You are on page 1of 8

Miami Mirror True Reflections

SERIES THE CRUNCH FITNESS FIASCO

CRUNCH FITNESS CHURNS AND BURNS WHILE MADONNA ROCKS


By David Arthur Walters The Miami Mirror June 21, 2011 MIAMI BEACH Mark Mastrov wedged his way into the Crunch fiasco, and managed to snatch Crunchs assets including the languishing brand and deficient goodwill out of bankruptcy. He obtained the management contract and 8% equity in the new Crunch entity for his own equity firm, New Evolution Ventures LLC, referred to at the time by its registered trade name, New Evolution Fitness Company. His predecessor, Mark Tascher, as we have discussed elsewhere, had a 20% equity interest in the old Crunch holding company. It behooved the sharp operators led by Brent Leffel, director of Angelo, Gordon & Company, the vulture equity firm that had a stake in Crunch both before and after the bankruptcy, to dump Tascher and other equity holders as well as creditors in an immoral Page 1 of 8

Miami Mirror True Reflections

rip off that outraged the bankruptcy judge who went along with it anyway because such depredation is one of the legal underpinnings of our great nation. Crunch would in part be converted into a franchise operation and go international along with other New Evolution Ventures fitness clubs, all of which Mastrov, with Leffels help, would ultimately sell to Vision Capital in exchange for a stake in a brand new, global partnership. Of course Mastrov did not hesitate to toot his teams horn while trumpeting Crunch after plucking it from bankruptcy: The Crunch brand is amazing and its been mismanaged in the past five years, he said. Ultimately the proof is how you operate. We can go in there and do a turnaround. It will definitely be challenging. Mastrov is evidently a shrewd enough operator to know that one should never borrow money needlessly, i.e. to take on needless risks by piling on debt. The new Crunch is debt free, he announced, after a successful $40 million credit bid bought Crunch out of bankruptcy a credit bid allows a creditor in bankruptcy to use the debt owed to it to buy the assets of the bankrupt debtor, effectually exchanging a certain amount of debt for equity if the bid is successful. Mastrovs New Evolution Fitness and Angelo Gordon had formed a partnership, CH Fitness, sometime before the preplanned bankruptcy to suit their purpose. CH Fitness then bought some of the secured debt owed by the current holding company, AGT Crunch Acquisition, thereby becoming its creditor; it would be CH Fitness who bid the debt owed to it and wound up owning the new Crunch, stripped of its old owners and its creditors except for certain Angelo Gordon interests that held equity in CH Fitness. It was announced that a Crunch expansion would be had through franchising, the franchisee taking the financial risk; ten club franchises have been handed out as of this writing and another forty or so are reportedly in the works. Mastrov and his partners did not put all eggs in the Crunch basket; at the time of this writing he is playing with Madonna Hard Candy clubs, Steve Nash World Fitness Clubs, YogaWorks, and UFC Gyms he must be having a great deal of fun with his new toys, and we think Tascher, who loves to build models, must be a trifle envious in addition a little angry at being made a patsy by his equity partner Angelo Gordon and its consultants. Mind you that the evolution in New Evolution Ventures implies growth and diversification. Naturally there will be plenty of extinction in the savage struggle for survival in the fitness industry. Fortunately no energy will be lost, for the conservation of energy is a zero sum game. More nice guys in the industry, like Mark Tascher, are bound to be brutalized in the process, and more brutes will be elevated and idolized. We do not know how much money Mastrovs evolutionary company has to commit to the fitness selection process. He got out of 24 Hour Fitness with a ton of money, relatively speaking, but no doubt his appetite is much larger than he can fund himself hence the need for the likes of private equity partner Angelo Gordon, and now Vision Capital no, that is not the scandalized Vision Capital Advisors formed by two visually impaired men. Mastrov himself is an example of Darwinian selection, which is a more or less random fit we see even the survival of the un-fittest, particularly among Homo sapiens. He has long been widely celebrated in the fitness industry press as the exercise evangelist who is the greatest Page 2 of 8

