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."
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