CAP EX continued

Using this formula, if we take the mean expense

for years 4 and 8, the average annual capex over a 10-year period would be approximately 6% to 6.5%.

Why the spikes in years 4 and 8?

Every three to five years, the market takes a significant turn or, put another way, it makes a significant advance. Whenever such advances occur, a capex adjustment is required. For example, about ten years ago, it became clear that yoga and Pilates were going to become mainstays of the club business. And five years before that, group cycling became a major industry trend. Few clubs can afford to miss these opportunities. Yet, doing them properly requires an investment “spike.” If one does not budget these spikes, then change becomes a threat rather than an opportunity.

Your members notice when they see you continually investing in improvements. It often helps justify dues price increases.

Then, at least every 8 to 10 years, a health club,

as is the case with any other retail business, needs a total overhaul so that it can once again become, as it were, a brand new facility. Otherwise, the club will become old, dated, and marginal, and can be severely harmed by any new competitor. During these years, there is a need to re-paint, re-carpet, replace equipment (fitness, computer, food & beverage, etc.), replace furniture, replace HVAC, renovate locker rooms, upgrade the décor, and so on.

What other methods can be used to calculate capex?

Some clubs like to think of the calculation of capex on a cost per square meter basis, a method that has been successfully employed by many clubs. Using this method, and excluding large court areas (ten- nis, racquetball, squash) from the calculation, a reasonable annual capex for most clubs might approximate two to three Euros per square meter. Thus, for a 30,000m2

Do these formulas always work?

A key factor in determining capex is revenue per square meter. The above formulas will work for most clubs that fall in the middle range with respect to revenue per square meter; i.e., 35 to 89 Euros (annual revenue/total indoor square meters). How- ever, for clubs that generate significantly greater revenue, adjustments need to be made. The adjust- ments would be to a lower percentage for clubs using the “percent of revenue” method, and to a higher Euro amount for those using the “cost per square meter” method. For example, for a club generating 120 Euros per

square meter in revenue, the annual capex budget might be 4% rather than 6% of revenues, and, at the same time, it might be 3.75 Euros per square meter rather than 3.00 Euros. In any situation, however, market conditions can change rapidly. Whenever this happens, a capex plan—no matter how well conceived—may need to be re-evaluated.

What if we budget less?

Club members and club personnel are keenly aware when clubs begin to deteriorate. Whenever this hap- pens, a club can rapidly become less competitive with respect to neighbouring facilities. You want both your members and your staff to be proud of your facility. In addition, your members notice when they see you continually investing in improvements. It often helps justify dues price increases. Also, it is critical to have the club “ready” to combat a new competitor and help substantiate its positioning.

What else should we know?

Probably the most important thing about capex is not simply what you do, but how well you get the word out. Whenever a club makes improvements, it should have a comprehensive strategy to trumpet those improvements to the local media, current members, prospective members and the commu- nity as a whole. Leveraging capex is as important as the money you spend on it. There are a variety of methods for internal member communication (website, social media, club newsletter, flyer, front desk counter cards, easel at front entrance, on-hold telephone message) and a club needs to use all of them. Please use the above formulas as guidelines,

club, this method would

require an allocation of 60,000 to 90,000 Euros (annual average over a ten-year period; see yearly percent breakdown on page 9).

not rules. Your own sense of what must be done (on an annual basis, as well as periodically) to make your club as dynamic as possible needs to be your primary guiding principle. The general guidelines specified above are meant to serve as background data for your own, more experiential judgments. n

10 Club Business Europe n

SPRING 2010 n

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