Miami Mirror True Reflections

person that's ever been in the fitness industry, period, and as the quintessential entrepreneur, as if he were the fifth element or essential substance of the industry, the purest adventurer, a representative hero who achieves his success against all odds of failure. He has not yet obtained the Golden Fleece. The fitness industrialist who dies with the most clubs in his chain dies happy, but he cannot rest happily until his death. Of course a man is the master of his fate in part if he takes the helm, but the wayfarers fate is also selected by the elements he encounters during the voyage. Jason had his handy crew and other helps along the way, some of them quite mysterious. Malcolm Gladwell reiterated the influence of The Few in Tipping Point, but he also revulgarized the Mystical in Blink, and gave humble Christian credit to the Circumstances necessary for success in Outliers. Whoever has will be given more, and he will have an abundance observes Matthew 13:12. Whoever does not have, even what he has will be taken away from him. We see enough circulation from poor to rich and from rich to poor to give the poor hope enough to pray, but hardly enough for very many aspirants to realize the American dream without quite a bit of good luck compliments of Lady Fortuna. Charles Sanders Pierce, the scientist, mathematician, logician and entrepreneur who said that what makes America great is that every poor bloke believes he can get rich, failed miserably in his business and relied on his great friend William James, best known for his lecture, The Will to Believe, for support in his dire poverty. We recall that Pierce, who believed in the theory of evolution, rejected the enthusiasm for intuition popular in his day yet espoused the ancient notion of Tychism, the doctrine of the objective existence of Chance. We recall that Mastrov hurt his knee playing basketball in junior college, and used a Nautilus machine to rehabilitate it. He received a gym membership in exchange for working four hours a week in a 5,000 sq. ft. gym in San Leandro, California, training people on Nautilus machines. He invested $25,000, of which he had borrowed $15,000, in the San Leandro gym after he became miffed over his Christmas bonus as a natural-foods salesman. The owner of the club, now his partner, whose name we do not find in the legend bandied about the Internet, was a software programmer who designed an invaluable front end system for the club. By 1994, with plenty of help from partners and key executives along the way, most notably from partner Leonard Schlemm, who had a Harvard MBA in finance, and his vice president, celebrity promoter Mark Golob, he had built up 24 Hour Nautilus, renamed 24 Hour Fitness, into a chain of 32 Northern California clubs, open twenty-four hours a day for the convenience of their members. The operation would eventually comprise 420 clubs worldwide with around 3 million members. Several factors contributed to its growth. Mastrov was fascinated by the growth of fast-food chains, and strove to follow suit with his fast-gym chain. The clubs were convenient: they were open 24 hours a day and were clustered around both home and workplace. They were available in several different sizes in a hub and spoke arrangement, the larger ones having more facilities such as basketball courts and pools. Alliances were made with star athletes, and programs involving the Olympics were instituted. Machines were lined up in a certain way for an express workout Mastrovs 24 Hour Fitness, like Taschers Town Sports International, had practically pioneered the use of EFT in the fitness industry. Since the banks would not lend out money for the expansion the 24 Hour Fitness partners had desired early on in the companys history, the Page 3 of 8

