Case Study: Learning from California Fitness's Workout

A subsidiary of 24 Hour Fitness, the largest privately owned fitness U.S. fitness chain, California Fitness has 22 clubs in China, Hong Kong, Singapore and Taiwan, including four co-branded with Asian superstar Jackie Chan. “We are the pioneers and we have set the standard [in Asia],” says MC Wong, the company’s senior vice president and chief financial officer. “We have seen some companies copying us, which is a celebration of the fact that we are good.”

 
But California Fitness has not been immune from the crisis. “Above-club costs,” that is, expenses with no direct impact on member services, were trimmed dramatically. Still, says Wong, the Asian operation is cash-rich and can call on the deep pockets of 24 Hour Fitness to continue with its expansion plans once the market starts to show steady growth again. She spoke to CFO Innovation’s Cesar Bacani.
 
Is there a direct link between the recession and membership in fitness clubs?
It’s actually quite interesting and, obviously, we’ve been studying it. We have seen a drop since the third and fourth quarter of last year in the number of new members joining, but we have seen a slight increase in the first half of this year. We’re still seeing it turning around locally plus continuing to turn across Asia, albeit in differing degrees. People are not buying the more expensive memberships and they’re a bit more hesitant in committing a lot of money.
 
The good news is that our existing members are renewing. We’re even seeing an increase in renewal rates. So, basically, people who are committed to exercise have not changed their behaviour. People who have not included it in their lives have slowed in the commitment to spend money to change their behaviour. It’s affordability too. And those who have savings when the economy is slow, and are perhaps less busy, may consider a membership as an affordable purchase that they hadn’t time to consider before. We have seen workout frequency numbers increase. Instead of going [to the gym] two days a week, they go four days a week.
 
There is some hesitancy [among other members] to buy [premium] packages in this economic climate. Discretionary spending is a little affected. So were in the past you used to come three times a week [to train] with a personal trainer, you might now come twice a week and just exercise on your own. We don’t see a complete non-renewal in personal training services; we see people coming for a little less, which is understandable.
 
So as CFO, how do you help the company reverse this negative trend?
We don’t want to go down the trail of cutting prices, because it’s just suicidal, really. So what we want to do is provide our members with excellent value, as opposed to cheap facilities and services. In fact, we want to improve members’ experience while keeping the price firm. For example, we still invest in our clubs i.e. we refurbish, we put in better equipment, thus nurturing a better workout environment.  
 
COST CUTTING
There’s little or no cost-cutting at California Fitness?
In a downturn every single dollar counts. When you go through huge growth,  sometimes you don’t focus on the back of the “house”, so it gets lumbered with a lot of inefficient, labour-intensive tasks. Nobody thinks of cutting these costs first, so it’s up to the CFO to review these costs and trim expenses, especially in a downturn.  
 

So did you let people go?

We have had to do it, because we were structured for growth; to build new clubs and so on. We had to let go off just over 30 people regionally, but we didn’t touch frontline staff. It mainly affected colleagues who were helping us find new sites and build more clubs. We still have about 2,000 staff.
 
The first focus for me is how to get front-line staff to be not encumbered with paperwork. We used to have things like [paper] contracts and travel and entertainment claims. We have a system now in place that deals with [these processes] electronically. We’re building a platform that makes [processes] more efficient, so you don’t have to pass a piece of paper from Hong Kong to the Singapore office, which then couriers it back.
 
Wouldn’t the use of technology make more people redundant?
I think it’s a fine balance. We’re not replacing people [who leave the company]. We’re putting in the right [technology] platform so when we return to growth, we don’t have to add more people, or not in the same magnitude as we did in the past.  
 
I’m always challenging the staff and trying to get them to use technology. We do not wish to employ human beings to perform a task that technology can easily do for us. I want my colleagues to be adding value at a higher level so that jobs are always there. If you are doing a job which say an answering service can do for you, where’s your job going to be tomorrow?
 
CASH MANAGEMENT
So you’re cutting costs by making existing staff more productive and processes more streamlined. Are you optimising cash management as well?
In some markets like Hong Kong and Singapore, debiting of [customer] accounts is automatic by the bank, so we need to do little to collect money. We only have to deal with people who forget to pay us. We have a credit control department that is responsible for contacting them. There will always be aspects [of operations that entail] interfacing with our members. The human touch is still very important.
 
