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Globalization: Embracing The Global Neighborhood
Part 3 of a 3 Part Series
By Mike Chaet
The Eight Great Global Challenges
"Trends define our challenges; how we respond to these challenges defines our success."
Global Challenge #1: Currency Fluctuations. Money, of course, drives the profit machine. When speaking globally, that machine doesn't always run so well. In Brazil, the currency fluctuations are so bad that every week, on Monday, they change the dues structure. People have to call in every Monday to find out what the dues structure is for that week. That's a crazy, serious circumstance. "How much does it cost to join this week?" The good news for the Brazilians is that they're used to it. Financial chaos is a matter of daily fact.
A great challenge to working with a number of different countries is this currency fluctuation. Slowly but surely, global economies are getting over their difficulties because greater minds than ours have had to figure out how to deal with it. But it remains a serious problem, especially in countries where currency devaluations can make discretionary income disappear virtually overnight.
Imagine having $20,000 in the bank that you've saved up for the last couple years. Suddenly there's a currency devaluation and the next morning, your $20,000 has become $5,000. How much are you going to spend on discretionary stuff at that point? In other countries like Russia and Italy, they too experience their currencies going up and down like a yo-yo. Fortunately, most of us are thankful not to have to worry too much about that.
Global Challenge #2: Weak Banking Infrastructures The Russian banking infrastructure collapsed two years ago. Banks refused to turn over the money of their depositors. There was no choice but to stand in line for hours only to get a pink piece of paper that acknowledged the amount of money you've got in the bank. And customers are free to withdraw it at any time... provided they first wait five years to get it. By the way, forget about any interest. And suffer the loss each time the ruble is devalued over those five years. Not a situation that promotes signing up at the neighborhood club.
"Only 1% of the people in the entire countries of Russia or China can afford to belong to a health club." Recently in China, we tried to set up a simple EFT system... if not for a few minor problems. Such as the fact they don't have bank accounts, or savings accounts. Or credit cards or debit cards for that matter. Automatic bank deduction of any kind, a fact of most club business that's taken for granted, is practically unknown in China.
Russians say the same thing but for a different reason. There, people are afraid that the Russian Mafia will steal the numbers for a spending spree. People don't pay monthly-they pay yearly. And they pay in cash... frequently to the staggering tune of up to $3,000 a year. As a result, only 1% of the market can join a health club because only 1% of the people out there can hope to pay for it. That means when you do advertising in Russia, 99% of the people reading the ad can't even take advantage of it. Not good. Imagine the personal nightmares if 99% of the people in your market literally could not afford it? That makes buying a membership not just a question of priority but one of sheer survival, a difficult objection to overcome. All sales techniques just flew out the window.
Global Challenge #3: Class Disparity As mentioned, only 1% of the people in the entire country in Russia or China can afford to belong to a health club. Such class disparity causes a whole new strategy that requires a lot of care in some of these developing countries. Nationally-branded types try to plop a North American-type club down in the middle of Moscow and are surprised when try to run it like they do in Canada or America and it fails.
Global Challenge #4: Import Costs Import costs can be a big problem in doing business across borders. In North America, it appears clear that the Canadians take the short end of the stick in terms of American trade. There must be some reason that the exchange rate is what it is, and must have strictly to do with bigger, more political reasons and larger class trade products such as lumber. But most of us don't work at that level. We're just trying to buy a line of fitness equipment and it's costing Canadians twice as much just to get it delivered. That's ridiculous but a very real challenge.
Whether it makes Canadians feel any better or not, but in Norway the import costs are twice as nasty. Makes it rather difficult for the little guy to get into business in some of these countries. Some companies in those parts of the world may produce equipment as good as some of the stuff done in others, so they're able to make do with local equipment, but that's not always the case. Import costs may be one of the greatest challenges to overcome.
Global Challenge #5: Cultural Practices When first working to expand the club business in Germany, the biggest objection we faced was the perception that working out was an unassailable right of the citizen and it was foolish to pay for something that should be your national right. But the German government wasn't building too many fitness clubs and the industry slowly gained acceptance as a valued commodity worth paying money for.
It takes a while to build the value of your product into the minds of the customers in certain places that culturally, they're not used to paying for the product. Other things, such as having women and men together in certain places, just doesn't fly. Even in New York, by the way, the [Hasidic] Jews do not believe that women should be working out in the same place as the men. It's simply a cultural thing. So we actually have clubs in New York today that have to keep their men's club and a women's club as separate entities.. When we work in places like that, we have to be very careful what we do in terms of culture. There's a Montgomery, Alabama club that's smack dab in the middle of the Bible Belt and does not allow women to work out in tights or revealing outfits. Matter of fact, rules require sleeves that go over the arm; no short sleeves.
