The single most important task in the development phase of any club project is proving the validity of the business concept. In other words, will the demographics support a facility that will elicit an optimal Return on Investment (ROI)? This process must begin with a comprehensive market analysis. Before investing exhaustive planning hours in project conception and development, a detailed analysis of the region should be done to see if it even warrants a facility of the planned size, or depending on the competition in the area, one at all.
The demographics will dictate the type of club that is built, the member that is marketed and catered to, and the square footage of the footprint. It will dictate the total club population and the membership fees charged, as well as the type and scope of the profit centers and amenities introduced in the club.
The demographics give you the ability to develop a project based on real information rather than a perception of the area. Many people develop their project based on two criteria: 1) Building their "dream" facility; what they would build if everything were perfect, and 2) Proximity to where they live. Unfortunately, very little is perfect in this world and proximity may be the least effective criteria on which to base a decision.
Not all demographic data is created equal and sometimes it can be very misleading. When choosing demographics, the first thing that must be questioned is where the information came from. A common problem with a lot of demographic data is that the source has not updated its information often enough and new housing, subdivisions, and/or neighborhoods have not been included. Also, there is a tendency for many real estate agents and builders to acquire their demos from the local city center or chamber of commerce which, in many cases, contains data that is not thorough enough to base decisions on.
I utilize three different companies to compile a demographic study depending on what information is necessary for the project. These companies are inter-related and are affiliated with the U.S. Census Bureau. In fact, one of them compiled, sorted, and summarized the data for the government before it was released to the public. They also projected the data forward in the census reports utilizing data trends compiled approximately over the last 100 years. Because I am able to pick and choose the information that is most pertinent to the project I am working on, it is the best way to ensure that the data is the most accurate and updated information available.
Once the data is deemed acceptable, a geography must be chosen. As stated earlier, many times a geography is chosen based on information that can not be validated. There are some tangible questions that must be answered in this process such as, is the market able to support a new club and if so, what size? How many prospects are available in the chosen radius and are there enough potential members to reach maximum capacity? Based on the chosen market, how long will it take for the club to reach full maturity?
What type of club do you want to build, or in other words, what is your vision for the club? Is it an upscale higher-income club with a beautiful design and finish, or maybe an adult-alternative concept, or will it have a serious hard-core fitness feel? At any rate, the vision may play a big part in the cost of the project. The demographics of the chosen market will determine whether the club will be able to draw enough members and charge enough to reach the projected financial goals.
Geography is generally based on a "geocode." A geocode is simply a starting point that the geography is based on. Technically, a geocode is based on a longitude and latitude but for our purposes it could be an actual physical address or even an intersection. An exact address is not always necessary as we are usually choosing a geography that is measured in miles, so if an exact address is not found, then a site may be chosen within a half-mile radius and still will be accurate enough. Another area where it is important to verify the demographic source is in the way the data is subdivided on a map. There are a number of ways to subdivide data including Zip Codes, Census Tracts, Block Groups, and Blocks. These categories have been listed according to size, from largest to smallest. This is extremely important when choosing a radius.
When a radius is chosen, the information within that radius shows up in the data report. If, for example, the data was subdivided by Zip Codes and a particular Zip Code overlaps the radius line, the information outside the line is also included in the report. This, unfortunately, skews the report because it will include population that is not inside the chosen radius. The smallest subdivision is divided by "blocks". The United States is divided into 64 million blocks. When the data is subdivided in block format, only the exact geography is extrapolated and anything outside the chosen radius will be excluded. Be sure to verify that the company you choose supports block subdivision. However, keep in mind that most do not because it requires state-of-the-art technology that can be very expensive. This is one of the reasons that different demographic reports for the same area show different data.
After determining the area, it is important to understand that every market is different. Downtown Manhattan will draw from a different sized radius than a rural town in Oklahoma. The area may be made up of mostly pedestrian traffic rather than automobile traffic. A city with a downtown workforce that consists of mainly public transportation such as a subway system will have less of a draw from that workforce than a market where workers generally live there or drive in. A town with a rural setting will have a larger radius to draw from. There may be a natural barrier in the chosen radius such as a river. People who live on the other side may do their shopping over there and even though they may be close in proximity, they may not travel across because all of their travel occurs the other direction. Also, depending on traffic and which direction it moves at different times during the day, it may affect the draw. I generally start with a five-mile radius as a template and then once the area is researched, modify the radius based on drive-times, natural barriers, and distance. It has been my experience that most people overestimate their potential market. The following steps will give a summary to narrow down a market:
Choose a radius.
Research the area to determine the true target market.
Fine-tune the radius.
Based on your club vision, exclude the income levels that would not fall into the target market.
Of the population left, exclude the age demographics that would not fall into the target market.
This will give you a worst-case, if-everything-went-bad-and-I-am-about-to-go-broke demographic. This doesn't necessarily mean that the project will not work, but it definitely would be worthwhile to take a deeper look at the chosen area and reevaluate the risk that you are willing to take to develop the project. It is very important to evaluate whether it is a smart business decision or an emotional decision.
Terry Van Der Mark is the President of The Thomas Plummer Company and has been with the company for thirteen years. He is their lead consultant and specializes in developing start-up facilities as well as trouble-shooting operations in existing clubs. He has over 20 years of club management and operations experience including ownership. The Thomas Plummer Company presents Health Club Management, Sales, and Business Workshops nationwide. Call 800-726-3506 for more information on products and services or visit thomasplummercompany.net.
