The first rule to surviving in the luxury club market during a recession is to stop calling your club a luxury club. Instead, call it a lifestyle brand.
That’s what Smaiyra (pronounced Smy-ra) Million, CEO of Millennium Partners Sports Club Management LLC, has learned. After 25 years in the hotel business (with the Ritz-Carlton Hotel Co.), the spa business (with Candelas Spas) and now the high-end club market (with Millennium’s Sports Club/LA clubs), Million knows a little something about luxury and branding. And with the recent recession, she’s learned how to market that luxury so that it is not perceived as a discretionary spend.
Efforts put in place by Million and former CEO Art Curtis, who now works for real-estate developer and Millennium’s parent company Millennium Partners on mergers and acquisitions of health clubs, plan to grow the company at a time when many club companies have chosen to drop their membership prices or open low-priced club alternatives.
Instead, Million and her team repositioned the Sports Club/LA brand from a luxury brand to a lifestyle brand after market research showed that people had a negative response to the word luxury during the recession. So, the company, which previously had referred to its six clubs as “urban country clubs,” stopped using that phrase and “luxury” in its ad campaigns.
“We don’t try to downplay the fact that we do have extras and that we do pay attention to the individual needs of our very discerning customers, but we just don’t talk about it as a luxury because a luxury is something that most people think they should be doing without,” Million says. Instead, the company’s ad campaign focuses on how health and fitness are essentials of life and, therefore, must be commitments rather than à la carte items that can be easily removed.
“It’s something that you need to do as a part of living and breathing,” she says.
The campaign is beginning to pay off. Prior to the recession, attrition at most of the Sports Club/LA locations, which are in New York, Boston, San Francisco, Miami and Washington, DC, averaged about 30 percent, with the Reebok Sports Club/NY location averaging about 21 percent. In 2009, at the height of the recession, attrition rose as high as 37 percent, but by the end of 2010, it had dropped to 35 percent, Million says.
That attrition was partly the cause for a 10 percent drop in revenue in 2010. Million would not reveal revenue numbers for the private company, but Millennium reported its 2008 revenue was $114.7 million when it submitted for Club Industry’s Top 100 clubs list. The company did not report its 2009 revenue for the next year’s list, but Club Industry estimated a 4 percent decline that year due to the recession, bumping it down to $110 million.
Another factor in the loss was a decline in ancillary revenue as members purchased smaller private training and programming packages. The hit was perhaps larger for Millennium than for some other companies, as 35 percent of its revenue is from ancillary services.
To overcome these obstacles, Million, Curtis and their team implemented several initiatives that Million projects will increase revenue in 2011 by 5 percent over 2010. Most of those efforts involve focusing on the customer.
In 2009, Millennium established a small call center in Boston to woo back members who either hadn’t used the club in the past 30 days or whose usage had dropped by 50 percent or more, Million says. The calls let members know that they were missed and promoted new classes and equipment they could try. Sometimes, the calls led to setting up sessions with a trainer.
The calls were important because the single largest precursor to a cancellation is non-usage, Million says. And even though the calls sometimes led to cancellations, most of the members were surprised and happy about being contacted.
“We saw that that has helped us and has been reflected in our numbers coming back in line,” Million says. “People sometimes just need a gentle reminder that they haven’t been there in a while.”
Millennium also listened to members when it came to dues. Instead of raising membership dues in 2010, Millennium implemented three additional pricing options. The company introduced a gold membership, which offered a lower effective monthly dues rate for a 12-month commitment. It also introduced a young professional rate for people in their 20s who wanted to join Sports Club/LA but could not afford it. At one club, the company introduced a weekend rate that allowed access to the club (and its popular rooftop terrace) from Friday to Sunday only.
“We tried to slice it and dice it enough so we could draw in more people without cannibalizing the existing membership base,” Million says.
Despite adjusting dues pricing, Million is not a fan of selling solely on price.
“As an industry, we don’t do ourselves any favors by making [price] the focus of what we present to the consumer,” Million says. “I think we need to do a better job of educating the consumer as to what the value of a health club can bring you. Whether it’s coming out of a recession or in good times, these are discretionary dollars that people think twice about spending. As an industry, we need to be more committed to speaking with one voice about the benefits of exercise rather than the $19.95 membership. No one really wins when we all drop to the lowest common denominator, which is always price.”
Millennium cannot afford to compete on price. And doing so there or anywhere else can affect the talent pool, Million says, because management cannot afford to attract the best people or train and mentor them.
“We need to develop a pipeline of professionals,” she says, noting that the practice in the hotel industry is to recruit interns and graduates from hotel schools and provide training for them. “They spend their career coming up and then you have seasoned professionals who grow into management and leadership roles. As an industry, we haven’t done that. We don’t cultivate our own talent. We poach from each other rather than investing the time and energy in the training and development of people, not only for your own company but for the industry.”
With the recession possibly easing, attrition rates improving and revenue rebounding, Millennium is now ready for the growth that Million and Curtis anticipated prior to the recession. The company had already spent $35 million in member-facing areas after it purchased its six clubs from the Sports Club Co., Los Angeles, for $80 million in 2006. Millennium had renovated the clubs, added new equipment, added private workout areas and created mind/body studios that, in some of the locations, fill an entire floor.
The company had also improved its infrastructure, centralizing its accounting functions, improving its information technology infrastructure and its customer relationship management capacities, all in anticipation of growth.
And growth is what Million sees in Millennium’s future now. She has targeted growth possibilities in Boston and Washington, DC. However, she would not rule out moving into cities such as Chicago, Dallas and Atlanta sometime in the future. Most of the new Boston and DC clubs will be smaller (35,000 to 40,000 square feet vs. 120,000 square feet for the main Boston club) and probably will not have pools, court sports or executive locker rooms. They would be in urban locations, possibly in the mixed-use, high-rise developments that its parent company owns, and they would surround the larger existing clubs in these cities.
However, the suburbs also may be calling Millennium, just as it has called some of its members who moved to greener locales after having children. Those children would require child-friendly programming and possibly pools, tennis courts and outdoor facilities. And rather than going in mixed-use, high-rise developments, the suburban clubs would probably be free-standing, Million says.
The cost of building new facilities on par with Sports Club/LA’s current facilities could be too cost prohibitive right now, Million says, noting that the company’s clubs cost anywhere from $35 million to $50 million to build in the 1990s. Instead, most of the expansion will come through purchases of existing clubs with existing members, which decreases the ramp-up time and the lead time for the return on the investment, Million says.
“A lot of our competition have the bare bones of something that we could come in and do something with,” Million says. “It’s all about finding a good location and a good membership base.”
With many club companies struggling due to the economy, the prospect of finding someone who wants to sell may be high right now. And that is what this lifestyle brand is betting on as it moves forward with its once-delayed plans for growth.