Ben Midgely, the CEO and Founding Partner of Crunch Franchising, LLC, FBR's 2018 Best In Category Fitness Franchise, talks to our CEO, Eric Stites, about how the brand creates a winning opportunity for its franchise owners.
Read the interview below, or listen to the full conversation here:
Eric Stites: We're back with another episode of "FBR Viewpoints." Your host today is Eric Stites, founder of "Franchise Business Review." My guest today is Ben Midgley, who is the CEO and founding partner of Crunch Fitness Franchising. Welcome, Ben.
Ben Midgley: Hi. Thanks for having me.
Eric: Absolutely. I know we were just talking about it, but it's great to be here on a nice spring day in Portsmouth, New Hampshire, [laughs] in the middle of February. Going to be 60 degrees this week, which is pretty exciting.
Aside from the weather, Ben, I want to have you tell us a little bit about the Crunch story for candidates out there and franchise investors out there that may not be familiar with the Crunch brand. Can you give us a little bit of your elevator pitch?
Ben: Sure, thank you. Crunch is a fitness company, obviously, founded in 1989 as an owned property. They were only corporately owned at that point. They weren't a franchise company and started in the East Village in New York City in just a single studio, wasn't even a full health club.
Crunch came out with these very unique, fusing fun and entertainment into group fitness classes. It was the first boutique fitness studio in the industry back then. It caught on fire for its uniqueness and its all welcoming approach to the customer base, is what they were going after then.
In 1995, they founded the No Judgments Philosophy. Other people in the industry have tried to imitate that approach. Crunch originated it in 1995 and made it their mission of statement that everybody's welcome, all walks of life. No matter who you are or what you do or what you believe in, Crunch is a place for you to come and feel comfortable and exercise and leave feeling even better.
The company, until about 2002, was independently owned by the originator of the brand at that time, then it was purchased by a company called Bally's Fitness which has pretty much gone extinct now in the industry.
In 2006, Angelo Gordon, a private equity firm, purchased it from Bally's. They partnered with a company called New Evolution Ventures, and they're a top level fitness management and investment firm. That's when I came into the business.
I was previously the president over at Planet Fitness. We turned part of Crunch into a franchise business. Then, we decided to launch into the high value, low price space of the fitness industry, which, at the time, and still is, the fastest growing category in the industry.
Since 2010, we've sold almost 900 franchises. We've got about 250 stores open and about 1.3 million members. We are looking to do about 80 store openings this year. So far, so good.
Eric: That's great! You mentioned the 900 plus sold. Those are, obviously, development deals that are people that own multiple locations?
Ben: Yeah. We focus on our shared philosophy, stay small to grow large. It's a phrase I coined years back, based on other experience I had in the industry, looking at franchise models that had hundreds of franchisees. It was challenging to have meaningful relationships with that many of your partners.
Our goal was to get people who owned, 5, 10, 15, 20 locations and then focus on a little bit deeper relationship with your franchisees, in terms of collaboration, sharing ideas, and just fostering the one on one. It's strange what a good relationship can bring, and not only with myself and the franchisees, but, obviously, the whole team and franchisees.
With those almost 900 sold, we have about 70 ownership groups. It allows us to stay in touch with everyone, communicate very effectively, change if we need to change, so we can move ahead of the industry n many cases, or if somebody beat us to the punch on something, we could adapt very, very quickly. That's been our approach. Hopefully, we can maintain that.
Eric: That's a great lead in to my next question. I'm glad you teed that up. Franchising, obviously, is all about relationships and many franchise companies struggle with that franchisee franchisor relationship. One of the primary reasons we're doing this interview today is Crunch is Best in Category in the fitness sector for the research that we do on franchisee satisfaction.
We look at hundreds of franchise companies every year and study that franchisee relationship. As I said, many companies struggle with that, and Crunch has definitely got that dialed in.
