UPFRONT > COMMENT

Down Year By Rick Caro

FBC UPFRONT » Comment

Club Financials: Insight Into A

During 2007, the U.S. economy start- ed to slow down but the club industry showed no real weakness. The follow-

BY RICK CARO

D

CLUB FINANCIALS:

INSIGHT INTO A DOWN YEAR

ing year was a different story. The word “recession” was officially introduced as the appropriate economic term. For many people, the predictors suggested that it would be deeper and longer than any of the previous three recessions. Duri ang 2008, retail stores fared poorly and many well known com- panies w nt out of business or cl sed many of their stores. Th debt markets became limited and eventually disap- peared t. Large companies that relied on cash flow-based debt could not attract adequate leverage, so debt was realisti- cally not a current alternativ .

Not doom and gloom N t doom and gloom

The fitness club industry surprised both insiders and outsiders as it was much more buoyant than many other industries. It had quickly learned some lessons c: It had to ignore the media, fo- cus on i wts own local market, it had to study its clubs’ metrics and not be led by natilonal trends. The key was realiz- ing that this was the time for real man- agement to take over. It was a time for management to be focused, analytical, consistent and action-oriented.

2008 fi nancial headlines

It was a time to focus on the funda-

2008 financial headlines

ssion will have a nifi cant it will be.

years apparently is flat. Clubs are chal- lenged to be more innovative to create new programs and services or to re-pack- age them. The net result is that earnings before interest, taxes, depreciation and amortization (EBITDA) are slightly de- creasing. However, outsiders still deem the EBITDA levels to be attractive.

uring 2007, the U.S. economy started to slow down but the club industry showed no real weak- n ss. The following year was a different story. The word “rec ssion” was offi cially introduced as the

ppropriate economic te m. For many people, the predictors suggested that it would be deeper and longer than any of the previous three recessions.

During 2008, retail stores fared poorly and many well- known companies went out of business or closed many of heir stores. The debt markets became limited and eventu- ally disappeared. Large companies that relied on cash fl ow- based debt could not attract adequate leverage, so debt was

Club growth and purchases unlikely

The industry overall seems to have ex- perienced a flat trend in recent years in terms of overall membership levels. (There were actually minimal decreases, but they were not deemed to be statistically significant.) The number of commercial health clubs has also leveled off the past 3-4 years. Given the lack of debt availabil-

Rick Caro

realistically not a current alternative.ity, there will be fewer new builds in 2009 despite more attractive landlord deals. Any growth of new clubs is more likely to occur amongst small regdional players

siders as it was much more buoyant than who may add a single new club; the larg- est club companies have su tbstantially

The fi tness club industry surprised both insiders and out- ny other indus-

tries. It had quickly le rned some lessons: It had to ignore the media, focus on its own local market, it had to study its lubs’ metrics and not be led by national trends. Th key as realizing that this was the time for real management to ake over. It wa

time for management to be focused, ana-

It was a ime to focus on the fundamentals around mar- ke ing, rising attrition rates and expense creep.

It s clear that the prognosticators do not have

dea when the U.S. will emerge from this deep recession. In he past, pundits us d to defi ne the club industry as “reces- sion resistant.” More recently, other fi nancial gurus have used the term “recession resilient.” It is obvious that the re- It is cleear that the prognosticators do not have a clear idea when the U.S. will emerge from this deep recession. In the past, pundits used to define the club industry as “recession resistant.” More recently, other financial gurus have used the term “recession resilient.” It is obvious that the recession will have an impact h – but we are not sure how sig- nifican cth it will be.

mental is around marketing, rising attri- tion rates and expense creep.

impact – but we are not sure how s g-

Using various indices, it appears that revenues are fl at in 2008 as well as the l vel of net membership . For many, the 4th quarter saw a teep increase in attrition. Early 2009 re- ports indicate that it is now under much more c

trol. In

Usin agn various indices, it appears that revenues are flat in 2008 as well as the level of net memberships. For many, still de m the EBITDA level

fact, in som early results, ne memberships are trickling upw rds. The non-dues revenue (ancillary revenue) which ad been g owing in past years apparently is fl at. Clubs are allenged to be more innovative to create new program d services or to re-package them. Th net result i

tha

the 4th quarter saw a steep increase in to be attractive. attrition. Early 2009 reports indicate that it is now under much more con- trol. In fact, in some early results, net memberships are trickling upwards. The non-dues revenue (ancillary rev- enue) which had been growing in past

16 Fitness Business Canada May/June 2009

earnings before interest, taxes, depre iation and amort za- tion (EBITDA) are slightly decreasing. However, outsiders in 2009.

clear

t “For many, the 4th quar- aer saw a steep increase in i ttrition. Early 2009 reports dndicate that it is now un-

er much more control.”

past 3-4 years. Given the lack of

debt availability, there will be fewer new builds in 2009 despite more attractive landlord deals. Any growth of new clubs is more likely to occur amongst small regional players who may add a single new club; the largest club industry. Also, it should be noted that

decreased their 2009 plans2. There is still growth in some of the franchise catego- ries, especially amongst the 24/7 all-access clubs.

