Chief Executive's Review
Esporta PLC
14 March 2002
14 March 2002
RESULTS OF CHIEF EXECUTIVE'S REVIEW
HIGHLIGHTS
- £4.2m of annualised pre-tax cost savings have been identified and are
being implemented immediately.
- A direct marketing approach to attract new members has been adopted
which, together with a more flexible approach to joining fees, has
produced encouraging results. January and February new joiners were up
24% for clubs opened in 2000 and prior years.
- Non-core activities will be outsourced to allow management to focus on
driving sales and profits and are expected to yield further annualised
cost savings of £0.5m.
- Action taken to enhance ancillary income through targeted price
increases and the introduction of new income streams including the
rental of advertising space, which are expected to yield a minimum of
£0.3m of non-volume related revenue per annum.
CHIEF EXECUTIVE'S REVIEW
On his appointment as Chief Executive on 11 January 2002, Maurice Kelly
immediately commenced a thorough review of the business and its prospects. He
has now completed this initial operational review and identified areas where
material cost savings can be delivered. Prior to his arrival, the Board had
taken a number of remedial measures upon which Maurice has built. £4.2m of
cost savings have now been identified, approved by the Board and reported
upon by KPMG Audit Plc. In addition, Maurice has planned a number of
initiatives to enhance revenues. The one-off cost of implementing these
savings and initiatives, which has been reported upon by KPMG Audit Plc, is
estimated to be up to £2.0m in the current year and will be reported as an
exceptional item.
A new management structure is being implemented across the Group. This new
structure will improve the focus and accountability of club managers,
increase the level of financial controls, improve service levels within the
clubs and the effectiveness of the support functions provided by head office.
In addition to these changes, the review has focused on the following areas:
- Outsourcing
- Costs
- Pricing
- Volume
Outsourcing
From now on, club general managers will be focused on, and accountable for,
maximising sales, profits and service quality within their individual units.
To ensure that they are not distracted from this task, a decision has been
taken to outsource the non-core activities of food and beverage and of
maintenance. These actions, in addition to making the food and beverage
operation profitable (it currently has 600 employees and incurs annualised
losses of approximately £0.5m), will greatly improve general manager focus
and will deliver better service in each of these areas. Heads of terms have
been agreed with an experienced operator for the outsourcing of food and
beverage and discussions are underway with third parties in respect of
maintenance outsourcing. Total annualised cost savings of £0.5m are expected
to be achieved from these initiatives.
Costs
Making club general managers directly accountable for their individual club's
sales and profits will provide an incentive to be efficient at unit level. In
addition, the following cost saving initiatives have been identified, all of
which are underway and some of which have already been completed, resulting
in a more appropriate cost base. These cost savings have been reported upon
by KPMG Audit Plc.
Identified Pre-Tax Cost Savings
Annualised Potential 2002 Potential
£ m £ m
1) Site management 0.9 0.7
rationalisation
2) Other club level 2.3 2.1
rationalisation
3) Head office savings 1.0 0.9
____________________ ______________
Total 4.2 3.7
Description
1) Site management rationalisation through removal of a layer of
operations managers at club level.
2) Other club level rationalisation including maintenance resource, the
health and beauty reception, rostering in the creche, fitness and
main reception areas, together with other headcount savings.
3) Head office savings by headcount reduction and other establishment
savings.
In addition, the Chief Executive is examining ways in which the construction
and fit-out costs of our prospective clubs (including those under
construction) can be reduced. There are plans to phase in ancillary
facilities and associated staffing costs after opening as membership numbers
grow. In this way, initial trading losses should be reduced, lower capital
costs achieved and the cashflow profile associated with each development
improved.
Pricing
The review has identified a number of areas where it should be possible to
enhance ancillary revenues and pursue other sources of income. These include:
- A more flexible approach to the pricing of creche facilities - moving
away from fixed pricing towards utility and capacity related pricing.
- A review of health and beauty prices which have remained largely
unchanged for three years.
