Running fit center isn’t as easy as 1-2-3
Amid high costs and weak membership, numerous franchisees in the 123 Fit 30-minute franchise system have shut their doors. Many are deep in debt and trying to ward off bankruptcy.
Lisa Woods is a fitness buff with a sales background, which should make her perfect for the 123 Fit. "I sold plastic pipe for 12 years," Woods said. "I can certainly sell fitness memberships. Anybody who walked through my doors bought a membership."
So why did Woods sell her franchise in Colorado for nearly nothing six months after she opened and then declared bankruptcy shortly thereafter? While she might have been able to sell memberships to anybody who walked in the door, nobody was coming through the door, at least not enough people to pay the cost of running the business.
Woods' is a common story in the franchise spearheaded by Rick Schaden, the controversial entrepreneur behind the Quiznos sub chain, and fitness guru Ray Wilson. The system in that time has become known more for big losses and shuttered doors than it has for buff bodies.
The company's closed units outnumber its current units by a nearly 2-to-1 margin. 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.
123 Fit was built around a fitness regime designed by Wilson that is more intense than the Curves workout – one that continues to receive raves even from the company's biggest critics. While other clubs target women, 123 Fit is open to anybody. Wilson, a longtime fitness industry veteran, had started Ray Wilson's Healthy Exercise and, at one point, vowed to have 10,000 locations nationwide. Schaden bought the nine-unit chain in 2005 and worked with Wilson to refine the concept.
The new company's financials have been anything but healthy. It lost $3.5 million in 2005 and another $6.1 million in 2006. The company's accumulated losses forced it to acknowledge in its FDD that doubt exists about its future. Yet 123 Fit executives also said revenues in 2007 would cover expenses.
That didn't happen. Through the first 10 months of 2007, 123 Fit lost $2.8 million and revenues didn't keep pace with the money the company took in the previous year, according to a financial disclosure filing. One franchisee said company officials, who would stay at nice hotels and use a company credit card during early visits to her location, switched to lower-end hotels while using their own cards during later visits.
Equipment sales to new franchisees so far have accounted for 70 percent of company revenue. Royalty payments, while increasing, still account for less than 10 percent of company sales.
Closures are causing greater problems. At the end of 2006, 123 Fit had 27 units in operation and another 73 sold but not open. Today it has 29 units, according to a tally on the company's Web site. Through the end of last year, the company listed 48 franchises that have closed, most of them in 2007. Former franchisees in interviews say more have closed since then.
Brooksy Smith, 123 Fit's chief executive and a veteran of the Quiznos chain, didn't return phone calls and refused comment through a company spokeswoman. Former franchisees all paint a similar picture of failure: high costs and few members. Many tried ads, following the company's playbook. 123 Fit itself couldn't go forward with a major marketing push largely because it didn't have the money in its advertising fund. Its Web site focuses mostly on franchise sales, rather than on promoting the benefits of the club to prospective members.
Even clubs that advertised heavily struggled. "I did a lot of advertising," said Jackie Middlebrook, 63, who owned a store in Sandy, Utah. She spent as much as $2,500 a month on ads.
Middlebrook was a member of another Utah club with her 62-year-old husband. They decided to open their own as a cure for the boredom of retirement and say they were promised their club would have 400 members by the time it opened. It instead had just more than 100.
Middlebrook says monthly expenses were as high as $12,000 a month, yet most months the franchise brought in $3,500.
They shut their doors in May of this year, 14 months after opening, on the advice of an attorney who told the couple to cut their losses. With their retirement money drained, they filed for bankruptcy. "Now we're trying to put our lives back together," Middlebrook said. "We're both going to have to go back to work."
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.
Those changes came too late for Elaine Rose, who is determined to stave off bankruptcy despite $176,000 in debt and obligations on a five-year lease for the center she opened in Missouri with her daughter. She opened with 20 members – far below the 200 she says she was promised – and at one point had 135. She advertised following company recommendations and tried negotiating with hospitals and a nearby neighborhood to boost membership. Nothing worked. The store never made a profit, despite being run mostly by family members not taking salaries.
She was set to close her store on August 29. By the end of an interview, Rose couldn't hold back her sobs as she described how she and her daughter plan to pay off the debt to keep from going bankrupt. "All of (my daughter's) pay is paying the bills," Rose said. "I'm getting additional life insurance. I'll be working a second job. My husband is 67. I'm 56. We have no retirement other than Social Security."
Rose then recalled why she bought a franchise in the first place. "It just looked safe."