Sink or Swim: Some struggling express club franchisees are getting a lifeline from a new company that pledges increased franchisee support.
Diversified Health, Fort Lauderdale, FL, is taking a calculated risk that eventually could bring it accolades and status as one of the largest franchisors of express and women-only clubs in the country or could sink the remaining struggling franchises that it has been acquiring during the first year of its existence.
Created in July 2007, Diversified Health first offered two brands of its own: Rejuvenate Fitness Center and Spa for Women and The Zoo Health Club for men and women. However, as the company saw franchise sales of express clubs slowing, it began making bids on existing systems, says Andrew Barnett, Diversified Health's executive vice president of corporate development. That soon led to the company bringing into its fold Liberty Fitness, Liberty Weight Loss, Fit for Her, Sedona Fitness for Women and ShapeXpress and promising two more major acquisitions in the next few months. Keeping each company's brand intact, Diversified Health has said that it will give these struggling franchisees the type of support and structure that their previous corporate ownership did not give them.
Whether or not Diversified Health is viewed as a savior or is simply a company strategically trying to enhance its portfolio remains to be seen. Its owner is Roger Wittenberns, who used to own Lady of America club brands, including Ladies Workout Express. Several Ladies Workout Express franchisees failed under Wittenberns' watch. Will the brands under the Diversified Health umbrella do the same?
By the end of the year, Diversified Health plans to have 250 locations in the United States and 30 more internationally, says Barnett. Diversified Health also plans to go public.
“By the end of two years, I believe we will own every brand out there other than Curves, Lady of America and Contours,” Barnett says.
Diversified Health is acquiring the company name, trademark, logo, Web site, and specific franchise and developer contracts of these brands. The company seeks distressed franchised clubs, Barnett says, and plans to turn them around by offering increased corporate support.
A lot of franchisees got into the fitness industry, Barnett adds, with the idea of making a quick buck or two, despite the fact that they had little or no fitness experience.
“We've built an infrastructure to make sure that we can help these people,” Barnett says. “We're not miracle workers, but we're certainly able to give them the opportunity to properly run a fitness facility. Even though we can't save everyone, and even though most of these franchisees are on the verge of going out of business, we at least give them the best opportunity of any chance of survival by actually giving them some real corporate support. Most of the systems that they are in, those systems have either run out of money or the people that own them don't have any interest in putting any more money into the system.”
Not all of the individual franchised clubs acquired by Diversified Health are troubled and distressed, Barnett says, citing one ShapeXpress franchisee who has been drafting between $40,000 and $50,000 a month. That's an exception and not the rule, however. A former ShapeXpress franchisee who has followed the company closely estimates that 300 ShapeXpress licenses were sold from 2002 to 2008. Only 100 of those clubs opened and about 70 closed, leaving about 30 clubs. Diversified Health says it purchased 38 ShapeXpress clubs in the acquisition this year.
“This move will allow our brands to grow exponentially,” Linden Wood, CEO of ShapeXpress, said in a statement in April regarding the asset purchase. “We are excited to watch Diversified's expert team of industry professionals take this company and its franchise partners to new heights.”
At the time of its acquisitions, Diversified Health listed 26 Liberty Fitness clubs, 17 Fit for Her clubs and six Sedona Fitness for Women clubs. Like Sedona, most of the Fit for Her locations are in Oklahoma, where ShapeXpress was headquartered. Wood is no longer involved in the day-to-day operations of ShapeXpress.
Last month, Diversified Health acquired Citrus Gym, a chain in Brazil that was formerly owned by John Kersh, the former director of international development for the International Health, Racquet and Sportsclub Association. Kersh recently became the director of international development for Anytime Fitness, Hastings, MN.
An industry observer says Diversified Health's purchase of these contracts gives the company an instant revenue stream. Diversified is not yet selling franchises for the brands it has acquired, says Barnett, who adds that the company will wait until it stabilizes the franchise systems and makes sure franchisees are satisfied before selling franchises.