Is that in-house or outsourced?
It’s done in-house. We are not at the moment outsourcing customer service because we are relatively efficient and our people are doing well. As to whether in the future we need this to happen, we don’t know yet. However, our IT infrastructure allows each market to help each other. Basically, Singapore can make the calls to customers in Hong Kong - the platform is there. Language is one issue. Not many people in other countries speak Cantonese. But we have staff in Singapore and Hong Kong who speak English. Plus we have Mandarin speaking staff in Singapore, China and Taiwan. 
 
Do you tap your banks in terms of treasury and liquidity management services?
Yes, but because we don’t borrow money, they don’t make a lot of money from us. We are always in surplus.
 

But that means it’s important for you to have 100% visibility of your balances so you know to the last cent how much money you have and in which account, and also that the funds earn interest?

Right, yes. When you don’t need to borrow, then the cost of money becomes zero, and so people think: I can have as much money sitting there, I don’t need to get a return from it. That becomes my challenge [as CFO], how to keep as little [idle cash] as possible - how to utilise the surplus.
 
Finance people are generally cautious, so when they think they need $2, they ask for $4. So I have finance managers who ask for a bit more because they fear they might not have enough to pay our landlords. We’re in the service industry, so rental and salaries are huge expenses.
 
How do you deal with this?
Keep an eye on them. Finance managers have to defend their funding requests.  
 
And I imagine you have complete visibility into all your bank accounts, so that helps you analyse whether too much cash is idle?
That’s one of the things we’re doing, to consolidate [accounts] into one bank, but we’re not there yet. There’s actually software that allows you to extract information from different banks, but I must say banks here [in Asia] are not 100% up to date. In the U.S., bank account information can be downloaded through [personal finance software] Quicken. Here, my Quicken doesn’t download. I think the banking platform here is not as sophisticated, and also you have different countries in Asia at different stages of development with various banking regulations.
 
I’ve interviewed global banks and they claim that they have links with regional and local banks, so they can actually give companies 100% visibility into their accounts across Asia.
We were looking at different banks in that aspect, but we didn’t see one which was good across all countries.
 
I must look after our frontline people, our club and the finance managers; I can’t ask them to use a bank that doesn’t give them service. From my perspective, I like to use one bank. But from their perspective, they will not get the service they need [from that one bank]. It’s a bit inconvenient for me, but their problem is day-to-day, while mine is probably weekly or monthly [with the preparation of financial reports].
 
You would need to reconcile a number of reports that have different formats and various starting and ending dates.
It’s a little bit more labour-intensive, but it’s OK. Basically they [club and finance managers] get reports from their bank and they send them to us electronically. Or we can access the bank reports directly ourselves. 
 

How do you invest the company’s excess cash?

I’d prefer central treasury in the U.S. [to do it] because they will get the best rates. We are not equipped to assess counter-party risks. I don’t have a team that can do that, so I leave the buying of products to my colleagues [in the U.S.] who are much more seasoned.
 
But you don’t really want to send money back and forth [to the U.S.] all the time. As I said, we’re still investing [in Asia]. For example, we’re upgrading some of our clubs, we’re putting money into the system. So basically you need to assess how much of the surplus you send to the U.S.
 
Also in Asia, you need to be quick on your feet because opportunities come and you’ve got to be able to react. You can’t say, oh, wait a minute, I’ve got to go and get some money [from central treasury in the U.S.]. So, it’s a fine balance between having a little bit of surplus here and sending everything to the U.S. We’re investing, so we’re not sending some huge sums of money back.

 

TECHNOLOGY
How do you harness technology in a services company like California Fitness?
Sometimes, with medium-sized companies like ours, to put the focus into this area, to invest time, not just money, how do you plan a system which would lead you to the next [stage], as opposed to replicate what is being done now? You want to be 20 years ahead [when] you’re investing in these IT platforms.
 
I’m also in charge of IT. We have an IT steering committee that focus on what we are spending on, what the benefits are, and then we deliver those benefits. It’s working relatively well.
 
In the past, especially in the boom times, people say, I want this, and they get it. It’s interesting that sometimes decision-makers do not evaluate money and people [required] adequately. And when things are moving very fast, some of these things they forget, and then the company is left with a white elephant.
 
