Feb 1, 2008 12:00 PM

The troubles that continue to plague circuit club companies also extend to business-savvy franchisees who trusted the reputations of some of the biggest names in the industry.

“Whatever they were told was in that franchise circular,” Golob says. “If one of my employees told somebody something that wasn't true — and I do not believe they did — they still had the numbers.”

The numbers don't look good for Butterfly Life. In an unaudited financial statement dated Aug. 31, 2007, the company listed losses of $815,255 and pretax losses of $771,361.

In an apparent attempt to reach out to franchisees, Gergley, the company's chairman, sent out two letters on Dec. 11, 2007. In the first letter to current franchisees, Gergley offered services such as a $200 per month reduction in royalty fees for 2008 and announced the establishment of a franchisee advisory council and an area representative council.

In the second letter addressed to former Butterfly Life franchisees, Gergley wrote that the company would attempt to re-sell the territory of closed clubs and send the closed franchisee 50 percent of the $29,500 franchise fee. The company also says it will attempt to re-sell available equipment, with 100 percent of the earnings going to the closed franchisee.

Whether or not these efforts will quell complaints by fomer franchisees, they don't address the belief that many franchisees held that Mastrov was going to play a big role in the company, Herman says. In the first three Butterfly Life UFOCs, Mastrov was listed as a director and founding shareholder of Butterfly Life, but he was not listed in either of the last two company UFOCs.

“Our understanding is that [Mastrov] may have made a financial contribution to this thing initially but really has nothing to do with it on an on-going basis,” Herman says.

Mastrov could not be reached for comment for this story. Golob refused to answer questions involving Mastrov's involvement with the company, but he did respond to the counterclaim by Butterfly Life franchisees.

“There is no merit to their answer of the lawsuit,” Golob says. “We plan on fighting this lawsuit to the end, and there is no doubt in my mind we will win.”

In 1991, Golob was 24 Hour's vice president of marketing. In 1992, he left 24 Hour and along with Gergley started the Linda Evans clubs. In 2003, Golob launched Butterfly Life. In 2004, he sold six Linda Evans clubs to 24 Hour, but kept five Linda Evans clubs, some of which became Butterfly Life clubs.

Tomei purchased one of the former Linda Evans franchises and converted it to a Butterfly Life club, which boasts a 30-minute training circuit along with group exercise classes and a weight-loss program. But Tomei's club began struggling, and she started receiving e-mails from other Butterfly Life owners who were in the same boat. Tomei began compiling a list of Butterfly Life franchises that were closed, closing, in the process of re-sale or had not yet opened. By Tomei's count, 88 Butterfly Life clubs in 16 states fit in one of those categories.

Golob would not provide details about the number of Butterfly Life clubs in operation. He did, however, say that franchisees should be responsible for their failures.

“People think when they buy a franchise, they're automatically going to make a lot of money,” Golob says. “They don't realize it takes a lot of hard work. Very few people ever blame their failures on themselves. If for any reason a franchise is struggling, it's always the franchisor's fault.

“You really have to feel bad for anybody that invests money in anything that doesn't make it. But how many health clubs have you known to close their doors for whatever reason? There's not a franchise out there today that doesn't have franchises that close.”

Golob says the company spent $2 million in marketing alone last year. Part of that marketing went toward a TV spot on The Learning Channel. Tomei describes the spot as a 5-minute infomercial.

“It's not an easy thing to create a brand,” Golob says. “But I can tell you we'll be standing when the rest are gone because we have the product. When we all put this together — and that was all of us — we wanted to have the best product out there. We knew selling franchises was the easy part of the business. Having them make money and being around 20 years from now is the key to the whole business.”

Learning Curves

Whether it's 1-2-3 Fit or Butterfly Life, or other circuit franchise companies such as Contours, ShapeXpress, Lady of America Fitness Centers and Liberty Fitness (which have also faced struggles), the standard for circuit club companies continues to be Curves.

However, some people say even Curves could be facing problems. In his book “The Big Fat Health and Fitness Lie: Enrich Your Life and Improve Your Health Without Getting Ripped Off in the Process,” Craig Pepin-Donat writes that Curves is a franchise and marketing dynamo that may already have hit its peak.

