An Example of Ineffectual Competitive Response- Part One

Back in November of last year, I wrote this post shortly after the opening of a local LifeTime Fitness club. I ended the piece by observing,

"I don't follow individual companies for investment purposes, and I don't own any positions in Lifetime Fitness. Looking at the chart, I can't say definitively why the company's stock price began to plummet late last year.

Perhaps it is viewed as a discretionary service which will be hard hit by the likely recession.
If so, the experience of the past few months in New Jersey suggests that they are far better managed than that. Nearly everyone with whom I've spoken at the new facility feels the services are much less expensively priced than what is comparably available. The staff performs in a manner that makes you feel you are watching a well-oiled retail machine at work. It doesn't take much thought to understand that Lifetime's size and growth potential allow its employees to consider career development options which are simply nonexistent in your local, smaller-scale fitness business."

Since then, LifeTime's equity price has bottomed and continued flat through to today. But that's not the point of this post.

Instead, I want to focus on the fitness club to which I still belong (due to an annual membership situation), but no longer actively use. I wrote of it in that linked post,

I've always liked the people who own and operate the fitness club to which I have belonged for nearly a quarter of a century. Were it not for Lifetime, I would have had no reason to sample another competitor, nor plan not to renew my membership when it expires early next year.

However, there's no realistic way in which that business can compete for my fitness dollar now. Due to a mistake made locating on a wetlands parcel, the owners cannot add more fitness services, such as swimming or tennis. The relatively high fixed cost nature of fitness clubs means that just a small loss of customers will have a severe impact on my current club's profitability.

Faced with, by March, two Lifetime fitness facilities bracketing it within a few miles on each side, my old club won't be able to raise prices and retain members. They obviously can't lower prices to retain members and still maintain profitability.

On both financial and service offering bases, it would appear that the club has a relatively short future. Schumpeterian dynamics, in the nature of a large, lower-cost, more service-rich chain of fitness clubs, has irrevocably altered the local competitive landscape for fitness facilities.

And, true to form, it has resulted in more and better fitness services for the customer's dollar."

About a week ago, I received a letter from my old fitness club. I think it's noteworthy, in that it represents the first tangible recognition by the owners and managers that they are in a tough bind. I should note, again, as I mentioned in that quoted passage, that I genuinely like the owners of my old club. Some of the remarks that follow may not be to their, or their managers', liking, should they happen across this post. But I want to illustrate a clear, pure business strategy and competitive response case, so I need to be direct and unvarnished in my observations and comments.

The letter opens,

"You became a member of (name of club) because of our size, programs, and features that could not be found in other clubs. We are small enough to know you, and large enough to serve you."

Well, this is partially true. I became a member of the club twenty-six years ago because it had the only squash courts in the area, while not being a private, country-club-style facility. At that time, the only real fitness club choices were YMCAs and this facility. But twenty-six years is a very long time.

To put it in perspective, when I was a pre-teen, in the mid-1960s, watching old movies on network television, I would sometimes mentally calculate what year would have been as far back from the date of some program or movie as it was from when I was watching it. From that era, the Depression was only thirty years earlier. Technologically, my pre-teen world was entirely different.

That's how I view the current situation. Nearly thirty years ago, socio-economic trends were quite different. So, reminding me why I joined the old fitness club nearly three decades ago simply causes me to remember how much the world has changed. And how little the club has changed with it.

The letter goes on to note the club's history of involvement in squash, with various programs for children, tournament sponsorships, etc.

It then contends,

"We will do everything necessary to continue our position as a premier squash and fitness facility. Our atmosphere, staff and squash professionals together with our facilities cannot be duplicated by other clubs, regardless of their size. Although it is sometimes difficult to balance the competing interests of our programs, we combine 30 years experience serving a challenging and wonderful clientele combined with a staff second to none."

Here, the letter departs into the state of denial.

Until early November, the club was a "premier squash and fitness facility." Then LifeTime Fitness opened its first of two clubs. Now, the old club is no longer "premier" in any sense except its pricing.

LifeTime has four squash courts at each facility. The old club has three older, narrower, hardball squash courts, and two wider, regulation softball squash courts. Softball is now the dominant game of the sport. However, the old club has one feature that is unique and, now, unchangeable. To explain fully, a little history of the club is in order.

