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Learning from Vivafit's failure

March 22, 2016

Poor financial management, high costs, poor business model         

 

 

It is always sad to hear of a business running into difficulty and closing down. But statistics tells us that this more the norm. The story of women's fitness chain, Vivafit, closing down abruptly in today's Straits Times throws sharply into mind how people tend to dive headlong into a business driven by a self-confidence that sometimes borders on hubris. Now I don't pretend to know the owner's thinking nor circumstances, and I am not saying that what we share in this article is the definitive truth of what happened with Vivafit, but on the surface of it, it probably is a situation of overestimating operating efficiencies. As Mr Jonas Ogren, the owner, admitted, they had faced manpower problems. In another part of the story, it was also reported that they had run out of money. So how can a chain of 4 fitness outlets suddenly go belly-up? We take a stab at the reasons and draw lessons from this so that any startup or SME reading this can draw their own conclusions, and if necessary, take proper "corrective actions". 

 

Poor financial management

This is the primary reason why startups and SMEs fail; not that they are not profitable, but that they have erratic business cycles. The most ideal is a cycle where money comes in on a regular basis, at a regular quantum and which covers all the running costs. But most businesses are not like this. There are ups and downs, and they may be profitable only on the last day of business. Not good! Unless there is prudent financial management, and there is a war chest deep enough that allows the business to continue even on lean months (or it has secured financing allowing it to do that), it is a constant struggle of meeting overheads with fluctuating revenue. It is for this reason that businesses should NOT sell packages and collect monies upfront. The revenue that was supposed to be spread out and recognised in the later months are all spent in the early months, leaving nothing downstream. Prudent financial management is very important in businesses, and it is not simply a matter of balancing the chequebook every month!

 

Poor business model

At first glance, having a club catering to women has a great value proposition! It will certainly draw in the ladies who might not be comfortable having the men gawk at them! But what about a club with segregated facilities? Wouldn't that have achieved the same thing? What this model of having a women's-only club has done is that it halved its own market size. Exercise machines can't tell the difference between men and women, and so they can be applied equally to both. By limiting one's market arbitrarily through a poor business model, Vivafit may ultimately have caused its own demise.

 

High fixed costs

Businesses that rely on physical infrastructure will always be faced with high rental costs, and a lock-in period that sometimes is too short. So even before the business can breakeven, the first rental tenure is up and the landlord normally jacks up the price. This leaves businesses struggling to make up the difference by way of higher recruitment, and if that is not possible, it will have to close down. But rent is only the second highest cost; in a service business, payroll is the highest, and with the tight labour market, and the pickiness of Singaporeans on the jobs they want to do, and add to that the limitations on foreign labour, businesses have no choice but to pay premium salaries even for lower level jobs to people who are obviously not interested to do a good job! This increases fixed costs tremendously! Yet, damned if you do, and damned if you don't. If you cannot hire enough people, you cannot service more people, and if you cannot service more people, you cannot earn enough. So this is the double-whammy that physical infrastructure based businesses face!

 

Same 'ol, same 'ol

Lastly, businesses like Vivafit are not hugely differentiated from other fitness clubs. A fitness club is a fitness club. Yes, you can play with ambience, with service quality, with the variety of programs, but ultimately, that's just the sheen that covers a commodity service. And as a commodity, you are impacted by the prices that other chains charge, and also by the proliferation of competition around you. Take a look at the locations of the four outlets that Vivafit operated out of before they shuttered - Tanjong Pagar, Raffles Place, Marine Parade and Clementi. There are so many other fitness chains operating there that, frankly, it becomes very boring very fast. And with the lack of good people, a good concept, good pricing, good business model, this business seems dead before it even started!

 

Is there no solution?

Sure there is, but the solution is very expensive! First, you need to own your own space so as to protect yourself against predatory landlords. Second, you need to have scale. Four outlets is not enough for a chain to survive on. It needs to operate 10 to 15 outlets in Singapore to enjoy economies. Third, either go super high-end, where you offer ultra-premium services for the super-rich, or you go super low-end where you have even cheaper options for the masses. Ultimately, equipment is equipment, and you need to see how you can increase their yield. Lastly, there is a need to reduce the reliance on full-time staff. Change the business model, enlist volunteers from the customer pool, get better in community building. 

 

There will probably be a consolidation in this industry as the economic downturn starts to bite. As fitness membership is totally discretionary expenditure - one can run, walk, jog for free (save the running gear which is amortised over the period of use) - there will probably be more of such instances in the coming months. If these businesses do not innovate its business model, and sharply reduce costs, there will probably be more people jogging on the streets!

 

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