Thursday, September 4, 2008

Weighty Matters: Running Fit Center Isn’t As Easy As 1-2-3

“Many former franchisees, unable to lure enough members to pay their monthly bills, have been left deep in debt. They've sold off assets and drained retirement savings to keep their businesses afloat. Some have declared bankruptcy. The problems are hardly unique to 123 Fit. The 30-minute fitness industry is filled with stories of struggling and out-of-business franchisees. Many storeowners say their up-front costs were higher than expected, and ate up the money they had planned to use to cover operating losses during the first few months. While many 30-minute fitness clubs tout themselves as low-cost business opportunities, 123 Fit has an initial investment as high as $229,425. By comparison, the higher end of Curves' initial investment is $44,595, less than one-fifth of the cost, according to that company's FDD. That may be a big reason why Lloyd Doolittle had problems despite growing to 650 members at one point. He still never made enough to cover the $14,000 a month it cost to run his California location. He shut his doors in August 2007 when he ran out of money, having lost more than $225,000. Doolittle said his club's problem was its low average revenue-per-member. At the time, the franchise required clubs to charge membership fees of $29 per month, and members could add a spouse for another $10 a month. Roughly a third of his members added another family member, and his average revenue per member was $21. And that was it. At the time, 123 Fit wouldn't allow franchisees to sell anything else to members, not water or T-shirts or personal training services. Many clubs rely heavily on ‘non-dues’ revenue, which according to the International Health, Racquet and Sportsclub Association accounts for 28.1 percent of a typical fitness club's sales. ‘We had no ability to increase revenue from current customers,’ Doolittle said. Rent is another factor in some clubs' demise. Early clubs had to be located in 1,800-square-foot spaces, often in high-traffic areas. While the company's FDD in 2007 said clubs could be leased for as little as $12 per square foot – or $1,800 per month for an 1,800-square-foot space – most franchisees interviewed said rent was far higher, $4,000 a month to $6,000. There are signs that the company is working to address the concerns over club-level operating losses. Clubs can be built in smaller, 1,200-square-foot locations. Owners are required to buy 20 pieces of equipment instead of 30, reducing the $90,000 equipment lease that saddled many owners at the outset. And they can now add vending machines with bottled water. Membership costs have also been increased to $49 a month and require a one-year commitment – though some say that price is now too high to lure members.”

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