|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
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
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
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
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