only co-exist, but thrive as well?

Absolutely. We see it all the time. The toughest competitor on the street is often the sole proprietor that is able to concentrate on two, three or four locations. They are always the best operators. They do a great job in the market. Then you have some of the bigger players that also serve the marketplace in a great way; they are able to advertise in a bigger way and help everyone by raising awareness. The more clubs that everyone can open and the better that we can work together to build awareness is what is really going to generate the level of interest that President Bush and others are trying to focus the country on. This country is obese. When you travel the world the way we do in our organization it is amazing when you get back home and just see the size of the people in the United States — we have some big, thick people in our country.

Ci How important or difficult is the staffing process when a chain is growing at the yearly pace that 24 Hour Fitness does?

People are always the toughest obstacle, especially when you are growing at the pace we are. We constantly focus on hiring, training and developing people. It really takes months and years to get people to understand what the industry is all about and how to service people the proper way. The beauty of where we are is that we grow at such a pace that we can slowly get the best of the best and give them the opportunities to grow. We really can afford to keep people excited by the paycheck in a positive way and allow us to attract some great people. Pay isn't enough, though, because people really want to learn and when they come onboard they want to be able to achieve and acquire new information. We constantly try to educate and train. Also, our system works on performance so those who perform are able to take upward steps.

Ci What has the impact of the economy been on the industry as a whole?

It is a tough one to answer. We are in a lot of regions around the country and some have been hit harder than others. Northern California and Silicon Valley have been hit pretty hard but when you get out to the Midwest you don't feel it quite as much. There is softness in the marketplace. However, we are performing very well. And when you look at the companies where you can see the numbers they are having good years as well. Our industry has done a great job of buckling down, getting out there and scratching and clawing, really showing their communities what they can do for them. We have been able to go out there and show the people that there is something they can do with their time while there is slowness in the job market. Clubs have also done a great job of unbundling services and making entry affordable to the marketplace. It has been said that our industry performs really well in tough economic times, and I think we are coming through this one very well, too.

Ci What kind of a role do you see the Internet playing in the growth of the industry and for 24 Hour Fitness going forward?

We spent a tremendous amount time, energy and effort on the development of our Web site and our platform. Our IT platform has been a focus for the last six years. We built our system so that when a person comes into our facility and joins our club we are able to e-mail them at home. We work on a paperless system as much as possible trying to be environmentally sound, and at the same time, bundled everything in there to be state of the art. We have done that because we are able to do that and we feel in the future it will be a huge advantage for us. The Web site is generating more than 50 million hits a month. We don't advertise it. We don't link with a lot of other sites. We just put it out there for our membership base — we have more than 1.25 million registered users to date. I think it is just another way for us to reach out and talk to people. One of the stigmas we have as an industry is that we are seen having a used car sales approach to selling memberships. A lot of people aren't really excited about walking into a health club because they fear being hammered by a sales person. The Internet gives us another way to talk to people and sell them memberships in a quiet environment that they feel more comfortable with. It is unfortunate that we have to show somebody the price of the club. Therefore, when you show them something written down on a price sheet, they may think that there is another negotiation. We decided years ago that we don't negotiate. We show them a price and allow them to pick the package that works best for them. We try to achieve a fine balance so that the person that buys, the person that doesn't buy, and the salesperson feels that they were part of a fair and ethical process and are happy with the decision and the company.

Ci What challenges do you see on the horizon for the industry and, of course, 24 Hour Fitness?

We really aren't that big of a company but we are a company that is trying to find its way — and we are doing a good job. In reality if we can get out there and help the communities and people we have done our job. Our industry as a whole has to sit back and take a look at the consumer. The consumer is getting smarter year in and year out so we have to get better at delivering on our promises. That way when the consumer comes in the door they stay with us; they don't come in for three to six months and blow up because we didn't deliver on our promise. We have got to do a great job inside the box. That way we can have high retention levels and keep people coming in long term. The other thing we have to be conscious of is that our society is extremely litigious. The government is always looking for ways to cut and slice for the benefit of the consumers and the government. We just have to be cognizant of what those changes may be and as they occur that we are part of that process. In any of the writings of law that affect our industry from the consumers' standpoint and from the industry's standpoint we have to be part of that process. This goes for clubs of all sizes. A company that has one club perceives that they have a different agenda then a company with 200 clubs. But when you get a person with one club that thinks they need something different than the bigger club you may get conflicts. We all have to stay involved and vigilant to keep the industry strong and growing.

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