It's either a no-brainer or no-brained: National retailers may be filing for bankruptcy by the dozens, but Michael Krongaard has no qualms about opening two Gold's Gym health clubs in Chesterfield County, an investment of $12 million and 86,000 square feet, in a span of three months.
“This is the best time,” he says excitedly while he bounces around the new Gold's off Midlothian Turnpike near the Aboretum, which opened Jan. 12. “It's not good for us to expand in good economic times.”
It's enough to give Circuit City ulcers. Thousands of people have been laid off in Richmond and most are curbing spending habits while a daily barrage of bad economic news trickles in. Car sales are at historic lows. Housing prices are tanking and the national unemployment rate recently exceeded 7 percent.
But it turns out the health club industry is something of a recession buster. When the economy goes sour, people head to the gym, Krongaard says. It might sound like an exhausted sales pitch, but there's increasing evidence that he may be onto something.
As of last Wednesday, Jennifer Hummel, the general manager of the new Midlothian Gold's, says the club was at 40 percent of its opening week goal to sign up 150 new members. The attrition rate at the more established West End Gold's — members who cancel per month — remained steady in November and December. After managing the smaller Gold's Gym off Research Road near Chesterfield Towne Center, Hummel says, she's learned an important maxim: “I've had a lot of members get laid off, but they don't want to give up their memberships.”
The health club is a place to relieve stress, which piles on when the economy tanks. Brian Evans, owner of American Family Fitness, which operates seven superclubs in metro Richmond with 115,000 members, says he started to get nervous in late fall when Wall Street collapsed, and began preparing to suffer through a drop in new memberships and membership renewals. It didn't happen.
“In the month of December, four of our seven clubs hit or exceeded goal,” he says, not unusual for that time of year. “We've had bad fourth quarters before in non-recessionary times. But I'm not seeing a major red flag yet.”
The first quarter of 2009 could tell a different story — when the clubs typically sell 30 percent of their new memberships for the year — but he sees no reason to panic.
“People are stressed. … So going into the health club is going to reduce that stress,” Evans says, explaining that the health club offers a refuge of sorts. “Sometimes your health is about the last thing that people can hold onto.”
The idea certainly bucks conventional wisdom, which long has dictated that during recessions people tend to let themselves go — eating, drinking and smoking more.
But that may have been faulty science. In a research paper that appeared in the May 2000 Quarterly Journal of Economics — “Are Recessions Good For Your Health?” — University of North Carolina economics professor Christopher Ruhm found that the inverse is true. After studying the death rates during economic booms and declines from 1972 to 1991, Ruhm found that a 1 percentage point rise in the unemployment rate correlated with a half-percent drop in the mortality rate — or about five fewer deaths per 100,000 people. He concludes, in part, that during economic booms people tend to work more, develop bad eating habits and have less leisure time to do things such as exercise; the opposite is true when the economy recedes.
Interestingly, Ruhm's findings also challenge a long-held belief that Richmond, once a tobacco manufacturing center, was largely recession-proof because cigarette consumption increased along with stress. Between 1972 and 1991, Ruhm found that a 1 percentage point increase in the unemployment rate also correlated with a 1 percent drop in smoking.
There are caveats, however. Typically, only 10 to 25 percent of a health club's members use the gym regularly, which leaves at least 75 percent susceptible to canceling during bad times. Many gyms, like American Family Fitness, may have members on long-term contracts, but do allow members to temporarily freeze their memberships.
Then there are membership defaults. Evans, the owner of American Family, says the default numbers for the fourth quarter — those who simply stopped paying without notifying the club — have yet to be tabulated.
At the YMCA of Greater Richmond, which runs 15 branches with 92,000 members in the city and surrounding counties and offers financial assistance to members who request it, says the nonprofit chipped in an additional $500,000 in 2008 to people who needed help paying — up to $2.7 million from $2.2 million in 2007.
Still, the YMCA, which develops deep ties with members in the community and also serves as the region's largest child-care provider, saw a net 3 percent increase in new members in December. The YMCA, which eschews long-term contracts, is also willing to forgo fees when members suffer financial hardships.
Nancy Keegan, executive vice president of operations for all 15 clubs, says she and her staff began working to identify the most vulnerable members when the financial crisis hit last year and began reaching out to them. The Y's relationship with its paying members runs deeper than the typical health club, however, which serves as something of a hedge. YMCA branches are often founded by members of the communities they serve, Keegan says, and 30 percent of its members are younger than 18 — in day care, for example, and participants in the Y's soccer, basketball and swimming programs.
In times of stress, many members see the institution as a stabilizing force and “don't want their child's life to change,” says Todd Gray, vice president of marketing and communications for the YMCA.
While the YMCA, established in Richmond in 1854, has also cut costs and done its share of belt-tightening, Keegan says she isn't worried about a drastic drop in revenues. “We've weathered a lot of recessions,” she says.
Evans of American Family hasn't been around as long, but he knows what it's like to run a young business when the economy drops out. In 1991, three years after opening, American Family Fitness ran head-first into a recession. “In 1992 or 1993, we struggled really bad,” Evans says. “That economic downturn was killing us and I almost sold the company.”
Krongaard finds himself in a similar situation in Midlothian. He's operated Gold's Gym in the West End for 7 years, but acknowledges that opening two new clubs in the current economy would give some the jitters.
Krongaard hadn't planned to open a second club near the Arboretum so close to his new, 45,000-square-foot gym off Route 288 and Midlothian Turnpike — set to open in mid-March — but the deal was too good to pass up, he says. American Family Fitness was unwilling to sign another 10-year-lease at the Arboretum — it's building a new club nearby — and when the landlord balked, American Family was forced to move out sooner than expected into a former Office Max just down the street.
Evans says the Office Max location is even better. Krongaard says he couldn't resist the opportunity to take over the Arboretum space, which had a built-in customer base. Now all that's left is to sell some memberships.
“There's a lot of gym owners that are poopin' in their drawers right now,” he says playfully. “I just don't think it's as tight as people say it is.” S