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Matthew Stevens, CEO of Spectrum Athletic Clubs, Los Angeles CA

A Rewarding Experience

Spectrum Athletic Clubs, Los Angeles, uses a rewards program to reach people inside and outside its clubs’ four walls, a move that has helped increase revenue by $40 million in three years.

Matthew Stevens, CEO, Spectrum Athletic Clubs
Interview conducted by Pamela Kufahl, editor

Q: How would you describe Spectrum Athletic Clubs?
A: We operate 12 facilities in Southern California and now 10 in San Antonio. Our clubs are geared in the mid- to upper-scale, athletic club category. If you use the hotel industry as an analogy, we try to deliver a product consistent with Westin Hotels. We look at everything—all the components in our offerings. Like with the locker room, we look at the locker box, the size, the lock. How do we make that experience a little more special? That’s what the hotel industry does with the bathroom. What does my shower look like? What does the shower head look like? Is that what’s going to make a difference in them being willing to pay $179 per night instead of $79?
On our fitness floor, our audio-visual is upgraded so at least 50 percent [of members using the equipment] have their own personal TV. We have a stretch area with a flat-screen TV with a running loop of a stretching program.
Other amenities are that we focus heavily on the safety side. When you walk in, we have large cabinets that say Safety Zone on them. Inside are complimentary bandages, ice packs, anything members would need, plus an AED (automated external defibrillator), crutches, wheelchair—everything you would need to take care of a member. You don’t walk into many clubs that have a basketball court that have a wheelchair to transport members [if they hurt themselves].
We work hard to find a vendor [for our cafés] that makes it a perfect fit for our members with an excellent menu. To have that as an extra component takes it up a notch.
So everything is a little bit touched up.
A typical club might make people find a basketball at the front desk. On our court, there’s a rack of basketballs that get replaced every three months. Four days of the week, we provide a referee for regular pick-up games—not just league games—and this is not a regular profit center. It takes it up a notch. It keeps the game organized. It turns the court over on a regular basis. We will see 50-75 people on the court at any given time.
Our kids’ programming is off the chart. We focus on all the fun activities kids would want to do. We recruited kids club directors from schools. We pay them above what they get paid at the schools to bring in the most creative people we could have.
So it’s all the little things to make a difference and to provide the experience that a person says, “Well, if I’m going to go to a Westin, what do I expect? If I go to a Marriott, what do I expect?” The hotel industry has done a good job of defining that. We’ve used that as our guide on how we make decisions on putting together the programming and components in our clubs.

Q: You have clubs in Texas and California. Why are you focused on those two areas of the country?
A: Spectrum Club Inc. came about because of two acquisitions by our parent company, Brentwood. They bought Racquetball and Fitness in 1999 and then Spectrum from Sport Club Co. about six months later. We’ve made a decision to make the brand all the same using Spectrum. We’ve worked on bringing all the clubs up to the same level of a Westin Hotel.

Q: How have you defined your target market?
A: Our target market is predominately 30 years old to 65. Household income varies between Southern California and San Antonio—it’s $50,000 in Texas and $75,000 in Southern California. We have programming for the different groups—programs for families and for seniors. We don’t dial in any deeper than that.

Q: Do you plan to purchase or build more clubs in the next two years?
A: We plan to stay dialed into both markets. We’ve projected out a mid-market in San Antonio and a larger market in Los Angeles. We have plenty of growth plans in each market. We will fill in so we have complete control of those markets. As far as further growth from there, we will see after our three-year plan.
We have some expansion plans. We have about $12 million of capital going into our facilities. That includes adding to some clubs. So we have good capital going into existing clubs. We will add three clubs in 2008 and three in 2009 in San Antonio.
In Los Angeles, we are in an opportunistic mode.

Q: Who do you see as your competitors?
A: In both markets, we have good, strong competitors—and that’s good. It makes us do a better job. We compete with Gold’s in Texas. They have 10 stores in San Antonio. Life Time Fitness has two stores. So we compete directly with them, and they are both good competitors.
In Southern California we compete with everyone. This is a hotbed of a market. This is LA Fitness’ home. Equinox has a big presence. Sports Club Co. has a big presence. We know how to compete. We understand our niche, and we stay true to our strategy and deliver our product. Our revenue speaks for itself.

