Value Added: Working Out The Business

By Thomas Heath


I thought I knew how fitness centers make money.

They sell lots of memberships at low prices, assuming many people will just stop showing up. The fitness center is built and staffed for the regulars, so the money from the no-shows is profit.
That's not how entrepreneur David von Storch does it.

"Our model is different," said von Storch, founder and owner of three VIDA Fitness centers in downtown Washington. Von Storch has built high-end fitness centers that depend on members coming often and signing up for extras, allowing him to spread the considerable cost of finding new members (hundreds of dollars per find) over multiple years.

"If a member quits after the first year, we are not doing what we should be doing," he said. But it isn't easy. Washington is a transient place, so long-term memberships are less reliable than other cities.

The first VIDA (Portuguese for "life") opened in the Verizon Center in August 2006; the second opened last October at 15th and P streets in northwest, up a few blocks from me at The Washington Post. The third opened last month at the Renaissance Hotel at 9th Street near the new D.C. Convention Center.

Von Storch said his fitness centers make money; he won't say exactly how much. Von Storch put up $5 million of his own money into the three centers, or somewhere around half the capital investment.

A little background. Von Storch is 50 and a Harvard Business School graduate. He is fond of quoting Warren Buffett (a Washington Post Co. board member) about reinvesting in your business and being smart with cash.

Von Storch started developing malls for the Rouse Company during the 1980s, then quit and took his savings to start a nightclub in Adams Morgan called The Dakota in 1986.

The Dakota was a success (and a learning experience about the pitfalls of a cash business), and he sold it in 1988 for a profit. He then started Capital City Brewing Company, a chain of local micro-breweries that has pushed his net worth into the tens of millions. He also owns a commercial building on U Street NW where his company offices are located. He drives a Smart Car plastered with advertisements for his businesses, and files a two-inch thick tax return. His splurge is a 2,500-square foot condo overlooking Miami Beach.

The von Storch empire includes two spas and a haircutting company, called Bang Salon, that exist under the name Urban Adventures Cos. Urban Adventures will gross more than $30 million this year, with a profit margin in the neighborhood of 10 percent, von Storch said.

While most people want to own restaurants or sports teams, von Storch is a workout freak who always wanted to own a spa. He is one of the few businesspeople I know who readily cop to mistakes. He told me tales of depending too heavily on an unreliable partners and expanding his brewery chain too quickly, errors that cost him a couple of million dollars.

His approach to VIDA is a case study in starting a new business.

"I was always going to open a gym," said von Storch, who is rail thin and doesn't touch dairy products or fried food. "Beer was a business opportunity. Fitness is my passion."

But he didn't approach fitness as a passion. He approached it with a cool eye focused on the bottom line: how much money could he make? Von Storch knew how to run retail operations and develop real estate from his years with Rouse. He also consulted and helped design Results: The Gym, which is a fitness center on the first floor of his U Street building.

Von Storch works out five days a week, reads about fitness and constantly talks to trainers, operators and front-desk people. He was watching and learning the business long before he bought in.

"I started going to annual fitness conventions once a year," von Storch said. "I was a sponge. I would start in the morning and spend all day with every type of vendor, asking the stupidest questions or any question that came to mind. I learned what was current, how to address problems and what was going to happen in the industry. Who had the best software? What were the software problems? I learned some of the biggest challenges in the business were the back office operations," which is the boring part like bill paying, bill collections and credit card systems.

He learned where to spend money for the biggest effect. (The entrance area, where most people get their first impression of the business.) And he knew location was key. (A Capital City Brewery in Bethesda had failed, in part, because of poor pedestrian traffic.)

"I walked the streets in downtown D.C. I looked at the number of housing units, hotels, office buildings and what kind of workers were in those buildings," von Storch said. He realized the ideal place to have a fitness center was within a five-minute walk of a person's home or place of employment. He followed pedestrian routes, determining which streets got the most traffic and which ones were ignored. What route did workers follow from the Metro station to their office? Where did they go for lunch? Where were new condos going up?

He liked the Verizon Center because it sat on top of a Metro station and was in the middle of a district bursting with office buildings, hotels and restaurants. And it had about 30,000 square feet of dormant retail space sitting on the corner of G and 7th Streets. When he learned a competitor was going in across the street, he met with the company and said he would outspend him if the competitor didn't pull out. The competitor withdrew. (A different competitor had done the same thing to von Storch when VIDA was thinking of setting up in Tysons Corner.)

