Time's Up

Several express club franchisees have shut down their operations, and some are suing their franchisors. Are franchised express clubs beginning to thin out?

Chris Burchard had always dreamed of starting his own business. After working for 13 years at a computer company, Burchard realized his dream in 2004 when he opened a ShapeXpress franchise in Overland Park, KS. ShapeXpress, an express club for women founded in 2002, sold 300 franchise licenses in its first three years. Burchard believed in ShapeXpress as a proven business model, and at one point, his club had almost 300 members. He even gave a glowing testimonial about the company on the ShapeXpress Web site.

However, financial difficulties followed, and Burchard closed his ShapeXpress club in May 2006. Although Burchard won't say how much debt he is in, he says he lost a lot of his savings as well as money he borrowed from lenders.

Burchard is just one of several franchisees of express fitness clubs who have suffered financially in the last couple of years. Other ShapeXpress franchisees are also in debt. Some Contours Express franchisees are in litigation, alleging fraud and breach of contract with their franchisor. Cuts Fitness, which had 38 men-only clubs and two women-only facilities, bought out the franchise agreements of its franchisees and closed its franchise business in June.

Other express clubs are struggling as well. It appears the demise of some of the so-called Curves knock-offs, including some men's versions, has arrived.

“This is the tip of the iceberg,” says Casey Conrad, president of Healthy Inspirations, a women-only club with exercise and weight-loss programs. “This is going to be a major black eye in the fitness industry.”

Conrad worries that members of closed express clubs or just dissatisfied members of express clubs won't join other clubs.

Litigation Troubles

Not long ago, franchise trade publications raved about express clubs. In 2005, Entrepreneur Magazine listed ShapeXpress, Tulsa, OK, in its “Hot 100 List of Franchises.” The same magazine also described Contours Express, Nicholasville, KY, as “fast growing” and “most affordable.” Cuts Fitness, Clark, NJ, was on Entrepreneur Magazine's top 20 new franchise list and also was on the top 100 list in Franchise Market Magazine in 2006.

Those lists are based on the number of units sold — not on how profitable the fitness club companies are — and don't have a lot of merit, says Eric Riess, a franchise attorney in St. Louis. Riess has negotiated several Uniform Franchise Offering Circulars (UFOCs) on behalf of ShapeXpress franchisees.

During the last six months, Riess has been approached by 35 ShapeXpress franchisees who want to sue the company. Riess says all of the ShapeXpress franchises in the St. Louis area that he has represented have closed.

“I've never seen one fail like this,” Riess says.

Many ShapeXpress franchisees have similar stories to Burchard's. One owner says she lost $375,000, pending the sale of her store and two other franchise licenses. She lived off borrowed funds just to get through the final months of her ownership. Another owner signed her franchise agreement in December 2003, purchased three licenses, opened one club in April 2004 and closed that club in January 2006. Her losses exceed $300,000. An owner in Illinois, who signed a ShapeXpress franchise agreement when the company started in 2002, says she is barely keeping her doors open and has lost all of her investments as well as her two kids' college education money. She calls owning a ShapeXpress “by far the worst nightmare of my life.”

Riess says the ShapeXpress franchisees who have approached him about filing a lawsuit do not have the money to do so. Even if they did, Riess says, they would have to travel to Oklahoma (where ShapeXpress is headquartered) and go through a private arbitration process, as outlined in the ShapeXpress UFOC.

More than 60 Contours Express franchisees filed a lawsuit in St. Louis in May against AABB Fitness Holdings Inc. (formerly Contours Express Inc.), Contours Express LLC and franchise broker James E. Hogg. The franchisees allege that the Contours Express UFOC understated the cost of building and operating a location, made earnings claims regarding profitability that are prohibited by the Federal Trade Commission, provided little support to the franchisees and covered up many of the franchise failures by not disclosing all of the franchisees who had left the system.

Jose Perez, who took over as CEO of Contours Express in July, would not comment on details of the lawsuit but says the company is “vigorously defending” the claims. Most of the 60 franchisees, Perez adds, are no longer with the company.

“We have complete faith in our system and what we're doing,” Perez says. “We don't see anything wrong with our model. The question is, do people follow the model?”