In 1978, the owners (I believe just two of the current three) collaborated to build a small, six-court squash club on a piece of land which was bounded by swampland and other structures. Soon thereafter, by 1982, when I joined, they had expanded the original building twice, to add racquetball courts, a small Nautilus circuit room, and aerobics studios.

As time wore on, the wetlands aspect of the property became important, because the owners would have to build into the parking lot, or upward, to expand the club further.

So, now, when the letter states "we will do everything necessary," that isn't quite true. They won't relocate the club.

Several months ago, one of the owners approached me in a weight room and directly asserted that he knew I had joined LifeTime Fitness. I replied that I had, as many other members of the old club, accepted the LifeTime Fitness trial offer to join for a month, at a preferred rate, with the option of leaving for only a $75 administration fee if I didn't like the new club. And that my younger daughter, not I, had been the driver behind this decision.

At the end of a lengthy discussion with this owner, I observed that the club had never really wanted families to belong, because their pricing treated each child as a separate, adult member, and then, only after age fourteen. Also, I suggested that, before he and his partners had pierced the back wall of the club for the first expansion, they should have sat down, considered their long term objectives, and bought land half a mile away, then vacant, to build a member-focused general family fitness facility, rather than private squash club which had been enlarged to attract some expense-sharing members.

His reply was, to paraphrase it closely,

'Yes, but who was thinking that far ahead in 1980? Nobody else was even thinking of a fitness club like ours back then.'

To myself, I thought, in response,

'A surviving fitness club, that's who. You had YMCAs to look to for an example of what the future would hold.'

The key trend that the owners and their managers, through the years, failed to notice was this. Fitness-oriented 20- and 30-somethings marry and have children. Eventually, they want more than a nursery for their children while they exercise. They would want a family fitness club.

YMCAs, YWCAs and their ilk have always offered this, but not so luxuriously as my old fitness club. Had the owners followed my advice, prior to expanding their current facility, they could have bought a sizable tract of land nearby, designed and begun building a YMCA-like facility from scratch, only somewhat more nicely appointed.

The letter continued with a reference to the squash pros. Here, too, they are in denial. The head pro is very qualified, experienced, and likable. However, he doesn't do nearly as much work with youngsters as he used to. Instead, two uncredentialed young squash players, whom I refer to as 'semi-pros,' do that. One is a converted tennis player with no formal squash training. The other, a very nice young woman, played varsity squash in college. Another pro, and arguably the club's best player, is a Jamaican-born, former professional squash player who now teaches squash part-time. Thus, the staff isn't truly any better than LifeTime's pro.

Further, most adult players could care less who the pro is, since they don't take lessons.

The letter goes on to promise,

"We are determined to work even harder so that (club name) is the best place for you to be a member."

Alas, too little, and about eighteen months too late.

From extensive discussions with friends who, like me, joined the LifeTime Fitness club, I gleaned the following information. What would have kept most of us adult squash members from leaving were these steps:

-When the first news of LifeTime's imminent arrival came, offer all squash members a reduction in membership fee from the penalizing $150/month level back down to the general member's $100/'month, or something slightly higher.
-Combine this reduction with a special offer to lock in the rate for, say, two years, with the balance payable upon leaving the club. This would have protected the old club's most profitable membership segment.

-Convert two of the older, narrower courts to a wide court, making a total of three softball courts.

-When repairing, for the fifth time, the front walls of the two existing wide courts, change the composition of or move the front wall so that moisture from the swampland did not continue to corrode the masonry and cause craters and repair-patch dimples for most of the three-four years between wall reconstructions.

-Extend the club's operating hours past 10PM and earlier than 5:30AM.

None of these steps were taken. Instead, the old club now simply has fewer facilities than LifeTime Fitness, at higher prices. They promise to institute a quarterly-meeting 'squash committee,' but, again, it's too late. Most of the adult squash members have already left.

By rough count, some 10% of members of the old club have migrated to LifeTime, including a large number of non-squash players. Why not? You get swimming, basketball courts, a rock climbing wall and more equipment for the same monthly membership fee.

Now, the old club cites its accomplishments and history. But its promises for the future ring hollow.

In my next piece on this example of ineffective competitive response to a new market entrant, I'll provide some financial context to frame my prediction of what will occur over the coming year for the old fitness club.