Miami Mirror True Reflections

partners used cash flow off monthly electronic funds transfers to expand while keeping the enterprise free of debt. Then, in 1994, an equity firm lined up $35 million in credit. In 2005, Forstmann Little & Co. bought 24 Hour Fitness Worldwide, which had annual revenues of $1.5 billion, for $1.6 billion. The New York Post explained that buyout firms are drawn to health clubs because they have proven to be stable cash flow generators, and also generally reflect high returns on investment. Mastrov stepped down as CEO, remaining onboard 24 Hour Fitness as chairman until January 2008, when his employment was abruptly terminated. A somewhat rude announcement was made to employees. Given the positive spin of his account of the separation that he had made a lot of people rich, that the buyer wanted to play a different game, and that he moved on wishing his successors well we believe the termination agreement must include a non-disparagement clause. He was looking for something to do, therefore New Evolution Ventures and its bevy of fitness ventures. As for the challenge at Crunch after Mastrov seized it, that was delegated to one of Mastrovs partners in New Evolution Ventures, Jim Rowley, his old pal from 24 Hour Fitness. Rowley saw no challenge in being the chief executive officer of Crunch, implying that he could run Crunch with one hand tied behind his back while serving other masters. In an Oct 1, 2009, Club Industry interview, he said he would be stepping into the spotlight as CEO of Crunch and as CEO of UFC Gyms, another venture he and Mastrov were getting behind. But he did not mind the role: I don't see it as a particular challenge, he said. It will be fun and allow me to extend my skill sets outside of leading NEFC and our other brands. I'm not much of a spotlight guy. Mark isn't either. The spotlight finds him. In my last role at 24 Hour Fitness, I had 225 clubs, $750 million in revenue and nearly 8,000 employees. To have 19 clubs at Crunch, to me, is rewarding. It keeps me very close to the business that I love. As previously noted, Mastrov and Rowley hung other brands on their New Evolution Fitness Company totem pole, including YogaWorks USA, Steve Nash World Fitness, UFC Gyms, and Madonnas Hard Candy Fitness. One can only imagine what is to come, what will fail and what will thrive according to Charles Darwins selection principle. We bet Hard Candy Fitness and perhaps McCrunch Fitness will enjoy the greatest returns, and that UFC Gyms will fail. Steve Nash is a good operation and will do all right if not pillaged and leveraged to death. Madonna knows how to please her customers and will not tolerate abuse, but The 24 Hour Fitness People may have to change their ways if McCrunch is to thrive. They have a history of emphasizing sales over service, of seducing customers then abandoning them once sold. Mainstream press claims that the 24 Hour Fitness chain abjured churning and burning, focusing on prospective customers rather than on retaining members. However, the business reporting must have been advertising disguised as news, or the policy must have changed if we are to believe the hundreds of complaints from all over the country posted on Internet boards. They get as many up-front fees from you as they can and then hope you don't ever show up, said one disaffected member. Keeping in mind that people are more likely to complain than to praise services and goods on the Internet, what the 24 Hour Fitness brand means to complainants and to credulous potential customers that read the boards: unfriendly, rude, disrespectful, Page 4 of 8

Miami Mirror True Reflections

misleading, dishonest, dirty, and badly maintained. Frequent complaints allege bad to horrible customer service, abusive cancellation policy, breach of club-wide access and other promises, deceptive practices, aggressive sales and collection tactics, unauthorized charges to debit and credit cards, dirty gyms, equipment in disrepair, bad general management, high staff turnover, and occasional issues with personal trainers, some of whom allegedly have criminal records and do not behave appropriately. It is this public reputation that caused the Crunch membership to cringe when it heard that The 24 Hour Fitness People were taking over Crunch. Many but certainly not all complaints within the fitness club industry are due to the fact that people do not read contracts before they sign them, wherefore are surprised to find funds withdrawn from their accounts which they did not realize they had authorized, or find themselves subjected to collection activities. Despite the express terms of consumer contracts, a theory of law in respect to adhesion or take-it-or-leave-it contracts has developed that protects consumers from having to read finely printed legal jargon, or requires the contract to be read at all if it is somehow inequitable. But the liberal perspective resulting in the death of the contract is not to say that the unread terms are not frequently violated and that torts are not frequently committed. Several class action suits resulting in settlements favorable to the plaintiffs have been brought against 24 Hour Fitness over the last few years, alleging unfair business practices that included continued collection of dues from zombie members debit and credit accounts after they had terminated their memberships. Plaintiffs also alleged that 24 Hour Fitness failed to use large print in its contracts as provided by statute, that it violated contractual terms that provided access to all club levels, and that it did not provide some of the amenities it had advertised. For instance, in Friedman vs. 24 Hour Fitness USA, Inc., (Case # 06-06282), settled in March 2010, it was alleged that 24 Hour Fitness was defrauding banks and their customers out of $1.6 million per month by charging debt and credit card accounts membership fees for terminated members. Los Angeles trial lawyer Robert L. Esensten alleged that "24 Hour Fitness is the modern day Al Capone, using the electronic banking and credit card system as Al Capone and his mob used the Tommy gun. This is exactly what the RICO [Racketeer Influenced and Corrupt Organizations] laws were designed to stop. Apparently 24 Hour Fitness's annual revenues of over one billion dollars a year are not enough for its owners, despite the fact that today's consumers are struggling to make every dollar count." In addition to consumer complaints, managers and personal trainers brought class action suits against 24 Hour Fitness for wages. On January 27, 2006, the United States District Court, granted final approval of a $38 million settlement on behalf of almost 50,000 workers employed by 24 Hour Fitness in California, The case involved manager overtime pay, off-the-clock work, meal and rest period claims, improper commission deductions, and uniform violations. To be fair, we note that a similar class action suits, Sarah Cruz, et al v. Town Sports International, d/b/a New York Sports Club was brought in New York against Town Sports International in 2005 and 2007, which have yet to be resolved at the end of 2010. Mastrovs predecessors at Crunch, including former CEOs Marc Tascher and Jeff Feinberg, virtually eliminated complaints about unauthorized charges and egregious cancellation policies; Page 5 of 8