Lady of America, a women-only franchise with an express club model under the brand Ladies Workout Express, has recently endured three lawsuits, according to a report in the October issue of Franchise Times. The company won a lawsuit against 50 franchisees in Florida and settled another lawsuit with 22 California franchisees by buying them out.

Minnesota Lady of America franchisees have also filed a lawsuit, alleging they were duped into buying Lady of America franchises and now have had to close their businesses because of low profitability. Similar to the Contours Express lawsuit, the Lady of America franchisees allege that they were given earnings claims by company representatives that were not part of the disclosure documents.

After accepting the Cuts Fitness buyout of their agreements, some of the former Cuts Fitness franchisees changed their models to coed, 24-hour facilities. They were struggling financially in the old model and needed to reach a larger market of prospective members, says Steven Haase, managing director of Cuts Fitness. Some Cuts Fitness franchisees say they are glad they made the switch and have seen their membership numbers increase.

In the end, the men-only model was not profitable, says Haase, who adds that the company is involved in one lawsuit that pre-dates the buyouts.

“Our franchise network changed thousands of lives for the better,” Haase says. “We have truly done our best to make the men's product work for all involved and are very frustrated that we did not get it done.”

Case Study

Unlike some of his fellow ShapeXpress franchisees, Burchard says he had a good relationship with his franchisor. Burchard, with a background in sales management, even did some consulting work for ShapeXpress but did not make any sales for the company.

Burchard purchased the rights to three ShapeXpress franchises for $45,000 rather than paying for one franchise at $30,000. (Burchard says that ShapeXpress encourages franchisees to purchase clubs in three- or five-packs.) However, Burchard opened only one of his three franchises.

“It made sense based off their cost structure to go for a little bit more,” Burchard says.

Burchard's monthly costs ranged from $10,000 to $15,000. His monthly revenues ranged from $8,000 to $14,000. The trouble spots started for Burchard when he says ShapeXpress excluded the cost of debt or financing in their projections.

“I was led to believe that I could be ‘cash-flowing’ it with a certain amount of members as early as 30 to 90 days,” Burchard says. “I continued to rack up more debt. I didn't have enough cash to sustain operations. I didn't want to go any further into debt.”

Labor costs, member attrition and staff turnover were much higher than expected for Burchard.

“The cost model for ShapeXpress is too expensive,” Burchard says. “In talking to clubs that were already open, I thought it was going to cost less to operate on a monthly basis than it really did, and I also thought that my revenues would be higher. I made some mistakes there. Maybe the owners that I talked to didn't have a full understanding of their costs and revenues.”

Burchard was confident in his sales abilities, but the people he tried to hire were not necessarily comfortable with ShapeXpress' sales model. Burchard says the company stresses “guerilla marketing,” an aggressive marketing campaign in which ShapeXpress staff members talk to women in parking lots or shopping malls and offer free trials at the club.

“[ShapeXpress is] very much a sales and marketing company that happens to sell fitness,” Burchard says. “It was difficult to find fitness professionals who were interested in aggressive sales and marketing.”

Burchard also says he had trouble adjusting to running a women-only club.

“When it comes to fitness, a lot of women don't stick with it, unfortunately,” he says. “Even the ones that had pre-paid memberships stopped coming after a few months. People who were paying monthly would stop paying monthly.”

Experience Lacking

One reason some express clubs are closing, industry observers say, is that franchisees often lack experience in business and fitness. Ironically, express club companies seem to openly promote to potential franchisees that business and fitness experience are not needed.

On the Contours Express Web site, in a section of frequently asked questions, the company states, “Absolutely NO previous fitness or business experience is required.” Perez says Contours Express will train franchisees on every aspect of owning a gym.

Ryan Hausher, the senior vice president of ShapeXpress, was not available for comment before press time. However, in an interview with Entrepreneur Magazine earlier this year, Hausher said ShapeXpress does train franchisees who lack a fitness or business background.

“It's so much easier to be able to take somebody that's good in sales and teach them the fitness side of it, rather than somebody that's really good in fitness and teach them how to sell successfully,” Hausher told the magazine.

