Rick Caro, President of Management Vision


Ci: You have had a long and successful career in the fitness industry. Tell us a little about how you became involved in fitness facilities.

My background started 30 years ago when I owned and operated eight clubs in the Northeast with two partners. We specialized in buying failing or failed tennis buildings and turning them into multisport clubs and taking clubs that had few — 300 to 400 — and turning them into 3,000-member clubs. We eventually sold the clubs due to personal problems with my partners' families. The founder of IHRSA consulting companies came to me and I've been consulting to the fitness industry for the last 19 years.

Ci: With the rough economy of the past couple of years have you seen the consulting business pick up?

I'm fortunate because I focused on specific niches for the consulting business that seem to be in demand through thick or thin, regardless of the economy. I do market feasibility studies for people that are going from scratch, but also work for clubs looking to expand since they may not have had a study done for five or 10 years. Also, someone looking to buy an existing club needs to understand the market before jumping into a deal. As for valuations, I do a lot of this regardless of what is going on in the economy. People need them for estate planning, to buy out a minority partner or because of a divorce procedure. Unfortunately, as we have more litigation in this society my expert witness business has become more popular and more needed. I also provide full operational analysis where I'm invited to look at everything from the physical plant, the sales and marketing, financials, programming — pretty much the entire business. All of these things are in demand regardless of the overall economy.

Ci: What would you say are the one or two things that club owners need to learn to help them individually — and as an industry — do better business?

The industry is still not good at doing market research, even on its own members. On the whole it does a lousy job of guessing, which it wouldn't have to do if it would listen to the people that are, in effect, free consultants. There's a science to doing market research and most people haven't learned to phrase a question correctly or they ask it in a way that creates biases. Sometimes, they don't even ask the right questions or distribute the research right. Even if they go to a local professor to help them design an effective survey, they may not get an adequate sample or be able to evaluate it correctly because they don't have a set of norms. It's not automatic that just because you get a number you know what to do with it. What we've learned over the years is that if you ask people what is wrong or needs to be changed it can often get done for little money or for free. Clubs just have to know what to ask to get the true answers from the members.

Ci: How do you see a rebounding economy impacting the industry?

I think we will have more clubs and more members. When I say more clubs I mean more facilities. We will see more non-profits, as well as for-profit clubs, it is not going to be just a for-profit-driven effort that will provide more facilities in the future. You will see more expansion of existing facilities, which hasn't been common. I think you'll see a little — I emphasize a little — consolidation with clubs acquiring other club groups as opposed to doing new builds. It won't be substantial though. It'll be more talk than action for a while. I also think we will see more private equity firms that have been talking about coming into the industry actually do so. I also think for the first time in 2004 we will see one of the private club companies go public. We may actually see one or two companies bought out by a larger financial institution.

Ci: How would increased non-profit entries affect the overall landscape?

I'm not suggesting that a not-for-profit entity that can legally do business under that status should go into a market. My one request would be that they should be no different than a for-profit and do a market analysis and know if that particular area needs a facility of that type. It is my experience that many don't do that because they are opportunistic companies and act quickly to take advantage of a building they can get easily. Both profits and non-profits need to do their homework before making any major decision and should turn to professionals to help with those decisions. Also, a non-profit should act like a non-profit and make sure they conform to their non-profit exemptions. For instance, if a university decides to open its fitness facility to the general public it should think twice about that since it is probably not what it got its exemption for. Or perhaps the university should think about forming a for-profit subsidiary, which is what a lot of people are doing.

Ci: What do you feel is the most important development of the last 10 years?

I don't believe there has been any one thing that had an immediate impact, but more a series of things. We are an industry that is a work in progress; we are still growing up as an industry. For instance, if you look at the programming and services component of the industry, we have more children's programs. We are not only housing certain aged kids in daycare, we are creating children's programs for specific age groups from toddlers all the way up to teens. What that is doing is bringing in incremental revenue and leading parents to join clubs. Another example is reaching out to the seniors and those wanting weight management. Leagues are also expanding like under six-feet basketball leagues or women's-only leagues. We are seeing services expand. We are seeing chiropractic or personal training expand. We are seeing a little more in the way of juice bars and massage. These are things that aren't necessarily revolutionary but evolutionary. There has also been an increase in technology, not just in equipment but in computerization and physical plant systems, all of which are part of the natural growth and maturity of the industry.

Ci: You say the industry is a work in progress. Where do you see it in its maturity?

The industry is still not as mature as it could be or should be. If you think of the bell-shaped curve I think it is still on the growth side of the curve. Most of these companies are not run with any real accountability. To have real accountability you need to have a board of directors with some outside, independent board members. Most clubs don't have a board or even an organized reporting structure where you discuss financials or strategy in a detailed way. Many people don't run their business in a way that can be understood by third parties. I have seen a financial statement that shows a minimal profit for the year. The club had a profit of well over $1 million, but they didn't want to pay taxes so they did things that were acceptable to the IRS, but left them with financials that couldn't show third parties the true success and value of the club.

Ci: What can help it grow to the next level?

