18 December 2000

South Africa: Future Of Health And Racquet Club Staff Still In Doubt

Johannesburg — The remains of Leisurenet have found a new saviour with the purchase by Virgin Active of the Health & Racquet Club (H&RC) for R319,6m announced on Friday, but the future of the club's more than 4000-strong staff and existing memberships remain in question.

There is speculation that the club's 800-strong sales staff complement will be significantly reduced as the new owner takes a hard line in managing its new acquisition and offers no discounts and no long-term contracts.

Virgin Active MD Frank Reed denies there will be retrenchments and says the new game plan is to upgrade all gyms throughout the country. "The issue is not about people, it is about membership," he says.

Virgin Active has given no indication that current membership contracts will be honoured, saying that these are being reviewed as a priority.

Membership will henceforth be commercially priced, strict financial management and controls will be introduced, payment will be by direct debit and no membership fees will be discounted, Reed says.

There will be only one-year contracts and pricing will be geared towards individual levels of service. There will be no hardsell sales strategies and tactics.

Reed says H&RC gyms will be replaced by "Life Centres", which will include Virgin cosmetics and Living River therapies, life libraries, internet stations and holiday flight deals.

The Virgin acquisition follows the liquidation of H&RC's holding company Leisurenet, itself previously in talks with Virgin Active to sell its problematic international Healthland operation just prior to liquidation.

Virgin Active, founded in August last year, has four clubs in the UK. It is developing a chain of UK and European health clubs as part of a plan to have a panEuropean presence over the next five years.

Virgin chairman Richard Branson, who says he was asked by former SA president Nelson Mandela to save Leisurenet, had strong words on the H&RC's business model.

He set out, in no uncertain terms, the reasons why H&RC's business model could not work and has proposed a new model of his own for the country's 85 clubs, to be rebranded under the Virgin brand.

Branson criticised the club's accounting methods, which he said necessitated aggressive sales policies. Sound operational management was undermined by poor financial management and control. Further, the model used did not generate sufficient cash resources or reserves to maintain a high-quality product.

Virgin said discounted fees were used to draw memberships and service growth, but this model could not succeed as the discounting of upfront membership fees was used to meet short-term cash needs and memberships were principally sold to A-B income groups.

The aggressive sales strategy and tactics resulted in a loss of focus and low membership retention rates, with a high cost of sales. Virgin said the business generated no cash to support day-to-day operations unless more clubs were rolled out with upfront cash income.

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