Felicia Sanders, vice president of operations for Diversified Health, says the company holds conference calls with franchisees every other week and offers role-playing exercises and Webinars for them. Sanders and her team have hit the road, visiting with franchisees face to face. The company not only is looking to offer relief to existing franchisees, but it also is developing relationships with the clubs' landlords, Sanders says. If a club is about to close, Diversified Health wants to find a new owner to keep the club in business, she adds.
“For us, it's more about educating ourselves on the brands,” Sanders says. “We're not a company that's going to go in and mandate and dictate. We're not going to test a program with these franchisees. We want to go in with tried and true promotions. Our goal is to get at least two or three franchisees from each brand, ask them to at least keep the door cracked for us. If we can win a few of these franchisees and we instill these marketing programs in place, the word will start, and it will start to trickle down.
“Do I feel like the mood of [franchisees] has changed a little bit with support? Yes. Are there some that we're going to be able to save? Absolutely.”
Roger Wittenberns says he's a self-made man who earned his vast fortune in the health club industry. In his house, Wittenberns keeps a photo from 1984 of himself holding a dime in his outstretched hand showing the last 10 cents he had to his name at the time, he says.
Wittenberns' Web site, www.rogerwittenberns.com, shows that he has accumulated a lot more dimes since that photo was taken. The Web site features photos of Wittenberns' mansion, his race boat and his 1999 Lamborghini Diablo. Wittenberns doesn't hide what his personal wealth means to him.
In another example of his extravagance, Wittenberns paid $27,900 in a 2002 online auction for a 1999 Ford Mustang convertible that was previously owned by rapper Eminem. Wittenberns purchased the car for his then-12-year-old daughter, with $10,000 of the proceeds going to an adult literacy program.
“You don't have to become a surgeon to be able to live the American dream of owning a nice house and enjoying nice cars and some of the finer things in life,” Wittenberns says.
Wittenberns is proud to say he has 35 years of experience in the health club industry, beginning with his time as a lifeguard at Jack LaLanne's Health Spas. He later became a manager for European Health Spas.
Wittenberns purchased his first club in the 1980s. In 1989, he began franchising Lady of America clubs and grew the company into one of the largest women-only club companies in America, with more than 1,000 clubs. In 2002, Lady of America acquired Ladies Workout Express, an Atlanta-based chain of 88 clubs, for $1 million.
Wittenberns is not without his critics. One industry insider says that while Wittenberns headed the company many of its Ladies Workout Express franchisees faced financial ruin. Owners who purchased a five-pack of Ladies Workout Express clubs and whose first club was not profitable were told they had to open the remaining four clubs before they could sell them, the insider says.
Actually, Ladies Workout Express offered a single franchise for $12,500 and a four-pack for $25,000, Wittenberns says.
“Nobody made them buy a four-pack,” Wittenberns says, adding that many Ladies Workout Express franchisees wanted to open multiple locations. “A four-pack gave a person the opportunity to capture a little market. What you would like to do is eventually grow your marketing hold on the trade area so that you'd have four of the best communities wrapped up operating under your brand.”
Some Ladies Workout Express owners also complained they did not receive enough training, marketing and support from the corporate office.
Posts from former Lady of America franchisees on the Web site RipoffReport.com list some of the same complaints that other express club franchisees have offered about their franchisors: lack of support, misleading start-up costs and lack of communication.
One franchisee on the Web site said she and her husband were “fooled by Lady of America” and added that their attempt to get financing through a company executive was a “nightmarish” four-month ordeal. Another franchisee began a post with the sentence, “Lady of America is an elaborate scam.” The franchisee also compared Wittenberns to a used-car salesman who sells cars that don't work.
Wittenberns responded to the posts on RipoffReport.com. In one response, he wrote that Lady of America had resolved its differences with the aforementioned couple. In another response, he wrote that he assisted one franchisee in re-selling his facility and recouping nearly all of his investment.