To help reach that apex of maturity clubs need to work on a few things. First, they need to know more about market research when it comes to members, former members or prospects — clubs just don't collect the data in any meaningful way. There needs to be action that comes out of the findings. Second, as an industry we don't do any long-reach or capital planning well. We do a good job of one-year planning broken out by month. If I ask a club when they need to re-carpet, they will know. If I ask about a major re-painting, they know. It is the same with technology and major renovation. What we have is some element of long-range planning by components, but not overall. They are more three- to five-year wish lists as opposed to committed plans. What they need to do is look at the estimated costs and take advantage of getting the kind of debt necessary at advantageous times even if it won't be used for a year or two. Third, the information technology area is lagging. Most clubs and even the larger club groups don't have a chief information officer. We're not getting the full benefit of the information we are collecting. We are not just in the club industry we are in the information industry as well.

Ci: What would expanding IT do for a club company?

One could theoretically be a smarter marketer by taking the data on where existing members come from and work with computerized geo coding firms that take the lifestyle of the people the club attracts, tell you where there are similar people in the market to those the club attracts so you target those people who fit the description the club should be going after. On the other side, the industry continues to struggle with retention. We don't seem to know much about our members. What we can do is input members' areas of interest, times of availability, etc. so if someone comes in to talk about weight management or stress management we can target them rather than plaster fliers around the club or send e-mails to the whole membership when there are only 111 people out of 3,000 that are interested. The club can still put up the odd flier to attract others, but the bulk of the effort can be concentrated and save time and energy for other matters. Additionally, by gathering this information the club can start a bike club or something if there is interest in it from members and then build classes around it. We are not taking advantage of the information we have to serve the people better and we're not making a dent on the retention side. This kind of information allows us to create the glue to keep them connected to the facility so they not only stay but also refer others. We have the opportunity to use technology — especially customer relationship management software — that would allow clubs to have detailed information to help us met their needs.

Ci: Why has it been so slow to implement new technologies?

Part of the problem is that clubs aren't hearing the success stories of people that are using this technology to grow retention by 2 percent or cut marketing expenses by so many dollars, targeting fewer people, yet signing more members.

Ci: How does targeting fewer people result in increased sign ups?

Fundamentally, we are all in the service industry. At some point we are all giving a service to customers. Some more than others. Some clubs may offer a cheap price for a bland physical space, average equipment, a standard locker/shower facility and say, here is my price, please sign up. Others may have a spa-oriented facility with plenty of amenities. People will know which they would join because clubs are making it clear what they are. There is nothing wrong with having those alternatives in the marketplace. What we are missing is a concept in marketing called positioning. What we are doing is building a facility and services and force-feeding it to the people. What we may need to do is pay more attention to the marketplace. Say we go after the family market, we need to know that we are not going to go after seniors, corporations or athletes. We need to have different kinds of equipment, programming, pricing and advertising plan — maybe take an ad in parents magazines as opposed to a local freebie newspaper that doesn't speak to young parents at all. Once you know what you are you have to go into the marketplace and tell that story over and over again so you get the prospective member that will want to be part of that facility. When I ask clubs what kind of member they attract they may tell me that the members are business people that are educated, in their 30s or 40s and other upscale generalizations. So I ask them if a 22-year-old is living at home and doesn't have a job and isn't any of those things the members of the club are, you'd turn them away and tell them to spend their money at a place they would feel more comfortable in? The answer is almost always, “there is no way I'd ever turn away a person that is willing to pay our price.” So in reality, its market definition is anyone that can legally sign a contract and has the ability to pay a certain price. That sounds a lot different than the origina profile. And those random people they pull in will not be happy with the club because the club cannot provide enough depth and breadth to cover every person.

Ci: Speaking of memberships, where do you see the richest pools of untapped members?

We need better penetration among teens. We are doing a good job up until 12 or 13, but there is a gap between there and post-graduation. Clubs may have to develop different offerings and a different story to help bring in this group. We also need corporations to do a better job getting employees and their families to take advantage of the sports, socialization and exercise that they find in clubs. Corporations say they are concerned about this especially with the high cost of health care, but they are still aren't making it a priority and putting their money where their mouths are.

CI: You say that corporations aren't making fitness a priority. Are the medical and insurance communities holding up their ends?

The medical community isn't asking the lifestyle questions and getting patients involved in facilities the way they could. They are still focused on illness and rehabilitation rather than prevention. Insurance companies still have minimal commitment to offer any kind of a benefit to someone who is a member of a club or more important that we have discrimination based on exercise vs. non-exercise like we have with cigarette smoking. HMOs still aren't stepping up and doing anything meaningful to get their subscribers to exercise, which may limit claims and help the managed care companies to improve the bottom line. In all of these sectors there is a lot of talk and little action.

Ci: What does the industry need to do to attract Wall Street's attention?

We need a successful exit from one of the companies that is a pure club company. Right now, Wall Street has a problem understanding Bally's because they see it as part club company and part consumer finance company. They see it as a hybrid the way they see The Sportsclub Company as part real estate development company and part health club company. If we had a pure health club company that sold to a financial institution or went public, then investors could analyze and measure who invested and what returns they get. Then we would have a benchmark to start with. We also need much better PR, especially financial PR. The only time we made the front page of the Wall Street Journal last year was when there was a lawsuit against a club due to somebody dying because of a reaction to some supplements that were allegedly recommended by a trainer at the club. It is sad that there isn't any other good news and sound financial news on the industry that has reached the level of that story. We need to do a better job of educating the financial community on what this industry is about. Right now they have to work too hard to learn about it and not enough of them are willing to do the work. But first and foremost, we need someone to exit to show that they can get out of the industry so we can have a measurement of what the investors' return on the investment was.

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