Congratulations on being ranked Best in Category this year. I guess my question around that is, obviously, you mentioned smaller is better and having the 70 or so ownership groups. Beyond that, what do you think some of the secrets are to keeping owners engaged and happy?
Ben: First, let me say, too, we're really excited that you guys gave us that ranking this year. Thanks very much for that. We've been participating in your survey for, I think, this is our sixth year now.
We've been lucky enough to be, at least, a five year recipient of being one of the highest rated over the last five years. To get to the number one spot this year, we're excited. Honestly, weren't fully expecting that by any means. It was a nice surprise.
Eric: Well, you earned it.
Ben: Thanks. I guess the best thing for me is to be honest, right? One of the keys to getting there is just listening to your franchisees. And a lot of times, franchisors always have a hard time balancing. Well, franchisees just can't be out running around doing anything they want. We're not trying to herd cats. In our industry, it doesn't work well.
We've got a business model. We need to be able to stick to it. We know what works. We created the model, and franchisees came in expecting the model.
Then, what you find, and I'm sure every other franchisor has found this, that different parts of the country, different things work a little bit better in some places. Not as effectively in other places. Once you start to allow a little bit of flexibility within those markets to address those markets properly and perhaps get better results. Which a lot of times are brought to you from the franchisees. Most of the time.
You would be wise to keep an open ear to that from your franchisees and allow some flexibility. As long as it doesn't change your core business model or the integrity of your franchise agreements, your FDD and what have you, in order to help them achieve those results. Because, ultimately, the success of the franchisee is the success of the franchisor. You're tied at the hip on that one, right?
And then, what we've tried to do, and sometimes it's very hard because you don't always hear what you want to hear, is just be open to all the feedback we can get. I'd say the majority of the time the feedback we get is very positive. If you were to pull any one of our franchisees aside and ask them, "At the end of the day are they happy that they're with us?" They're all going to say yes, I would say, except for, maybe, one or two.
I probably can't please them all. We listen to them. Sometimes, you'll get some criticism that you're like, "Jeez, that kind of hurts. That one's dumb. I'm not sure why somebody's saying that," or somebody feels like that. Nevertheless, once you spend some time getting into the conversation, then you ultimately come to a better understanding of each other.
At least, we've seen from our experience come to the right conclusion and the right solution where both parties feel listened to, and valued, and respected. I believe we found a good solution that benefits both the franchisee and the franchisor. We tried to put a premium on that, it ends up taking a lot more time, sometimes. In the long run, it benefits you quite a bit.
Eric: It's interesting that you mention that. That's in the research that we've done. We definitely see that in the companies that are doing things right. That it does take often longer.
Sometimes, that requires slightly slower growth, or it leads to a slower process. At the end of the day, the end result is significantly better and, obviously, that relationship is strong. It helps certainly on the performance side of things when franchisees are engaged.
Ultimately, the value of the company is a lot higher, too. That's one of the things. You mentioned that you're private equity backed and that, I know, is often a struggle, too. Balancing those perspectives of the franchisee profitability, the ownership of the company. So many private equity companies come into franchising and don't understand that franchise relationship. We see a lot of companies get upside down with that.
Again, kudos for listening to your franchisees and having an ownership group at the corporate level that understands the priorities of that as well.
Ben: We're fortunate in terms of our private equity relationships. Both Angelo Gordon and New Evolution Ventures are highly in tune with doing right by the franchisees and the long term benefit. We're fortunate from that standpoint.
Eric: I want to shift a little bit here and talk more about the consumer side of things. Obviously, the fitness sector is probably one of the hottest and more competitive sectors out there. At the consumer level, how is Crunch managing to stay relevant?
Obviously, you see lots of different trends come and go. In the fitness sector, you guys have been around for a long time. How are you managing that at the consumer level?