Wittenberns stops short of saying that some of his franchisees were not successful. He says that in his position with Diversified Health, he hopes to correct the mistakes he's made in the past.
“Were there bumps along the way? Sure,” Wittenberns says. “You can only work 14 hours a day, seven days a week. You can't get through to everybody, but you can certainly try. When you have one location, it's certainly easy to provide support. When you have 50, 100, 200, it's still pretty easy to provide support. When you start breaking 500, 800, 1,000 locations, you need to have a tremendous amount of corporate support.”
Wittenberns says that not every franchisee will be a success even if they all get the same support.
“From the heart, for 35 years, I never intended everybody to be as successful as my top franchisee,” Wittenberns says. “When you have close to 1,000 (clubs), you're going to have No. 1,000, and you're going to have No. 1. That's just the natural order of mathematics. Our goal is to offer everybody the same support and tools, and different people use them in different ways.”
Barnett, Wittenberns' longtime friend and colleague, adds, “Doesn't everyone learn from a previous experience? One thing about Roger: He's stayed in the industry.”
In 2005, Wittenberns sold his controlling interest to Trivest Partners, a Miami-based investment firm.
“When I sold the company, we had very few closures, and everything was great,” Wittenberns said. “Under my operations, it was nothing but hard work and dedication from my position and our corporate support staff.”
After he sold Lady of America, Wittenberns spent the next two years out of the industry before he decided to return with Diversified Health.
He returned to the business with the intention of being successful, he says.
“It hasn't all been a stairway to heaven climb, but it's certainly been a lifetime experience, and I've enjoyed the industry so much, especially sharing it with people that also have the same vision of building a health and fitness center.”
The founder of one of Diversified Health's acquisitions, Liberty Harper-Simonsen, started Liberty Fitness in 2002, and then sold the 60 locations she built to Concentric Equity Partners, Chicago, in 2004. It changed hands again in 2005, before Diversified Health acquired it last year.
Although she was no longer president, Harper-Simonsen remained with the company as a director of franchise services until she resigned last year. She says she sold the company in 2004 because running the business “just wasn't for me anymore.”
Harper-Simonsen, who now runs her own franchise coaching company in the San Francisco Bay Area, says she still hears from former franchisees who are still running Liberty Fitness clubs. Those franchisees are concerned about the future of their clubs and about Diversified Health's involvement, she says.
“They definitely are worried that Diversified might not be the right company, but maybe they just need to give it more of a chance,” Harper-Simonsen says.
Harper-Simonsen says she likes the direction that Diversified Health is going and hopes the company and its franchisees are successful.
“I think the plan sounds fantastic,” Harper-Simonsen says, “although I just hope that their focus truly is to continue to help those existing franchisees. Is their primary focus really to help women, or is it to make money? Unless they can truly say helping women is their first focus, they won't be successful. They have to make sure that that's where their heart is.”
The question for Diversified Health may not lie in where its heart is but on the foundation of its business acumen. As Wittenberns knows, with every business move, risk is involved. Diversified Health's move into the express club market may seem risky to some, but not to Wittenberns.
“I've never really evaluated the risk aspect,” he says. “To us, we see it only as an opportunity to take existing brands, consolidate them all and build another great company. We're certainly not in this to fail. I wouldn't be making an effort to fail.”
“Time's Up,” http://fitnessbusinesspro.com/mag/fitness_times/
“New CEO Joins Liberty Fitness, Gets in Shape,” http://fitnessbusinesspro.com/mag/fitness_new_ceo_joins/index.html
“New Owner of Lady of America to Invest in Support,” http://fitnessbusinesspro.com/mag/fitness_new_owner_lady/index.html
“Lady of America Launches Co-Ed Clubs,” http://fitnessbusinesspro.com/forprofits/fitness_lady_america_launches/index.html
“Ladies Clubs Join Forces,” http://fitnessbusinesspro.com/forprofits/fitness_ladies_clubs_join/index.html