What is the Crunch experience? What does the brand stand for? The founder of Crunch, Doug Levine, started the company with the intention to attract male fitness enthusiasts to aerobics by catering to female audience. The initial concept had a clear goal, but it did not work out as Doug planned. He ended up opening a chain of workout places that cater to both men and women. Crunch’s competitive advantage lies in its ability to offer a fitness experience like no other fitness studio.
The Crunch “experience” consists of innovative workout plans like “Hip Hop Aerobics”, “Co-Ed Action Wrestling”, “Rollerblade Aerobics”, “Firefighting Training”, “Bobsled Training” etc. By combining original workouts and offering its clients new ways of engaging in the fitness, Crunch is separating itself from its competitors through innovation and differentiation. It was quite a revolutionary concept at the time, when the predominant clubs had an image of either a bodybuilder gym or the place where everyone looks good. Doug made sure to convey a sense of uniqueness.
He wanted Crunch to become a new way of doing fitness. Crunch became well known for its innovative culture. Doug wanted to make fitness fun and accessible to a majority of people. His main demographic target were urban 25-34 year olds. Crunch developed its brand through smart advertising, creating key partnerships with apparel companies, word of mouth and just being different than other places in the industry. Crunch brand was build on offering a workout place that is unique and more than just a gym. Doug was able to constantly offer new types of fitness programs that sparked interest with the public.
He wanted to portray Crunch as a place where people would not feel self conscious or worry about what other people think. From the company’s CEO down to a trainer in a gym, Crunch is a fun, energetic place and unique fitness place. What are Doug Levine’s strengths and weaknesses? With prior experience in the investment banking industry, Doug is a person who understands numbers. He understands what makes a company look good to potential investors. Like many entrepreneurs, he demonstrates the focus to stay on task, but at the same time he can juggle multiple projects at a time.
Maybe one of his most valuable traits is his awareness of his weaknesses. Doug knows what things he is not capable of doing and is able to accept the fact that someone else with more experience needs to be brought on board. Many entrepreneurs are too proud of their companies and are not willing to accept that they need help. Even though Doug has ideas about Crunch and where he wants it to go, he lacks organizational skills to run a corporation. He is aware that he core competency is not people management, and when working in a predominantly service based industry, that is a big thing.
For example, when Crunch first started customers were charged on a per visit basis which was not an industry norm. He quickly changed the model to a combination of a monthly subscription and a non-subscription method. Doug is also lacking marketing skills which was evident in his inability to address club retention ratio (addressed by his VP of marketing). Like for many entrepreneurs, Crunch was a learning process for Doug. When the company got too big for one person to run, he was able to realize that he needed help and he knew exactly what he was lacking.
Successful entrepreneurs often have a big picture in mind, not to say they do not think or care about the day-to-day operations of a business, but tend to find experienced managers able to steer companies the way they see fit. How have they financed growth? What are the operational considerations in running a business like this? So far Crunch has been a self-funded enterprise. This means that Crunch was funding its expansion with its cash from operations. This is typical of start-ups and it minimizes the risk of ruining founders credit and the risk of incurring potential debt.
On the other hand, it is also a potentially dangerous way of expanding. Even though it is true that an increase in debt structure increases the riskiness of a business, funding expansion cash from operations is a double edged sword. If the business starts experiencing a volatile demand for its product/service, there is a possibility of a cash shortage necessary to run day-to-day operations. If there is a shortage of cash needed for daily operations, management might have to lay off some labor. Labor turnover (retraining) tends to be an expensive thing in the long run and should be avoided if possible.
Even if an entrepreneur does not want to take on a huge amount of debt, small amounts of debt can be beneficial for a business. It can free up needed cash to make quick operational decisions, and it provides a cushion for unexpected events. Is the acquisition a good fit? Specifically address the value of the assets being acquired: Square footage, membership base and any other areas you deem relevant. The Atlanta acquisition has a potential to add a substantial increase in the company’s customer base.
If done right, it can be a very good thing for the company. On the other hand, there are some concerns the company has the right to be worried about. The question is if Crunch’s business model would work in Atlanta. There are many differences between the two locations. The Atlanta locations are bigger in size, with additional offerings like a basketball court, a full size Olympic pool, and a slightly older demographics. It is uncertain if Crunch’s business model would work there. There is also a difference in the subscription system.
Another problem that might arise is the fact that some Atlanta clubs are almost three times larger than an average Crunch gym. This means that there is a lot of capital tied in the fixed assets, and if the transformation does not work the way it was intended, Atlanta gyms can become cash cows and put even bigger strain on cash from operations. Doug would have a hard time funding this acquisition with the money generated from operations. This means that he would have to issue some stock or get debt financing. Also, given the current management issues, the acquisition might not be the best idea.
Crunch is still having some organizational issues, and adding six new locations with around 70,000 new customers might present a big managerial challenge. The additional cost of training the employees to bring them up to the standard of Crunch culture is not insignificant. Is the organizational structure and company skill set adequate to take the company to the next level? I think there is a good mix of talent at Crunch. Even though there is no lack of talent, I do not believe Crunch has the managerial and organizational scale to increase its business by 60% over night.
In order to expand in such fashion, Doug should hire someone with the experience in taking a $30million company to a $100+million company. Storm was not up to the job because of his inability to embrace the corporate culture. The same thing might happen in Atlanta. There is a possibility that SportsLife’s customer base would not find Crunch’s business model appealing, or that its trainer base would not be able to make a smooth transition to the Crunch way of doing things. Then again, entrepreneurs tend to take educated risks, which makes them look like heroes when things go the right way, and failures when they do not.