Q: Can you talk about the Health Miles program that your company offers to corporations for their employees and, more recently, that you began offering to your club members?
A: We’ve been one of the lead companies working on Health Miles, a software product with [a rewards company]. Health Miles is a Web-based product that allows a member or employee to track all their [health and exercise] data associated with measurements and activities. It creates “miles” that are converted to a rewards program. (Editor’s note: This program is similar to the rewards programs that airlines have in place.)
Today, our members can upgrade and add miles to their memberships. They can earn over $1,000 in prizes over the year. It means taking their blood pressure once a month, doing a fitness assessment twice a year, tracking activity onto the Web site using a Go Zone—a computerized pedometer that’s downloaded at a kiosk at our clubs. You earn miles, and you hit levels and earn money. You can put these miles back into things at the club or [use them at] one of 40 major participating retailers. It might be a gift card—up to $250 worth, or 12 personal training sessions, two fitness assessments, an extra $100 worth of club services or a year’s executive guest pass privileges, which allow members to bring in guests for free.
It doesn’t reward you if you are a fantastic athlete vs. a non-athlete but for tracking your activities. The concept is if you do this on a consistent basis and if you have a red flag pop up for something—diabetes, heart disease—it will trigger you to see a doctor. The challenge in the health club side of the world is that no one sees those red flags because people don’t take their blood pressure once a month. So it’s only when a shock situation takes place that people realize they are diabetic.
Health Miles is rewarding you for doing these things. So you can do that as a member or as an employee [of a corporation that has enrolled in the program]. The employer can see that they have 135 employees of whom 35 percent are in the obese category, 22 percent are classified as diabetic. Then, you can decide what you are going to do to remedy that—either a diabetic program, quit smoking program or something else.
We’ve been working with [the rewards company] for three years. We rolled it out in 2006 in San Antonio. We landed a school district with 10,000 employees in San Antonio as our first big client. Health Miles was included in their health care services. So if you signed up for health care with the school district, you signed up for a membership in Health Miles.
A typical wellness program gets 10 percent to 20 percent participation. The school district is averaging 58 percent participation in the program. That’s the lowest participation rate that we have. The average company [enrolled in Health Miles] has 90 percent participation. We have about 32 companies enrolled in it now.

We have a software and hardware growth plan here. On the software side, we are talking to companies with 25 employees and some with 400,000 employees to put Health Miles in. They can bundle the package as they’d like. They can choose from a menu of services.
So it changes the look of an athletic club program. Here’s the hardware (the physical clubs) and then here’s our software (the Health Miles program).
When we started diving into this and executing the rollouts, we found it was so easy to get the high levels of participation because we employ the gym teacher of the 1980s. They work for our industry. You have an entire world of people who want to work in our space, but the only option—if you don’t want to be on the business or sales side of it—you have is to be a personal trainer. If we can do this, you have opened a whole other area to a whole new group of people to recruit to our space. That takes our industry to a different level.
So we tested this Health Miles program with our company. We allowed our employees to do Health Miles and we paid for it for them and their families. We sat down with the five major insurers. We have 500 employees, which was $1.5 million per year for health care. We asked for pricing from all five insurers. All came in at a 17 percent increase year over year. Then, I held a meeting with each one of them. I walked them through Health Miles and our claims history. Then, they resubmitted their plans. All came through with a lower price.
Instead of taking our savings to the bottom line, I upgraded all the services that we provide to our employees on the medical side. So we went up 6 percent in costs, but their co-pay costs went down and we got them a 100 percent co-insure match on a PPO. We did this because if we can show the world that the preventive side is the way to go, then our employees have themselves a career path that will rank up there with the computer industry.

Q: How does the Health Miles program affect your corporate fitness?
A: I’ve been in the industry since 1985. I started in New York selling corporate memberships to investment firms. The challenge we’ve had in the past is, how do you track the [employee health] data? You can tell employers that exercise is great for morale and reduces absenteeism. They say great, but how do I know that? We’d give them attendance reports, but the data was hard to track. This program now allows us to capture the data, so I can show them the activity. Users go to a kiosk to get their data, and it’s captured into the system. The cholesterol and all of their results download on the Web site for them. They don’t have to input it themselves. Now, I have the data to work with the companies. Now I can help build a roadmap on how to take charge of their health care costs, and carriers can help manage disease with employees.
We already have a standing relationship with Humana and now also with United Health Care in taking our data and sharing it with their systems. Working with the corporate world all starts with, can you show them data?