Ben: The good thing, first and foremost about the fitness industry is, it's not my term, but it's unamazonable, from that standpoint. With all the 8,000 retail closures that you had last year because of the shift to online and changing consumer trends. You're not going to get affected by that in fitness. Everything that could have happened to fitness online has already happened. There's streaming, video services. There's wearables where people can do anything, get tracked or exercise anywhere anytime. I've never thought, "Oh, Jeez! Now that people can exercise in their house or track their fitness, no one's going to need health clubs." It's just not the case.
They are all just supplements to the community, that is, the health club. People like it. People enjoy it. They like the motivation. They like the camaraderie. As long as the club companies are doing well. More and more nowadays choosing the right site, building out for the right amount, managing your payroll and your expenses properly.
The diligence behind the business is very important to being competitive. Beyond that, it's just keeping up with the trends and technology. Your website has to be built mobile first as everything has to work for the customer on a mobile basis. Over 40 percent of our sales come in from a mobile standpoint, not online. We're not that high.
We sell online, but 40 percent is mobile based. You have to have member apps that integrate them with other people in the health clubs community. You have to have online class reservations, for conveniences. People have to modify their accounts online. All the standard conveniences that people would expect from any other business.
You have to integrate that into your business. Your classes have to be constantly evolving. You can't stay still. Once somebody does the same exercise routine for a certain period of time, they want something different, something new. We still hold true to that fun. It's a fusion and fun and entertainment that we did in the past. That's important.
The way our staff interacts with our members is super important as well, so we put a premium with all the franchisees in terms of making sure people are greeted properly and customers are treated appropriately. I get 1.3 million members, and I'd say all of one to two customer complaints get up to me in a month. It's not that hard to get to me.
We're very fortunate on that. We watch all the social media aspects, feedback online. We have a very strong presence whether it's on Facebook, or Instagram, or Twitter, or all those other things. Constantly learning. Constantly evolving. As long as you keep things fresh, then people will keep coming back.
Eric: Where are you guys going to go over the next five years? You mentioned that you've got a lot of units already committed to. I've looked at your FDD. I got to say, it's pretty [laughs] impressive. You've got no turnover whatsoever. Your Item 19 is impressive. What kind of growth can we expect over the next five years?
Ben: We're just at a tipping point. I remember back in my Planet Fitness days, when we got the company from opening 50 a year to 100 a year and then things took off from there, before I came over here. We're just about at that point. We did just over 50 clubs last year. Open, we're projecting somewhere around 80 this year.
The franchisees are getting much better at site selection. Real estate trends are heavily in favor of our whole space, for fitness. There's not a lot of 20,000 to 40,000 square foot tenants out there. A lot of the strip centers are looking for that and they are being very aggressive in terms of trying to get people into those centers. That's very helpful.
We've got a lot more support team in place than we used to have, whether it's for construction or financing. Sort of a concierge, if you would, that helps get people from point A to point B. There's a lot of things the franchisees end up wondering about after they buy a franchise like, "Hey, what do I do next? What do I do next?"
There's a lot in our training programs. Our online properties are marketing our national ad funds starting this year. We're going to be the second full sized fitness company in the industry to have a national ad fund. That's exciting. Look, we've got, like I said, almost 900 sold units.
Even if we stop selling franchises, we're still going to have at least, a 700, 800 club chain in the next few years. Our main focus is opening the clubs and keeping the franchisees profitable. That's the focus that's been from day one. As long as you're doing that, then it tends to compound again. Naturally, more people see that and they want to be part of that.
That's how we keep things moving forward. I'll wake up at night if a franchisee's not doing well and I just think about it and obsess over it. We work on a plan to get them back to where they should be. That's one thing I can say I feel good about what our company is. The primary focus is the franchisees, because if they work, then everything else works.
Eric: Clearly, that's reflecting in your satisfaction scores. I know you've got a lot of multi unit owners, but new candidates are coming to you all the time. Who is that ideal candidate? What is it about a franchisee or a group of partners that make them successful? Who are your ideal people?
