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Out with the GOLD, In with the NEW

As Gold's Gym International (GGI) celebrates its 40th year in the fitness industry, the company is changing. For some, that change is a sign of maturity, but for others, it's a sign of big business moving into the family style company that they knew — and bringing with it unwelcome changes.

GGI has been moving away from a license-based company for several years, but this year it's implementing a new franchise agreement that replaces the $1,000 flat franchise fee with a royalty-based fee that charges franchisees 5 percent of their revenue (3 percent for royalty and 2 percent for a promotion fund). The initial franchisee fee has risen from $20,000 to $25,000.

For Keith Albright, senior vice president of franchising at GGI, that change is just good business because it allows the company to invest more in franchisee support, including geo-mapping technology to help in location planning and gym design, and software for training purposes. In March, the company added five regional field managers to provide increased support.

Two licensees contacted for this story declined to comment because they were in the midst of deciding whether to continue with GGI. However, Jerry McCall, who is a franchisee with multiple locations and the president of the Gold's Gym Franchisee Association, said that the fees are “pretty tremendous.” McCall expressed concern about whether the added support and services GGI promised would justify the bump in fees.

However, the bump doesn't have to come all at once. Current licensees and franchisees have the option to sign a legacy agreement. Two hundred seventy-five franchisees are eligible for the legacy agreement this year, Albright said.

“We thought it would be tough to take a franchisee who has been paying a flat fee and say that next week you'd have to pay a royalty — that's too tough for someone who has helped us build the brand,” Albright said.

The legacy franchise agreement requires franchisees to pay $1,000 per month with a 5 percent increase each year for a period of five to 10 years, depending on the length of the contract signed by the franchisee. The increase is the same whether they sign up for five or 10 years.

“It gives them an opportunity to slowly ease into paying that percentage royalty,” Albright said. “When that agreement expires, we would expect them to sign the franchise agreement in place at that time.”

The dozen licensees still in the Gold's system had until June 30 to decide whether or not to convert to the legacy franchise agreement. Licensees who did not opt into the legacy conversion program last month will face another decision at the end of their current licensing agreement term. At that time, they can renew under GGI's “then current form” of franchising agreement or exit the Gold's Gym system, Albright said.

GGI has lost “a few” individuals due to the new franchise agreement, but Albright wouldn't say how many. He did say that he understood the concern on the part of some long-time franchisees and licensees.

“Historically, a franchisee with GGI was a fitness person who grew up in the gym,” Albright said. “In the last few years as more capital comes into the industry and more big players come in, we are seeing a different prospect come to us. It's about business.”

Today, the potential franchisee often has deeper pockets and may be debating between purchasing a Gold's Gym, a McDonald's or a Krispy Kreme. Royalty-based fees are more common in the franchising business (although not necessarily in the fitness business) because that system is predicated on the idea that someone who does more business will use more franchise services and, therefore, should be paying more, said Lane Fisher, partner at FisherZucker LLC, a law firm that deals with franchise agreements in the fitness industry. Typical royalty-based fees run 5 percent to 7 percent of net or gross sales, he said. So today's potential franchisee, who may be looking at several industries, often won't flinch at the royalty-based fees.

“The industry has changed,” said Albright. “There's lots of big players. We feel an obligation to provide the franchisee with tools to succeed. The royalty-based fee gives us the muscle to give them those tools. So now we are more a traditional type franchise model.”

Fisher said that the changes at Gold's Gym, recent changes in agreements at other fitness franchises and the entrance of franchisees with deeper pockets show a maturing of the industry. Ultimately, having big players in a market is a plus for the existing players because it makes the existing clubs more valuable and enhances exit strategies, he said.

“The bigger players might be a candidate to buy the disgruntled franchisee's location,” Fisher said.

However, licensee and franchisee concerns extend beyond the new form of franchisee payment, said McCall, who won't be affected by the new franchise agreement for several years because he resigned the old agreement prior to the new one taking effect. In particular, some franchisees are concerned the new agreement will essentially turn them into GGI employees.

“Back when we were licensees, they didn't give us much, we didn't pay as much and they didn't restrict us much,” McCall said. “Over time, they've become more expensive and more restrictive. That's the transition we're going through at this time. As franchisees, we are more and more losing who we are as business owners.”

The fear of losing their independence stems from the type of licensee that GGI looked for in the early years.

“The model that I created at the beginning was based on wanting to find a certain spirit among the franchisees — an entrepreneurial spirit,” said Paul Grymkowski, former head of licensing at GGI and currently co-owner of 365 Fitness, licensed co-ed fitness facilities with cardio and strength equipment plus express 30-minute workouts. “So they'd be truly independently operating in a way that would be most conducive for their market.”

That independence was important at the time because Grymkowski didn't know what the future held for gyms 35 years ago. He needed independent operators who could survive in a lean or highly competitive market, he said.

“After you give them years of operating independently and then you come back to them with a very structured franchise model, you are going to have resistance,” Grymkowski said. “It will be interesting to see how this works out because of the type of people who are in the program.”

Adding to the fear is that the new fee structure also changes some of the reporting requirements. Now, franchisees must report gross revenue data, numbers that didn't matter with a flat fee arrangement. Additional data gives the franchiser more information to work with, such as determining under-performing clubs or clubs where sales or labor widely differs from others in the area. With that information, the franchiser can suggest remedial measures to help the franchisee, Fisher said.

The new agreement also includes a right to refusal clause, which Fisher said often exists to prevent franchisees from “fireselling” their business. The franchiser can opt in and retake the unit and keep the value of the unit up, fix the property and then sell it, he said. The right of approval that is also included is typical of most franchise agreements, he added. Grymkowski agreed, saying that a franchiser must have the ability to approve of anyone using the club's name.

McCall also expressed concern that anything a club owner invented or implemented at his or her club would be considered property of GGI, but Fisher said that that clause is typical in most franchise agreements.

“In the gym business, if you roll something out, you have to believe you are going to lose your rights to it unless you make a separate deal,” Fisher said. If one franchisee offers a certain program that becomes successful and the franchisee down the street sees this, that second franchisee will want to be able to offer it, too, he said.

“It breeds dissension among the franchisees,” Fisher said. “Franchising breeds uniformity. The franchiser has the right to make sure the units and unit offerings are uniform. Those things are designed to maximize good will and brand identity.”

Concerns about the changing franchise agreement may have helped GGI in April when it posted one of its best months yet for franchising. Whether existing gym owners were renewing before the agreement changed or not, GGI signed a record 22 new franchise agreements that month: 60 percent from existing Gold's Gym owners who were expanding their operations and 40 percent from new investors. That bodes well for GGI's plans. By 2010, the company plans to have 1,000 facilities. Corporate stores will comprise 15-20 percent of that, international stores will be one-third of that number and the rest will be domestic franchises, Albright said. Currently, GGI has about 620 locations in 42 states and 26 countries — 39 corporate-owned locations, about 100 international locations, almost 500 franchised locations and about 12 licensees.

Whether the company hits those goals with many of its current licensees and franchisees intact may depend upon how the company communicates with its gym owners at the GGI convention this month in Las Vegas. Albright said the issue would be discussed openly at the meeting. He said that once gym owners understand the details, he expected the majority of them to stay on board with GGI.

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