However, Riess says that's one of the problems. Too many franchisors sell franchises to just about anybody.

Rick Caro, president of Management Vision, agrees, saying that franchisees struggle because franchisors are not doing a good job of screening them out. Because many of the franchisees lack any business background, it's especially important for franchisors to offer training and support, but too many of them fail to offer enough of either, Caro says.

Michael Scott Scudder, owner of the online-based consulting firm MSS FitBiz Connection, once toured 15 express clubs in a major U.S. city in one day. A common theme among the clubs he toured was that the franchisees did not know how to market themselves and that the franchisor was not lending any marketing assistance, he says.

Undercapitalization also comes into play in the express club market. Too many franchisees are going into business with too little money and not enough planning, Riess says. One of the biggest complaints he hears from franchisees is that the franchisor offered estimated operations costs that were too low, resulting in undercapitalization.

Adding to these problems is the oversaturated state of the express club market, especially in smaller towns, Conrad says. The $29- to $39-per-month model does not work for many women-only clubs, Conrad adds.

Haase says one of the reasons his men-only clubs suffered was because men typically don't talk to each other while they are working out. That also hurt word-of-mouth advertising, Haase adds.

The Curves Factor

Curves, which started the express-club-for-women craze, also is experiencing franchisee turnover and club closings, industry observers say. However, Curves spokesperson Becky Frusher says that the company is doing well, with almost 8,000 locations in the United States and more than 10,000 worldwide. Frusher says that as many as 800 Curves clubs are for sale at any time, but that those clubs are usually sold without closing.

“We have been looking at the areas a little more closely and are not being so quick to re-sell them,” Frusher says. “We're closing more [clubs] than we've ever closed before, but it's still a very small percentage of total clubs.”

Frusher says that Curves has nailed the market for its target demographic, saturating it with the Curves brand to a point that it's difficult for others to compete.

“I think the gap [between Curves and other women-only clubs] is going to keep getting wider and wider,” she says.

A Bright Future?

The gap between Curves and some express clubs does seem to be widening. In 2006, 57 Contours Express clubs closed, Perez says. He expects that number to have risen this year. When he became CEO in July, Contours Express had 248 open clubs. As of Oct. 29, the company had 226 open clubs.

However, Perez says the company has “made an incredible amount of progress in the last six to eight months.” Contours has sold 300 clubs to franchisees and plans to have 750 to 1,000 clubs in the next three years, he says.

The only ShapeXpress in the St. Louis area that remains open is doing well, according to its owner, who took over in February. She says memberships have doubled since she took over, although she did not provide actual member numbers.

Despite the negative publicity about some express clubs, key-card club franchises are now being touted by the franchise industry much like express clubs were a couple of years ago. Franchise Market Magazine ranked Snap Fitness No. 1 and Anytime Fitness No. 3 on its list of the top 100 new U.S. franchises in its fall 2007 issue. Both are key-card clubs that are open 24 hours a day, seven days a week. The ranking is based on the number of franchise units a company has and the growth rate of the company.

Scudder warns, however, that what's happening to companies such as ShapeXpress, Contours Express and Cuts Fitness could happen to Snap Fitness and Anytime Fitness.

“Who are [key-card clubs] going to get other than already established exercisers?” Scudder says. “Do they really think that video files are going to satisfy a new-to-fitness member who decides to join a key club?”

Despite the problems that some franchisees are facing, people will continue to open fitness franchises, Scudder says.

“This country is franchise crazy, and the industry is really pretty franchise crazy,” Scudder says. “I expect to see more [franchises] rather than less in a relatively short period of time.”

That increase in fitness franchises is beginning to reach out into more niche markets. The rise of clubs aimed at attracting the 50-and-over population as well as teenagers and elite athletes will entice more people to want to become fitness franchisees, Caro says.

“You're going to continue to find people who have a dream who think franchising is the way to go,” he says.

Burchard, who had that dream when he opened his ShapeXpress franchise, says he takes full responsibility for its failure. Would he encourage someone else to open a ShapeXpress franchise? After a long pause, Burchard says, “No, I wouldn't.”

Kelsey Garrison, editorial intern, contributed to this report.

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