Von Storch tries to commit to sign long-term (25-year) leases in return for lower rents. Both Verizon and 15th Street share space with his Bang Salons, which absorbs some of the rent costs as well as bringing in new fitness members.

His biggest costs are the capital investment. His 15th Street VIDA location cost $6 million, ranging from a super-high tech air conditioning system to walnut floors in the workout room to special adjustable lighting. Exercise equipment alone cost $1 million. The center is the first of its kind to employ a computer system that reads members' fingerprint to track attendance, food and beverage purchases, tanning, massages and other ancillary services. All that information is compiled at his U Street headquarters.

Von Storch said the 15th Street location has signed nearly 2,000 members since it opened four months ago. To keep those 2,000 members coming for years, VIDA has a program that stays in touch(through e-mail or telephone) after 30, 60 or 90 days to remind them of their membership. It also tracks each member according to how much they spend. There are promotions and receptions aimed at keeping members involved.

The biggest source of VIDA revenue is the membership fee. Second is income from personal trainers. A personal trainer can make between $75 to $95 per hour per member. Trainers keep about half and VIDA gets the rest. Laundry service is extra, and monthly lockers are $15 to $25 per month, depending on size. Tanning is another $15.

VIDA's three centers employ about 80 people, most of whom are part-time employees. Payroll eats up 40 percent of revenue. VIDA pays for half the health care of full-timers. Rent costs another 15 percent. Utilities, said von Storch, "are frightening."

VIDA's most carefully guarded secret is the number of members it needs to break even. Once a club hits that number, profits soar. That's because the business costs stay the same once all the equipment is purchased, the building is rented and the staff is there.

"Once you are over the hump, the marginal costs of goods sold is virtually zero," he said. "It's like a hotel."

The goal is to boost the revenue from each member from the $87 monthly dues to $150. If VIDA can get 2,000 members at one location to spend $150 a month, that would bring in $300,000 a month, or $3.6 million a year. That's more than half the $6 million investment in the facility.

Von Storch earns a seven-figure income from Urban Adventures, and part of the company's profits go to 30 or so investors in the brewery restaurants. Much of the rest is reinvested in the business. He believes the current recession is going to create real estate opportunities to expand his growing retail empire around the area. He is hoarding cash waiting for the opportunity.
"We manage cash and are in a strong position to take advantage of opportunities," said von Storch. "It's what Warren Buffett said: Live below your means."

By Dan Beyers  |  February 8, 2009; 9:47 PM ET  | Category:  Value Added
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Comments

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Great article. It was nice to see how much research went into the idea before launching the business. It would be interesting to learn how (or if) Mr. Von Storch is using any social media or other online tools to build relationships with gym members.

Posted by: kellyh99 | February 9, 2009 7:03 AM

I make a very good living and I would not pay $150 let alone $87 a month for any gym. I do just fine at a gym for a lot less. Just as I see thousands of empty condo buildings around the Verizon Center and wonder who thought the masses would come, I wonder the same for this place.

Posted by: ssd1 | February 9, 2009 9:26 AM

I'm a member at Vida in the Verizon Center. My experience there has been fantastic. David von Storch creates exciting, attractive and innovative environments in which members can invest themselves and reach for their potential. I joined in September 2006, the month after the facility opened.

I'd like to see David and staff explore social media opportunities to strengthen their relationship with customers, prospects and other key targets.

I applaud his vision and commitment to invest in and create positive, rewarding customer experiences. Thanks David. Great job.

Del Galloway

Posted by: delgalloway | February 9, 2009 10:41 AM

Is Del Galloway von Storch's mother?

Posted by: Tess6 | February 9, 2009 11:26 AM

sounds like Mr. von Storch could use some serious antitrust counsel. Is it the Post's policy to celebrate anticompetitive conduct in its articles?

Posted by: heltzooor | February 9, 2009 11:51 AM

I've been a member at VIDA since October 2007 and have been 100% satisfied. The facilities are great, the classes and trainers are phenomenal, and the staff is very receptive to customer suggestions. I don't think $85+ is too much to pay for a gym membership in this city, especially given the quality that you get with VIDA. I've recommended VIDA to multiple friends, and will continue to do so. Mr. von Storch runs a great business, and I will continue to be a patron as long as I live/work near a VIDA location.

Posted by: ERER1 | February 9, 2009 3:45 PM

It's so refreshing to read a positive story about a savvy entrepreneur in today's economic downturn. I live in New York City where gym memberships cost twice as much as VIDA Fitness. No matter how bad things get, I wouldn't dare cancel my gym membership...truly my solace in today's horrible economy. Hopefully Mr. von Storch plans to expand his VIDA presence in the New York region...we don't have anything as swish or as affordable as his fitness concept up here.

