The Katrina Effect


On Aug. 10, the last day of its liability and property insurance policy term, Cross Gates Athletic Clubs was dropped by its insurance provider. Due to Hurricane Katrina-related costs, the insurer left the New Orleans area, even after raising premiums by more than 30 percent.

That left Cross Gates, which has two locations just northeast of New Orleans in Slidell, LA, looking for a new insurer. As of press time in late July, the company hadn't found a new provider but expects to pay even more when it does, says Dion Grossnickle, general manager of Cross Gates.

It's a similar story at Franco's Athletic Club in Mandeville, LA. The club's property and liability insurance nearly doubled after Hurricane Katrina, says Dave Bradshaw, director of business development for Franco's.

“We have to absorb it as a cost of doing business, but it affects our profitability,” he says.

Increased insurance premiums and rates are just one of the many changes the health club industry in the coastal South and New Orleans are facing since Hurricane Katrina hit the area two years ago, creating one of the worst disasters in U.S. history. While most of the least affected areas are rebounding — and in some cases booming — other areas are still deserted, leaving little need for a health club.

The president of one insurance provider for health clubs says that his company and most insurance companies have resolved all Katrina-related claims. However, insurance companies have to charge high premiums and deductibles for property insurance in the area.

“Insurance underwriters have to prepare for the inevitable second Katrina or even worse,” he says. “If they don't charge enough to cover the future losses, they simply go out of business.”

The increased insurance costs are just a necessary evil of business, Grossnickle says. Although Cross Gates' Lake Pontchartrain location was above sea level and not in a flood zone, the club was destroyed after about seven inches of mud littered with snakes and debris washed in with a tidal surge during Hurricane Katrina. The facility was not covered by flood insurance. The club's owner opened a temporary, 6,500-square-foot, fitness-only club across the street from that location last September, but he hopes to eventually rebuild the original facility — this time with flood insurance.

“It will be very expensive, and that will affect our bottom line a lot,” Grossnickle says. “We were above sea level — not in a flood zone — and this was the last thing we thought would happen to our business. But it happened.”

However, rebuilding is taking much longer than planned. Earlier this month, new owners purchased the strip mall where the destroyed club was located. As of press time, Cross Gates' owner was in talks with the mall's owners to move into the location again and possibly expand it. The new lease would cost at least 40 percent more than before Katrina, Grossnickle says.

“There's still so much room for us to grow as a company, even though we've grown so much within the last year and a half,” he says. However, he admits that growth opportunities are limited because many buildings in the city are still in a state of disrepair.

Franco's Athletic Club closed its Lakeview, LA, location after the 17th Street levee broke less than a mile away and covered the area with almost six feet of water for two weeks. The club has no immediate plans to reopen its Lakeview facility, Bradshaw says.

“There simply isn't enough market there currently,” he says. “It is difficult, or impossible, to obtain affordable liability insurance for homes and businesses. There is a litany of problems preventing the rebuilding or new development of clubs in affected areas.” (For more on Katrina's effect on construction and rebuilding, see page 30).

Winds of Change

Katrina changed the way a lot of health clubs in affected areas do business. Many clubs began offering short-term memberships because members in the area move a lot due to frequent job changes and the housing shortage. Many clubs also added niche programming and express classes to better compete with fitness chains.

Staffing has been an issue as well, says Tim Bracey, senior director of the West Jeff Fitness Centers in Terrytown and Marrero, LA (both on the outskirts of New Orleans). Because the centers are a department of the West Jefferson Medical Center, a not-for-profit community hospital, spending is tight.

“Fewer dollars are available for things we typically do, and we're trying to be as cost effective as possible,” Bracey says. “We haven't had any quality issues as a result, but when we do lose an employee, we ask, ‘Do we really need [to replace] that person?’”

For the past two summers, employees were scarce at Cross Gates, but the number of people inquiring about employment is increasing now, Grossnickle says. Right after the storm, the club had to pay its employees $1.50 to $2 an hour more to stay and work. As the area rebounds, though, wages have returned to normal, he says.

Katrina has taught many club owners and managers the importance of having a detailed emergency plan. Since Katrina, Grossnickle has learned that communication is an essential key to recovery. He is collecting phone numbers and e-mail addresses of every staff member and is building a blog for employees to post their whereabouts. The blog will also allow the club to communicate with members about the progress of the clubs, he says.

Management at Elmwood Fitness Center, which has locations in Harahan, New Orleans and Metairie, LA, also improved its communication efforts, collecting all members' e-mail addresses and creating a more intensive retention program. Members can earn gift certificates and sweatshirts just for using the club, says Michael Heim, youth fitness director at Elmwood.