“The big-bucks dream was sold to would-be franchisees who believed the pitch that they could build up a small chain and sell it for a large return on their investment,” Pepin-Donat writes in his book. “In the early days of the franchise, it actually worked for many operators. As Curves territories peaked and attrition rates started to climb along with competition from other Curves knock-off concepts, the dream of making big bucks on the re-sale of a Curves franchise has diminished, leaving many Curves owners wondering what happened.”

In November, Curves spokesperson Becky Frusher said that as many as 800 Curves clubs are for sale at any one time but that those clubs are usually sold without closing. Frusher added that Curves is closing more clubs than in the past but that it's still a small percentage of the 10,000 locations worldwide, including 8,000 in the United States.

However, the Boston Business Journal recently reported that, according to the publication's research, the number of Curves gyms in Massachusetts is down 20 percent, from 194 clubs in 2006 to 156. Membership has also dropped 20 percent in that state, from 77,600 in 2006 to 62,400.

Entrepreneur magazine's annual Franchise 500 rankings are based on factors such as financial strength and stability, growth rate and size of the system. The magazine also considers the number of years a company has been in business. According to the rankings, Curves has fallen from No. 2 in 2005 to No. 185 in 2008. Anytime Fitness and Snap Fitness, two key-card club companies, rank No. 75 and No. 96, respectively, while Gold's Gym is at No. 183 on the 2008 list. Quiznos, by the way, was not on either the 2007 or 2008 list.

Despite the lower ranking, Curves remains the largest player in the circuit club industry. Curves recently launched its breakfast cereal and cereal bar brands, and it has aired a national commercial. Curves CEO and founder Gary Heavin has compared Curves to big-name brands like Coca-Cola and McDonald's.

“Gary sometimes says, ‘We're like Coke, and there's no Pepsi,’ or, ‘We're like McDonald's, and there's no Burger King,’” Frusher says. “I think we are so far ahead. We have nailed the target market for our target demographic. We have saturated the market or penetrated the market with our brand.”

Bob Purvin, the chairman and CEO of the American Association of Franchisees and Dealers, says Curves has an “ingenious” model that, in a way, sneaked up on the industry.

“I've been in franchising for 35 years, and in my entire life, I have never seen, other than Curves, a major player get to plus-5,000 units and nobody knew who they were,” Purvin says. “How can that even happen? It was a business model that worked without a player like Starbucks putting millions of dollars in front of it.”

Too Much of a Good Thing?

Purvin is trying to mediate the problems with Butterfly Life and its franchisees and chose not to comment on that company specifically. However, Purvin says he does notice problems throughout the industry, suggesting that the market is oversaturated and oversold.

“With the exception of Curves, in terms of the circuit-training [companies], I don't know of any that appear to be doing well,” Purvin says. “Curves has garnered a huge part of the market with happy customers. So you have to distinguish yourself to ween away from the industry leader. Every place I go, there will be a Curves. Every place I go, there will not necessarily be one of the others. So what do I do? I spend more money on the location, I spend more money in the decoration, I spend more money on rent. The underscore is I spend more money. If I have a bigger cost of doing business, then it's going to be a difficult problem.”

Sean Kelly, who publishes the Internet blog FranchisePick.com, sees several posts on his Web site from struggling franchisees. Kelly says the 30-minute circuit club companies are suffering from what he calls the “hot new franchise syndrome.”

“When someone buys a ‘hot new’ franchise concept, they are saddled with both the financial burden and restrictions of a franchise and the uncertainty of a new, experimental start-up,” Kelly says. “Could the women-only, 30-minute model retain members in the third, fourth or fifth year? Can a club be successful on membership fees alone? Can they compete against the wave of new competitors? When you buy a franchise, you are paying for certainty, not questions.”

Despite the troubles that his franchisees face, Golob is adamant that Butterfly Life will succeed.

“Any new business has to cross the Grand Canyon,” Golob says. “You just need people that when times get tough, they know how to stay calm and steer this thing. That's why people buy a franchise. They're betting on us to be able to steer clear of a lot of this. I'm betting on the management team to make this thing happen.”

Some circuit club franchisees, however, no longer have the resources to weather the storm, nor do they have the trust in their franchisors.

“I think they're just bleeding us of all our money,” says Jorgensen, the 1-2-3 Fit owner who closed her club last month. “And they don't care.”

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