Posted by: ckohll | February 9, 2009 3:54 PM

I've been a member for about a year and a half since moving to the area. Upon investigating gym options in the area (including fit club and WSC), I found most were comparable in price, but VIDA had a much better space, better atmosphere and best of all was most convenient.

As a member, I have been more than satisfied but then again I probably fit right into the von Storch model without even trying to. I get my hair cut at Bang (and love my stylist!), I occasionally use a personal trainer, I rent a locker and occasionally even get a smoothie after a rough workout.

I have been thouroughly happy with everything from the customer service to the amenities, classes and triainers. I have yet to have a negative experience. Coming from someone who is in and out up to four or five days a week, that is saying a lot.

Posted by: lizroman | February 9, 2009 4:04 PM

I've been in the fitness industry for 14 years now and it is nice to see a high service health club making headlines. In a time where most clubs are following the trend of very low cost/very low service, I applaude VIDA and Mr. von Storch for choosing to be the Rolls-Royce of the fitness industry. Imagine that - a health club concerned about your fitness neads, rather than just being a membership mill. Novel idea!

Posted by: FitnessGuru | February 9, 2009 4:08 PM

place treats me right. i can only say i wish there was a place like this for my parents to join in Arizona. i really like the energy in the gym. finally the windows are nice, i hate training in a basement like Rocky. plus the staff is solid too. 8 outa 10.

Posted by: bills456 | February 9, 2009 4:23 PM

test

Posted by: commentator6 | February 9, 2009 4:26 PM

I was weary of "high-end" gyms for a while, but decided to try VIDA out on the recommendation of a few friends -- and so glad that I did. The facility is welcoming, and I have never had to wait more than 10 minutes for a machine. The classes definitely make it worth it for me, the Zumba and yoga classes in particular. VIDA's helpful staff, the cleanliness, and overall atmosphere make it an enjoyable experience, not just a workout at any gym.

Posted by: marygru | February 9, 2009 4:51 PM

I don't care for his strategy of threatening competitors

Posted by: jlkohll | February 9, 2009 5:09 PM

Good to see how a fitness club works, though I'm content with 80 bucks a month at the YMCA. The best part of all these columns, in my opinion, is getting entrepreneurs to share the details of their business models - research, siting, costs, revenues.

For anyone looking to start or grow a small business - this column is invaluable.

Very interesting stuff.

Posted by: JoeBagadonuts | February 9, 2009 5:11 PM

I've been going to gyms for more than sixty years, so my experiences over time and in all parts of the world, have run the gamut from the good, the bad and the ugly. My criteria for judging a gym in a positive way has always been excellent equipment, in perfect working condition and cleanliness throughout. My purpose is to get a good workout, without the bells and whistles mentioned in the article. If it works for people, and keeps them exercising, it's all to the good. Realistically, however, it is dedication and perseverance that, in the end, are the only things that matter.

Posted by: Diogenes | February 9, 2009 5:12 PM

Nice to see another business that focuses on the lifetime value of a customer instead of trying to make a quick profit. I've always thought there was something a little slimy about the model at most gyms--sign up as many people as possible and hope that few of them come back. But when a gym's profit depends on people coming back, I can respect that.

Posted by: furnituregirl | February 9, 2009 5:26 PM

See what happens when you don't pay your
Titan Fitness, Gold Gym (dead but still
selling your debt) etc:

http://800notes.com/Phone.aspx/1-800-392-4029

Posted by: atmanman | February 9, 2009 9:25 PM

Sounds like a great place and reasonably priced. I look forward to joining a gym soon and would be happy to check it out.

Posted by: joshuawashingtonpost | February 10, 2009 1:51 AM

As a former personal trainer/group fitness instructor in downtown DC it's nice to see a high level operator doing well, esp in this economy. Running a health club is an expensive business and low-cost operators who position themselves on price are the ones who try to warehouse members. There is a niche in providing a high-end service at a reasonable price as Von Storch is finding out.

Posted by: ptymccall | February 10, 2009 11:37 AM

Agreed about threatening competitors tactics. I also was turned off and would not support such a business.

Posted by: nojunk4me | February 10, 2009 2:50 PM

Interesting story of how an entrepreneur turned his passion into a business. I've heard great things about VIDA and hope Mr. Von Storch opens one in Virigina soon!

Posted by: MDC2 | February 11, 2009 9:04 AM

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