Q: How much participation in the rewards program are you getting from you club members?
A: The club program is broken into three categories. Thirty-three percent of our users are regular users—our group that uses the group on a consistent basis. Thirty-three percent use it two to three times a month, and 33 percent use it less than that. So it evenly breaks across those lines. If we don’t move people from the last category, that’s where we lose those members, if we don’t at least move them into the second category.
To our club members, Health Miles was only rolled out as of Jan. 1, 2007. (Editor’s Note: Prior to that, the program had been sold to corporations who offered it to their employees, and the employees may or may not have used Spectrum clubs.) The beauty of Health Miles is that you are engaged in our product throughout your entire day. If you wear the Go Zone, which is where you earn most of your points, then you are using Spectrum all day. You are getting rewarded by us for your activities. So it’s no longer dependent on you to walk through our doors to have an interaction with our company.
So if someone comes two to three times a month through our doors, but they use our Go Zone, then they are using us every day. They are thinking, my typical day is only 3,500 steps, but I need 7,000 steps a day. So should I walk someplace for lunch or do I go by the club to get a workout? If I can get into their psyche to change that behavior so they are getting exercise a little bit more all day, then we’ve had an impact on their world. And they are getting rewarded for this.
It’s tearing down the walls. You don’t value our product by simply walking through our doors. You value it by a dynamic environment.
We are finding that members are buying Health Miles for their parents who are not even in the cities that we operate in. Maybe their parents are in Waco, TX, and they have a discussion about how many steps they took and they do it in a fun, competitive way. That creates a whole new line for us as far as where we can go with the business.

Q: Can people purchase the program only, or do they have to be a member of your club?
A: We sell Health Miles only for $20 per month–no membership to the club.

Q: Why aren’t more clubs offering their members a program like this?
A: We were working on this for two years to get this right. Virgin Life Care and IBM were doing the technology and Humana was providing the health care expertise. Just in the last six months, we’ve taken it full bore to market but in a correct way. Spectrum and Virgin have tried not to mass market it through the health club industry. We’ve zoned in our markets in Los Angeles and San Antonio to get this right. If we get this right, it’s a win for everyone in the industry. So we aren’t trying to get every health club in the industry to jump on board. It’ll probably be another 12 months to have a major national launch. We hope to get two more major companies on board.
We need the 100,000-employee company. It could be an entire city workforce. It could be a union group that has 100,000 employees. The 100,000-employee groups are looking at $500 million-health care contracts. Then, we want to have a monster company. We are at the table with companies that have 300,000-400,000 employees. If we can have one pilot at 100,000 and another at 300,000-400,000, then we’ll have all the groups tested out and understand what we have to do to deliver the product.

Q: How will implementing a program like this affect clubs?
A: The one major adjustment we made from a programming standpoint was to build out classrooms for workshops. We developed a curriculum to do six-week cooking programs, stop smoking programs, etc. You can do an online program if you are not within the area of our clubs.
Right now, we’ve had a high success rate of insurance companies picking up the cost of the seminars if you are in the high-risk category.
We’ve had to make an adjustment in our physical plant to make areas that are fun.
But it’s profitable for us because insurance companies are paying for it.
We’ve also had to build out computer zones in our clubs. We have a minimum of six computers at each club free for members to use so they can check their Life Zone, which is part of Health Miles. They can download their Go Zone, and they can use the Internet for what they want.
It’s especially important for our senior members. Often, every seat is taken. It takes about 15 seconds to download their Go Zone. They don’t have to download it every day, but they have to download monthly. It will take down all the information and time stamp it from the last download. It puts it into graphs and charts for them to see their progress.

Q: How much profit are you making with this?
A: This year, we creep over the $100 million mark. We grew from $60 million in the last three-and-a-half years. We still have 22 clubs, but we grew $40 million in revenue.
The potential is astronomical. If we can prove out this process, the revenue growth for us and for the industry is fantastic. We have to do this right, not just try to get the quick buck out of it. I need to make sure that we deliver the results. Was I able to help them in the form of dollars by changing their health care cost increase of 15 percent, or did I change the culture of the school system? Did I allow them to stabilize their benefits? This is one of the deepest dives that anyone in the industry has done using the public athletic club sector as the vehicle for delivery.

Q: How could this affect the obesity issue?
A: We are hoping to launch our program by mid summer to allow children 12 and up to be on this. The No. 1 demand we have from school systems and members is to have this program rolled out for kids. Parents want to do this with their kids. We can make this cool. We can make the Go Zones in different colors. Some of our staff wear the Go Zone on their shoes, hips, belts, legs. My staff has found ways to make this an accessory to their outfits. We want to make this in different colors so that you can switch it out depending on your outfit.

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