Miami Mirror True Reflections

however, once the 24 Hour People took over, the mood definitely changed. This writer noticed a tipping point at the South Beach Crunch on Miami Beachs Washington Avenue; thereafter Crunch was no longer much fun for members; the staff only had fun horsing around with itself while ignoring the members. The staff could care less for the members or about each other for that matter, and were interested only in making the numbers for fear of being fired, hence the members already signed on were left behind. An employee of Crunch in New York said it well on an Internet board: Upon 2009 takeover by 24 hour fitness Crunch quickly became an unpleasant place to work. All management was fired and replaced by 24 hour Fitness crew. New management created a hostile work environment that even the customers began to pick up on. Moreover, the South Beach Crunch members considered the staff to be arrogant and negligent, and complained not about bad customer service but about no customer service. Attrition proceeded apace. There was no effort whatsoever to retain longstanding members, to recapture lost sales, so to speak, as they headed for the door; indeed, not even a kiss was blown good bye at the door, or by way of a nice letter inviting the member back to the club, perhaps with an offer of no initiation fee and free months according to the term of previous membership. In sum: affection for customers and recapturing lost sales has certainly not been the strong points demonstrated at Crunch since the greatest leader of the fitness industry has taken over, handing off chief administrative task to his old sidekick Jim Rowley. In a special 2010 recorded session entitled No Member Left Behind: How to Sell Your Members What They Want, Packaged in What They Need, and Keep Them for Life,the International Health, Racquet and Sportsclub Association featured fitness industry icon Mastrov along with other panelists comprising the most respected professionals in the industry. Mastrov reportedly disclosed a secret during the discussions, which one can discover by buying the DVD. The panel explored the fact that nutrition and weight control are natural essential extensions of the health/fitness club business. The DVD reviews the premise that a fitness and nutrition solution is the answer to the biggest challenge facing clubsattracting and retaining members. On March 27, 2007, this writer was moved by brand love to make a few suggestions to interim Crunch CEO Feinberg in response to his imperious and dismissive attitude: Start with knowing the Crunch Community and identifying with its demands. Actually get to know as many members as you can. Get to know, for instance, the Miami woman who moved away from Miami Beach but who rides the bus an additional hour and a half every weekday after work to work out at the Crunch center, but she lives two blocks from a nice gym/spa with access to a pool that is having a $90 three-month special. Why does she bother with Crunch? It is not a bother. She says she loves the Crunch Community, whom she regards as her friends. Employ the principles of reverse marketing: lead your community by serving it, by actually connecting with people, by empowering Crunchers to obtain what they want, not only in physical but emotional terms as well. Now Crunch is for everybody, in such a way that something is very special about that, so connect with them and find out what that specialty is. Connect directly with the community tools and give Crunchers opportunities to maximize the satisfaction of their demands. Help them aggregate an even more exciting crowd, providing them with quality resources. Page 6 of 8

