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Evolve of Die!
Originally Posted 09/01/10

Small business is fascinating. Why do some business concepts work, why do some fail and why does there always seem to be a pattern or path that emerges when you study a business that isnít performing? Questions like this drive me crazy and I spend too much time trying to figure out why we do the things we do in this industry.

One problem that has particularly caught my attention over the years is why are some owners or club chains successful for a period of times and then all of a sudden fail? It seems like every one that is in business for a while in this industry eventually hits a point where they just canít keep up the previously successful behavior. Twenty years of success becomes a year of failure in just a heart beat.

One individual club situation I have been watching closely for several years involves an owner in the Northeast that has been in business for over 20 years. He opened his first club in the mid 80s and was very successful. Over the years, he has acquired the real estate, opened three more clubs and just last year he opened his fifth unit. And after 20 years of buying ski condos, property in the islands and great financial success, he is now getting his ass kicked and is losing about $50k per month in this new club with little movement in getting the flood of losses stopped anytime soon.

My theory on this has been that everyone keeps reinvesting and leveraging the previous success into successively bigger and more costly clubs. At some point they all go one unit too far and the last unit brings down all the other ones, as well as taking down the owner individually due to the fact that he had to hock everything he ever acquired to get the bank to do the new deal.

By the time he gets to the last unit, which everyone of these guys always swears will be the last one, because every one of these players just wants that one last big deal and then he will quit, he has everything he owns in the game to secure the bank loans and money needed to do the "big deal.Ē

My thoughts were that the egos involved at this level of play just force the owners to keep the chips on the table just one more time seeking the big kill. I believed that these owners all eventually fail, or at least go through three or four years of hell on earth, because at some point the clubs are too leveraged and the debt takes them down. It is the same result in the chain clubs. Sooner or later they all build one unit too many spelling the end of a good run.

It is sort of like a bad, but rich, blackjack player in Vegas. He takes out a big credit line that will give him money to get back even after a week of big losses and he just keeps pushing the stakes higher and higher believing that it will only take a few huge hands to get him even. This guy always fails losing everything and I thought that the club owners, and even the big chain guys, are like these players in that the egos and the "I canít lose because I have always wonĒ mentality hammers them all at the end.

I was wrong about my theory. It is not the egos and the need to keep killing it that results in the failure. It is because they never read Darwin and the theory of evolution.

My latest epiphany on this came while I was discussing the franchise clubs in the industry. I was wondering out loud why they just donít continue to reinvent themselves like the successful real world franchise or major chains, such as Starbucks or even Dennyís, eventually sliding down a long muddy hill to just becoming a former name that is now nothing but a shadow of its former glory.

For example, what happened to World, Powerhouse, Goldís (that now has clubs offering $9 memberships), Curves and almost any other name that rose to the top and than began the slide into obscurity? Goldís for instance still has a recognizable name to the consumer but they used to be, "the nameĒ in fitness.

How can you go from being of the two most recognized names in the history of modern fitness (the other was Nautilus) into a club chain that is now divided into apparently two separate entities with no national direction or sense of continuity? How can some of their clubs charge $9 and others charge $54 and still use the same name and be in the same organization?

My theory was that all these household names in our industry failed or faded because the owners were always driven to open too many units or leverage too big. But my enlightenment points to the real reason they fail is that everyone of these companies, and that includes the small guys like the one mentioned above with five units, just continue to build the same unit over and over again, year after year, until the concept wears out and the consumer walks away.

The guy mentioned above didnít take the hit because he was over leveraged, although that is a factor that will haunt him as he tries to fix the mess and has no reserves and no ability to raise more money; but rather he is failing because he built the same club last year that he built in 1995. It might be prettier, bigger and better finished, but it is still the same club with the same brands of equipment and same dated concept he has used for all his clubs. The fitness world simply changed but he didnít.

He is failing because he has proven yet again that you can only take a business concept so far and then you have to reinvent yourself. Every single business idea wears out at some point in time. The consumer grows but the club owner doesnít, and that is reflected by the naÔve thought that I will just build the same club over and over again for the next 20 years and the consumer will continue to buy it forever. I am sure that Ford Motors can give you a lesson on two as to what happens if you donít reinvent yourself once in awhile.

What happens to these companies now? Where does Curves go once your circuit concept becomes stale? Where does Goldís go once you are no longer the Mecca of fitness and local training clubs are now fulfilling that mission you owned for over four decades? Where does the local owner go when he leverages everything in his life to build a club that is 20 years out of date, cost almost $5,000,000 to build in rental space and is bleeding him to death? How can he fix something he should have never built in the first place?

Even this decadeís giant gorilla in the room, Planet Fitness, will go through the same growth phases and some day they too will build a new club somewhere that is simply one club too many of the same old idea. The ghosts are already swirling as PF continues to sell the consumer circuit equipment training and limited free weights in the era of functional training and a smarter consumer educated by the Biggest Loser and Menís Health. We invent, we rise, we reinvent or we fail. Life is that simple in the world of business.

My mental breakthrough comes from realizing that it isnít the need to gamble everything one more time on the big deal; itís that all these failures result from simply building the same concept one too many times wearing out the business plan.

The lesson here is change or die. Starbucks, after about 10,000 units, closed 600 or so, dropped an unprofitable food line, added instant coffee and all the cool toys to support the new concept, and restructured their stores, all of which is more change in one year than most owners go through in 20. Evolve or die should be your words to live by in your business.

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