- Obtaining listing fees for exclusive supply of products to our health
and beauty areas.
- The introduction and rental of advertising space within the clubs.
Each of these initiatives is underway. New pricing was introduced in the
creche and health and beauty areas during March and the effect of these price
increases on volume will be carefully monitored. Heads of terms have already
been agreed in relation to the rental of advertising space and to the
exclusive supply of products to our health and beauty areas. These two
initiatives alone are expected to yield a minimum of £0.3m of non-volume
related revenue per annum.
Volume: a significant change in marketing approach
Previously, marketing at Esporta had comprised a series of locally driven
actions which, towards the end of 2001, were augmented by national
advertising.
At this point in the development of Esporta it is not appropriate to
advertise what are essentially localised propositions on a national basis.
These approaches have failed to generate sufficient enquiries for the clubs
which, combined with an inflexible approach on joining fees, led to
disappointing joiner numbers in 2001. Therefore, there has been a significant
change in the marketing approach at Esporta to make use of centrally managed
but locally appropriate direct marketing techniques. Esporta is now making
extensive use of direct mail, database mining, local press advertising and
outbound telemarketing through an experienced external agency. This activity
is being funded by a reallocation of existing marketing budgets and the
improved trading performance in the first two months of the year.
A new club marketing programme has also been introduced involving the
provision of extra support to drive initial membership numbers and joiners
immediately post opening.
In 2002, Esporta is taking a more flexible approach to the charging of
joining fees, based on local competition and individual club maturity and
capacity levels, to attract greater numbers of joiners. The Board will
monitor closely the impact on attrition levels of the increase in membership
numbers together with the new approach to joining fees and all the other
initiatives.
The effectiveness of these actions is measured by the executive team on a
weekly basis and the results to date have been encouraging, for example:
- Leeds, which opened on 1 December 2001 and had only 668 members at the
end of December, is now recovering and has in excess of 1,300 members.
- Wandsworth, which opened in mid-December 2001 and had a disappointing
1,045 members at the end of December, now has over 2,200 members, and
is ahead of expectations.
- The clubs at Romford and Chelmsford, which opened in June 2001, have
had exceptionally strong joiner numbers in January and February 2002
and each now has over 4,000 adult members, less than 9 months after
opening.
- Belfast and Kingston (which both opened on 1 March 2002) benefited
from the new club marketing programme and already have adult
membership numbers of over 1,700 and 2,000, respectively. Both clubs
are ahead of internal expectations.
In overall terms, the level of joiners in January and February 2002 is
substantially ahead of budgeted expectations, with joiners at comparable
clubs (those opened before January 2001), ahead of last year by 24%. For
clubs established before 1999, the increase in new joiners was 38%.
Continental Europe
A full review of Esporta's Continental European strategy is now underway. The
Chief Executive's initial assessment is that the long-term viability of these
operations has been obscured by deficiencies in local day-to-day management,
which have now been addressed. An experienced UK management team has been
deployed in Iberia and is making progress. Many of the cost savings and
efficiency improvements that have been identified and captured in relation to
the UK clubs will also be introduced in Iberia and Sweden to improve the
profitability of those businesses. Once the benefits of this process become
apparent, the Board will be in a better position to judge the longer-term
viability of the Continental European operations.
Summary
The Chief Executive's review has focused on actions that will have an
immediate impact through operating cost reductions. In addition to operating
cost savings, the Chief Executive is examining options to reduce the
construction and fit-out costs of clubs to which the Group is contractually
committed (including those being built) and to minimise initial trading
losses from new openings. The Board is also rigorously reassessing the
capital costs and commercial rationale for previously approved sites in the
UK and Iberia where there is currently no contractual commitment.
In summary, and as will be clear from the foregoing, actions have been taken
that should lead to significant improvements in the operational performance
of the business.
The directors accept responsibility for the information contained in this
document and, to the best of their knowledge and belief (having taken all
reasonable care to ensure that such is the case), the information contained
in this document is in accordance with the facts and does not omit anything
likely to affect the import of such information.
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