Probably the biggest lesson learned for clubs is for them to be as prepared as possible, says the president of one insurer. He recommends that clubs in a wind or flood area store materials to be used during emergencies. These materials should include plywood for windows and coverings for interior sensitive equipment, such as computers and treadmills.

“Then just say some prayers,” he says.

Grossnickle recommends that operators read their policies carefully, so surprises don't pop up when a disaster hits.

Rising Tide

Despite lingering issues, some areas are rebounding.

“Things are coming back — not back to normal by any means — but I can tell you from a business standpoint that money is starting to flow from the federal government,” says John Marini, vice president of Adjusters International, a disaster recovery consulting organization. “My experience [in affected areas] over the last 18 months is that the really prosperous businesses were able to hold out and are back.”

Areas with the most population growth are faring best, Marini says.

Slidell, LA, is one of those areas. Although Katrina hit Slidell hard and many areas of the city were flooded by Lake Pontchartrain, Cross Gates had its best year on record in 2006 — despite only one of its two facilities being open most of last year.

“It's shocking,” Grossnickle says. “There was an influx of people moving into the area, and it just happened. People who lived in New Orleans or lower parishes moved here.”

Elmwood Fitness Center is “busting at the seams,” Heim says. Usage and membership at Elmwood locations are both on the rise since Katrina. Its facilities had 378,500 visits in 2006 through May, and that number increased to 384,000 over the same period this year.

Cross Gates also cites success with its children's and aquatics programming.

“Because of the hurricane, a lot of the places people used to go to for aquatics aren't there anymore,” Grossnickle says. “We're planning to expand next year with slides and a lazy river. Our pool is too populated.”

However, with more people comes more competition. Facilities contacted for this article cited franchises — mostly small express clubs — moving into the region.

That's no surprise, as more than half of affected businesses don't reopen after a major disaster, making the market ripe for competitors, Marini says.

“Your customers usually come back, but if it's taken awhile for you to reopen your business and if a competitor offers a discounted rate, then you're not getting them back,” he says.

Despite the hardships, the health club industry hasn't lost its presence in the coastal South, most club operators say.

“We know people need this. They need physical fitness to release stress,” Bracey says. “There are still areas that are devastated and look untouched, and some areas are overpopulated with lots of traffic. It's a mixed bag, but there's still growth and opportunity.”

Franco's hasn't given up on its closed Lakeview facility, either. The club is waiting for the area's population to return, even if it takes years.

“There will be opportunities for those who are entrepreneurial and have some risk tolerance,” Bradshaw says. “Lakeview, where our destroyed club was located, will come back as it was, one of the nicest areas of New Orleans, and we'll be interested in that market once again.”

Economic and Construction Indicators For Louisiana Post-Katrina
2004 2006 2004-06 Change 2008 Projected 2006-08 Projected Change
Gross State Product (in billions of year 2000 dollars) 133.3 131.9 -1.10% 140.4 6.40%
Resident Population (in millions) 4,516 4,521 0.10% 4,550 0.60%
Employment (in millions) 1,919 1,847 -3.80% 1,910 3.40%
Retail Sales* (in billions) 59.1 64.2 8.60% 70.3 9.50%
Housing Permits (in millions) 23 95.6 315.70% 15.2 -84.10%
*Q4: Seasonally adjusted annual rate Source:

Katrina's National Effect On Construction

Hurricane Katrina affected much more than the coastal South, and its effects are still being felt on construction projects across the country.

According to a report by the American Institute of Architects and, Katrina ranks as the costliest natural disaster in U.S. history, with losses estimated at $150 billion to $200 billion. That's four times the damage Hurricane Andrew caused in 1992.

The level of destruction and need to rebuild has led to significant price increases in construction materials (steel, concrete, gypsum products and insulation) and petroleum-based products (roofing products, PVC piping, asphalt paving). Occasional materials shortages and rising transportation costs have also been a problem, according to “The Economic and Construction Outlook in the Gulf States after Hurricane Katrina.” (For more information on construction prices, see chart on p.34.)

Mary Chapell, director of the University of Kansas (KU) Recreation Services in Lawrence, KS, has experienced the price changes first- hand through the expansion of KU's Student Recreation Fitness Center. The $6.3 million addition to the center was originally scheduled to be completed during the spring semester, but due to spring and summer rains and Katrina-related increases, the center probably won't be finished until August 2008.

“I would have to say that the effects from Katrina have been a domino effect,” she says. “We've noticed it mostly in shipping and delivery costs due to gasoline prices to bring in the steel and large product items.”

Chappell says deliveries are also less frequent because vendors are lumping several neighboring orders together.

“We have had [vendors] want to deliver at 5:30 a.m. just so they can get on to the next stops, and if we miss the stop, it might be days before the next one,” she says. “That is critical if it is an important shipment, and [missing that shipment] delays progress.”

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