ytical, consistent and action-oriented. Given the debt markets and the lack of funds, it is not likely that new private

equity firms will enter the club industry in 2009. So, no major deals are likely in the U.S. in 2009. In these troubled finan- cial times, “cash is king.” So, there may be some purchases of existing clubs in 2009- 2010. However, purchasers l may be ind - pendent clubs and involve theD purchase of distressed clubs. There will be likely be no club companies going publicc in 2009. Other trends, show there are fewer hos- pital wellness centres getting funding. Likewise, public parks and recreation c n- tres are not likely to win over local resi- dents for bond issues and increased tax as- sessments. Fewer non-profits are likely to

ment

amongst the 24/7 all-access clubs. Given the debt markets and the lack of funds, it is not likely that new private equity fi rms will enter the club in- ustry in 2009. So, no major deals are likely in the U.S. in 2009. In these troubled fi nancial times, “cash is king.” So, here may be some purchases of existing clubs in 2009- 010. However, purchasers may be independent clubs and involve he purchase of distressed clubs. There will be likely be no club ompanies going public in 2009.

Other trends, show there are fewer hospital wellness cen-

tres getting funding. Likewise, public parks and recreation centres are not likely to win over local residents for bond is- sues and increased tax assessments. Fewer non-profi ts are likely to fi nd donations for building. No strategic investment from analogous industries is likely as those companies are under pressure to focus on their core competencies. No international companies are ikely to enter the U.S. club industry in 2009.

g ireater overnmental influence, HMOs, c forporate or insurance involvement in supporting the health club industry. In conclusion, 2009 looks like it will be

creased their 2009 plans. There s still growth in some of the ranchise categories, especially

a difficult year. For many clubs, their fo- cus has led to real expense management and surprisingly improved EBITDA levels as revenues were relatively flat. It is likely to be an unpredictable year with more at- tention spent on analyzing each month. If a club is holding its own early in the year, this should provide some confidence for the whole club management team as it navigates the waters for the remainer of the year.

iet entres are still not creating long term success sto- ries for their customers because most lack a defi ned exer- ise component. Although diet pills are gaining governmen- tal approvals, they appear to be having no major impact on the club industry. Also, it should be noted that there was no major progress in 2008 in greater governmental infl uence, HMOs, corporate or insurance involvement in supporting the health club industry.

In conclusion, 2009 looks like it will be a diffi cult year.

find donations for building. For many clubs, their focus has led to real expense manage- No strategic investment from analogous industries is likely as those companies are under pressure to focus w oin thei core competencies. No international companies are likely to enter the U.S. c slub industry

Club growth and purchases unlikely

The industry overall seems to have experienced a fl at t end in recent years in terms of overall membership lev- els. (There were

ctually minimal decreases, but they

Diet centres are still not creating long term success stories for theRiirc custom-

company with

were not de med to be statistically signifi cant.) The num- ber of commercial health clubs has also leveled off in the

k Caro is president of Management Vision, Inc., a club consulting

ers because most lack a defined exercisexpertise in helping clubs with expense management

component. Although diet pills are gain- ing governmental approval sst,u tdhey appear to be having no major impact on the club

and fi nancials, club valuations, member surveys, market feasibility ies, expert witness testimony, club sales/purchases and operation- al analyses. Management Vision can be reached at (800) 778-4411 or mgmtvision@gmail.com.

d surprisingly improved EBITDA levels as revenues were relatively fl at. It is likely to be an unpredictable year th more attention spent on analyzing each month. If a club is holding its own early in the year, this should provide ome confi dence for the whole club management team as it navigates the waters for the remainer of the year.

Rick Caro is president of Management Vision, Inc., a club consulting company with expertise in help- ing clubs with expense management and financials, club valuations, member surveys, market feasibil- ity studies, expert witness testimony, club sales/ purchases and operational analyses. Management Vision can be reached at (800) 778-4411 or mg- mtvision@gmail.com.

companies have substantially de- there was no major progress in 2008 in Page 1  |  Page 2  |  Page 3  |  Page 4  |  Page 5  |  Page 6  |  Page 7  |  Page 8  |  Page 9  |  Page 10  |  Page 11  |  Page 12  |  Page 13  |  Page 14  |  Page 15  |  Page 16  |  Page 17  |  Page 18  |  Page 19  |  Page 20  |  Page 21  |  Page 22  |  Page 23  |  Page 24  |  Page 25  |  Page 26  |  Page 27  |  Page 28  |  Page 29  |  Page 30  |  Page 31  |  Page 32  |  Page 33  |  Page 34  |  Page 35  |  Page 36  |  Page 37  |  Page 38  |  Page 39  |  Page 40  |  Page 41  |  Page 42  |  Page 43  |  Page 44  |  Page 45  |  Page 46  |  Page 47  |  Page 48  |  Page 49  |  Page 50  |  Page 51  |  Page 52  |  Page 53  |  Page 54  |  Page 55  |  Page 56