Miami Mirror True Reflections

The essence of a community is communication. Besides doing some Crunching from time to time, how does the busy Crunch C.E.O., for example, get to know Crunchers and respond to their demands? Take advantage of the most powerful communication tool built by man: the Internet. Where was the C.E.O. and Director of Member Services when hundreds of disgruntled customers including Crunch employees were bad-mouthing Crunch on the Internet over the billing fiasco? If they were seriously interested in resolving the problem, one would think they would appear in virtual space from time to time and respond to concerns in certain terms, keeping in mind that the other side of a negative complaint is a desire for something positive. Some of the most powerful executives in the country including Donald Trump take a quiet hour or so to find out what people think of them and their companies, perhaps having someone scout out the most important forums in advance. What do people like and dislike about Crunch? What sort of people are they? Of course the best forum is the one sponsored by the Crunch Community, the Crunch Site built in Crunch-space by and for Crunchers, accessible to members only. Crunchers can rant and rave, within decent parameters, about Crunch to their hearts content, and every once in awhile leaders from Corporate can make their appearance to get their two cents in on issues, and to start their own threads about particular subjects of importance to the community. Feinberg, the interim CEO foisted on Crunch by Angelo Gordon as an outside crisis consultant, did not really care about the customers but was only interested in making some snap decisions and returning to his consulting firm Crunch paid out around a million a month for outside consultants. He was soon gone but the Crunch community had not been ruined as of yet. Crunching was still fun. But New York was still not listening, and the kit and caboodle went down the tubes, to be snatched up by Mastrov and his 24 Hour Fitness defectors. We experienced the 24 Hour Fitness Syndrome; we were ignored and looked down on as if we were stupid, or we were not even looked at. Many of us left; no effort was made to retain us. Nobody cared about us one bit. The likes of Mastrov and Rowley are unlikely to listen to mere customers once sold. Once seduced by clever marketing and advertising campaigns and retail sales pitches, customers are abandoned, left stranded in the gym to be hustled by personal trainers and ignored by them too if they do not buy sessions. If Mastrov does not listen to us, perhaps he and his Spin the Bottle partners will take a chapter from Howard Schultz Pour Your Heart Into It, The Best Way to Build a Brand, and save themselves a huge consulting fee. Authentic brands do not emerge from marketing cubicles or advertising agencies, says Schultz. They emanate from everything the company does. Moreover, Mass advertising can help build brands, but authenticity is what makes them last. If people believe they share values with a company, they stay loyal to a brand. He says Starbucks built brand loyalty one customer at a time. The foundation of an excellent brand should be built with the strength of the human spirit, not an ad campaign. Retailing is generally mediocre, so Starbucks strove to be the best in its business in every town. Starbucks found and developed its competitive advantage in its people. A great brand is always bigger than itself. When you meet with an experience at a higher level, where you are treated positively, where someone goes out of her way to make you feel special, Page 7 of 8

Miami Mirror True Reflections

when youre welcomed with a smile and assumed to be intelligent, the experience stands out. We hire great people and imbue them with our passion for coffee. We do that through a training program whose sophistication and depth are rare in detail. Mystery shoppers are sent out to check on customer service. Comment cards are made available. Disappointed customers are given freebies. None of that is groundbreaking. It is what outstanding companies do. Everybody knows that, but few do it. Schultz is obviously a master salesman. He is not a conman; he sincerely believes in his product, loves his customers and therefore strives to keep them happy. I asked a personal trainer with international experience what the secret of success is for a fitness center, he said, Its the people. It doesnt matter how good your equipment and place is unless you have good people. There must be good people at the top as well; dissatisfied with The 24 Hour Fitness top-down and careless way of doing things, the trainer is just marking time until an opportunity presents itself. Thus the beat goes on. The secret of success is no big secret. It is just that The Few have stopped listening.

Page 8 of 8

You might also like