That shows up in other areas as well. We once created a campaign that said "Join For The Health of It". We really thought this was a nice campaign. Good graphics, good byline and the whole thing. A lot of clients loved it. However, one of our clients angrily send it back because it was too close to "Join For The Hell Of It". The client was a very religious person and refused to use it. So cultural differences, believe or not, do come into play more often than you'd think. In most cases, it'll be more of a sensitivity issue than anything else.
"Independent clubs are more nimble, faster and can implement a program instantly and be on to the next one. Can you imagine a chain trying to make a decision when they have 300 clubs? "
Challenge #6: The Chains Versus The Independents Big box chain operations have many advantages: a fixed development formula, standardized operating system; they live and die by their numbers. And they'll do away with service elements simply because the numbers don't work out right. Chain can enjoy fierce internal competitions because they have a large number of people and they can throw some big prizes at say, the top salespeople. Lower cost of capital because they borrow more money. Bulk purchasing advantage, standardized training, and leveraged expertise because they have more people. They can hire one really strong person to develop something that could be distributed to all the clubs. Leveraged advertising and branding. That's some of the advantages the chains have.
Our major challenge is to confront the chains. With all those advantages, how can the independent club operator compete?
Chain disadvantages can become our advantages. For example, we don't have to prepare and file expensive public reports. The leaders of our independent clubs don't have to spend all their times with lawyers and stockholders. Independents have lower capital demands and visible leadership-the owner can be right there in the trenches taking care of his or her members. Independents have a greater ability to make quicker decisions. They're more nimble, faster and can implement a program instantly and be on to the next one. Can you imagine trying to make a decision when you have 300 clubs versus 2 or 3 clubs or a single club?
Chains don't enjoy the community involvement of the independents. We can go and be part of the local chamber of commerce or rotary club and be an integral part of the community, whereas if you have 300 clubs and the owner is a hired hand, they're not going to get that involved in the community. The power of ownership is really important when people decide where they're going to join.
Further, we can structure our programs based on the individual service of a member versus the commodity that the large chains will bring to the market. For example, McDonald's is sort of a commodity hamburger. What you see is what you'll get. But in an independent restaurant, they can tailor your order and put a price on it. Same with fitness needs. We can tailor our product to best advantage for the member.
It's easier for independents to put back reinvestment money as long as we're making the money; it's our decision in how to use it. Lastly and perhaps most important, it's easier for independent operators to have a point of differentiation because we're more flexible. we can look for holes in the market and fill it. That's our point of differentiation whereas a big chain pretty much has a fixed product that must be forced as-is into the market, come what may. Responding is a question of how we use our advantages.
Challenge #7: Overbuilding When first started in the club business, CMS would do demographic studies that would define needs for one club for every 30,000 people. We'd calculate to pull in 7%, a couple thousand members, and everyone goes home happy. Next thing you know, competitors notice how good they're doing so they decide to put another club right next to the first. Soon, there's three clubs and several office buildings. Demographics have been totally thrown out the window. Operations become based on greed, stupidity, over zealousness, and a lack of sophistication in positioning products... with the result of creating some huge problems.
At one time, there were 50 health clubs within perhaps a three or four mile radius in San Diego. Don't do this over saturation clustering! Limit the number of clubs that are built to the places that can support them and be profitable. Know your numbers and if it doesn't support it, don't build it! Don't create where the need doesn't exist.
Everything went up 8 to 10 times... except memberships in health clubs that may have gone from $19 to $39
Global Challenge #8: Under Pricing We've noted it before: 1965 the average income in an American household was $6,400. Now it's $46,000... eight times that amount. Cars $2,600 then are roughly $24,000 today. Houses at $13,000 now cost $150,000; bread went from 21 cents to a almost two bucks. Everything went up 8 to 10 times... except memberships in health clubs that may have gone from $19 to $39. Memberships prices only went up twice or so. It becomes a question of service at what price? How can you give service when you're not collecting enough money to give service?
The only way you can do this is to give value for the product. That's not going to happen with the big box mentality. They're going to come in and try to keep the prices as low as possible. As an independent club owner, you'd better add value to your product and separate yourself from the big box guys and raise your price. And every single club that's done so over the last 5 or 7 years has been successful. If you try to compete with Wal-Mart on price alone, you're gonna get killed.