Ben: I'll tell you this. There's two ways to answer that. One, once you become a little bit more mature system I'll start from the reverse angle there. It's pretty easy to see who you don't want in the network. In the beginning, it's harder because you're anxious to sell some franchises, and you just want get people in the network.
As you start to have more and more owners, you start to pretty much get pretty clear warning signs during the sales process which can be months, if not a year, before someone buys a franchise. The types of questions they ask, how detailed they get or don't get, what they focus on, how they position themselves.
You can pretty much tell what type of an operator they're going to be. One thing I would say to anybody who is new in franchising is, "Provide, as you can." Because revenue growth is predicated on how many you sell and open, right?
Be a little more picky with your selection. Make sure your gut doesn't tell you, "Not sure about that person," because generally if it is, you're going to end up having a nice 10 year relationship with them filled with turmoil and challenges.
Once you learn what you don't want in the network, it's easier to choose what you do want. Then, what we found is that we have a good system. We really do. We know how it works, but there's a certain type of franchisee that has this higher level of engagement than others.
Those ones that get engaged, gosh, they bring us tremendous ideas that show us results, sometimes, we didn't think we're possible. Because we're just taking what we're doing, and they're making a number of aspects of it better, which is great.
Then, we'll latch onto those ideas. We'll take those best practices. We'll package them and easy to understand and execute it our way, and we'll get them out to the rest of the network. We're now looking for those who are, obviously, more financially well heeled, because they can move quicker, especially in a market like this.
You want to up your average net worth and your liquid capital criteria and then somebody who's a dedicated, focused, detail oriented business person.
Eric: It makes sense. On the topic of net worth, I know it's not a small investment you get involved in, especially when you're talking about multiple clubs, potentially. What is your typical financial requirement as far as net worth?
Ben: Basically, for a single club, you've got to have, at least, a million net worth and 400,000 liquid, but once you get into multiple clubs that has to go up fairly significantly, especially if you intend to open more than one club a year.
Ideally, you probably want to be somewhere in the three to five million net worth category. It should not be tied up in real estate or what have you.
There has to be a liquid component to that because then it comes down to financing. Most franchises try to lever things up as much as they can, so they have less cash out of pocket. Then, when you want to lever your assets, they can't be encumbered by other lenders that have other positions.
The more clean your balance sheet is, the more able you're able to guarantee loans with different assets, the more likely the banks are to finance you. Then, you can receive it a lot of cash out of pocket. People are getting more and more sophisticated about it.
The underwriting rules are underwriting rules. Banks are going to lend based on certain criteria, so you've got to meet that.
Eric: That's a good point. Obviously, I'm assuming a lot of your candidates are already owners of other businesses. Is there any area where a lot of people are coming from, like a lot of restaurant owners or real estate owners?
Ben: We're seeing actually a lot more people that are in construction, because they can come in and they can build their own club. They save a lot of money. That's Your large initial investment is your build out. We're getting actually a lot of people from the tanning space, that own tanning companies. Their business model is recurring revenue. They automatically bill people which attracts them to the fitness industry because you have 80 percent of revenue every month is automatically billed. People like that.
Then beyond that, I'd say real estate. You have people who own a lot of sites, that now they want to put health clubs in their sites. I'll say those two areas are probably the...We have a lot more than that, but those were starting to see over and over again.
Eric: Interesting. Ben, I want to thank you again for your time today and congratulate you again for being Best in Category and Franchisee Satisfaction for the fitness sector. Obviously, you guys are doing a lot of the right things. It's easy to say and hard to execute on that.
Ben: Thank you very much. Thank you for having such a great service that you offer us out here. For those who are bold enough to expose themselves to the anonymous feedback, and I think everybody should. It's a great thing you guys do. Thank you very much.
Eric: I appreciate it. I appreciate it. It's Ben Midgley from Crunch Fitness. If you want to learn more about Crunch Fitness, you can visit franchisebusinessreview.com, or you can go directly to CrunchFranchise.com and learn more about franchise opportunities with them. Thanks, Ben.
Ben: Thank you.