As an IT services provider, you have to talk to your customers and get them to focus on the future. Sometimes [decision-makers] are so busy, just living for today, they don’t get users’ input and exercise leadership and strategic thinking on what the company should look like in 20 years’ time. It’s like you’re building a house for one child now, and then suddenly you have 10 children and you don’t have enough bedrooms, but the lot next door has been sold and so you have to move house.
 

Is the IT system robust enough that it is easy for you to forecast and budget, to look at working capital ratios and so on using the information in there?

The thing with our system is that there is so much data. You can spend forever just farming it. You have to identify what is it you want to look for, what decision you want to make before you go into this fantastic data hole.
 
One thing we’re doing is to look at our customers’ behaviour so we become a better service provider. How often do they come, where do they live, where do they work . . . so we can understand how to deliver a better product. You don’t want to go there and you’re no. 3 in the queue for the treadmill. Certain days are more popular. In Central [business district in Hong Kong], for example, on the weekends it’s not so busy because it’s more of a work area. In residential areas, weekends would be a busy time.
 
In the U.S., we have the capability to tell members how many minutes they’ve been on the treadmill, how many calories they used up. It’s a way for them to track their health. But not so many members are so devoted [in Asia], or they have their own tracking device. And so it’s a fine line, how much time and money should we invest in this type of membership, if most of the members are not so interested in this information.
 
I know a lot of companies that use the Internet to garner feedback from customers. Is this something that California Fitness is also doing?
Yes, this is one of the initiatives, the Internet as a marketing tool, as a communications tool. We are improving our web page and what we are doing on it, how we use it to communicate with our members and prospective members. It’s keeping our client-services department very busy. They are, from an IT perspective, my internal customer. We work with them to lead us into marketing to the next generation.
 
There is actually a blog about us at the moment, which we monitor. All feedback is worthwhile. People are trying to tell you something. We rather they say rather than not say.
 

THE WAY FORWARD

You say California Fitness is preparing not just for today, but also for the next 10 years, 20 years of growth. How is that planning process going given fears that there might be a double dip recession going forward?
We are now focusing on getting ourselves more streamlined, more ready for the next growth phase, which will also equip us for the next dip, if there is a next dip. Being efficient, cost effective, is always the right thing to do.
 
Secondly, in some of the decisions we made in the past, we have had time to ponder and say was that the right decision? What’s working and what’s not working, what are lessons learned? When you’re growing so fast, you don’t step back and ask: Is this working?
 
For example, sometimes we would invest in a club and not understand the return. Is it really for the member or is it really for the person whose ego is to have the best equipment? The equipment has different ranges. Fitness people obviously appreciate the Porsches, the Ferraris, [of fitness equipment] but maybe the customers only want a Honda. Sometimes, in wanting the best for our members, we give them things they don’t appreciate or use. 
 
When you open a new area, maybe you should do a profile of the members and what they want before you put the equipment in. And, say, if you have a Porsche in Central, maybe members there should be paying more.
 
I know California Fitness has ten clubs in Hong Kong. What about the rest of Asia?
We have six clubs in Taiwan and four in Singapore. We have two in China at the moment, but we would like to expand further, when the time is right. We have a yoga club in Malaysia plus two yoga clubs in Hong Kong, but our core business is, and will continue to be, fitness. 
 
Are you looking at Thailand, Indonesia, Philippines, India?
No, we are not venturing into new countries at the moment. We decided that Singapore, Hong Kong and China would be areas where we need to focus on. When you open in a new country you have [to deal with] new laws and tax, you need a management team, and so on.
 
Even in China, legislation and regulatory authorities are so complex that managing just two clubs takes a relatively large amount of our time. We need to look at the availability of banking facilities too, like credit cards. In some countries, this is not so easily available.
 
Are you looking at franchising?
We do not have any franchises at the moment. We’ve been thinking about that. If we wish to grow, should we grow through franchising? It’s less capital intensive for us and will therefore allow us to grow faster. But it does come with a price. How do you assure quality, how do you protect the brand? To date, we haven’t found a partner we feel we would like to do that with. In the meantime we’ve got so much of our own stuff to do. 
 
Is the Hong Kong fitness market so saturated that there’s really no need for you to be adding some more clubs?
There are two aspects: How many players there are in the market, and how many of the population have converted behaviour to bring fitness into their lives. On the second, we feel there is still a lot of ground [to cover]. I’m told that in America, the penetration is about 20% of the total population go into fitness. In the more developed Asian countries, it’s below 10%. So definitely there’s still room to increase the total penetration. 

 

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