California Fitness was pumped for growth, but not fit for purpose

Jason Ng says the slow decline and eventual demise of the ambitious but questionably run chain should be a lesson, not a source of schadenfreude, for its remaining rivals

PUBLISHED : Friday, 15 July, 2016, 10:08am
UPDATED : Friday, 15 July, 2016, 8:13pm

Twenty years ago, a Canadian entrepreneur walked down Lan Kwai Fong and had a Eureka moment. Eric Levine spotted an opportunity in gym-deficient Hong Kong and opened the first California Fitness on Wellington Street, a few steps away from the city’s nightlife hub. Business took off and by 2008 the brand had flourished into two dozen health clubs across Asia. There was even talk about taking the company public on the stock exchange.

Hong Kong chief executive looks to improve consumer protection in wake of California Fitness collapse

Then things started to go south. The chain was sold, broken up and resold a few times over. Actor Jackie Chan got involved and exited. The Wellington Street flagship was evicted and shoved into an office building on the fringe of Central, while key locations in Causeway Bay and Wan Chai were both lost to rival gyms. What was once the largest fitness chain in Hong Kong began a slow death that preceded the actual one that stunned the city this week.

California Fitness operated on the so-called Gillette business model. Like a cheap razor, gym membership was offered at a low rate – sometimes as little as HK$100 a month – to get consumers on the hook. The real money-maker was the overpriced razor blade: personal lessons at up to HK$800 an hour. The strategy encouraged aggressive sales tactics and over the years devolved into a Ponzi scheme: staff were pressured to constantly recruit new members to subsidise the existing ones who tended not to fall for their sales pitches.

The strategy encouraged aggressive sales tactics and over the years devolved into a Ponzi scheme

Blame it on the competition, at least in part. Pure Fitness, a better-run alternative, threw its hat into the crowded ring in 2005. Within years, the formidable new entrant peeled away the high-end clientele. Haemorrhaging customers and revenue, California Fitness had little choice but to take the hard selling up a few notches.

As the numbers game intensified, so too did complaints against California’s unscrupulous sales practices. Staff were known to lure unsuspecting passers-by with free gifts and free trials, only to have their ID and credit cards held hostage until they signed on the dotted line. Members who declined to renew their personal training contracts were punished by neglect – their trainers suddenly too busy for an appointment. In one particularly egregious case, an autistic teen was reportedly detained in a club for hours and coerced into taking out a HK$90,000 loan to pay for a fitness package.

Hong Kong chief executive looks to improve consumer protection in wake of California Fitness collapse

Still, members who relented and purchased expensive plans didn’t always get their money’s worth. Trainers often wasted paid time on mindless chit-chat with clients or put them on a cardio machine while they played with their phones.

Things fell apart, sometimes literally – a false ceiling collapsed and injured three in a steam room in 2014

Substandard services were matched by poorly maintained facilities. Members bemoaned old equipment, bad hygiene and rampant locker room theft. Things fell apart, sometimes literally – a false ceiling collapsed and injured three in a steam room in 2014. More troubling still, slack management allowed some of the clubs to become notoriously cruisy. It was not uncommon to spot two pairs of feet under the curtain in the same shower booth at the Mong Kok club.

All that culminated in the chain’s undoing this summer. After reports of financial trouble surfaced and creditors came knocking on the door, the two-decade-old enterprise finally pulled the plug. On Tuesday, management shut down all 12 gym and yoga locations and threw hundreds of staff and tens of thousands of members into limbo.

It appears that Pure Fitness stands to be the biggest beneficiary of California’s downfall. But Pure will be well served to learn from its competitor’s blunder. As the yoga-fitness-apparel-health food chain expands rapidly in Hong Kong and China amid chatter of an imminent initial public offering, Pure Fitness bears the hallmark of an ambitious upstart eager to build a growth story. The pressure to succeed will again be borne by club managers and personal trainers.

The trick is knowing how to meet the corporate goals from on high without falling into the same trap that destroyed its ill-fated rival.

Jason Ng is a lawyer, freelance writer and author of Umbrellas in Bloom. Follow him on Twitter @jasonyng