One of, if not the key agenda item on any leisure operator’s board meeting agenda right now will be the imminent changes to the National Living Wage. By far the biggest cost to any operator is its wage bill. A large proportion of staff are likely to be on lower wages. Whilst driving up their pay has a worthy social impact, it could hit the leisure sector hard, plunging many operators into the red.
But what if, rather than focusing on the negatives of higher costs, we instead look to what this could offer in terms of opportunities to do things more efficiently and better, not just cheaper?
From April 2020 the new minimum hourly rate of pay for anyone aged 25 and above is £8.72, a rise of 6.2%. For those aged between 21 and 24, the hourly rate goes up by 6.5% to £8.20 per hour. And even under 20-year olds see rises of over 4.5% per hour. Given the makeup of staff within the sector, coupled with the fact that a health club is an incredibly labour-intensive business to operate, these cost increases will, on the face of it, have a seismic effect on profitability.
Outsourced operators, particularly those of local authority centres, may be hardest hit. One Scottish leisure trust’s accounts for the year ending 2019 showed that staff costs were around £29 million out of total costs of £42 million. In other words, 69% of expenditure related to staffing costs. This trust made a net loss of £400,000 for the year, which happened to be topped up by an additional subsidy from the council. However, with staffing costs being almost 70% of total costs, and these set to rise, this will put an incredible strain on this – and many other operators’ – P&L’s.
Even a blended increase of 5% in staffing costs, in this case, would equate to £1.45 million of additional annual costs. That needs to then either be funded with incremental income or through cost cutting elsewhere.
Bearing in mind the sector (even in privately-owned clubs) struggles with lifecycle management and maintenance upkeep, it seems unlikely that this change in April will signal a doubling down of investment in customer experience. Higher opex typically means lower capex too. But is this the right approach?
What can operators do to address this risk positively and creatively? Clearly, they will be looking to see where efficiencies can be made, including with technology. But fundamentally, you need to have a certain number of people on site at any given time to fulfil key positions such as lifeguards, first aiders, etc. We’ve seen some examples of eradicating receptionists (e.g. Pure Gym) or using technology to greet members instead of so many people but this can only go so far, it seems.
One area that presents a clear opportunity to save some cost but also improve customer experience is around cleaning and maintenance of floors. If we think back to only a few years ago, when the minimum wage was closer to £7.50, and we assume four cleaning staff for 10 hours a day, seven days a week, 52 weeks of the year, that equated to a cost of something like £125,000. Now, however, the same level of provision would be costing over £145,000. That’s a 16% increase which outstrips growth in membership rates.
All floors in the sector are being cleaned frequently yet overall, standards are very poor. This suggests that the way daily cleaning is being done is ineffective. Look at the kinds of improvements that are possible.
This is typical. It’s very, very rare that I’ve ever visited a leisure club and haven’t been able to dramatically improve standards.
Based on work we’ve been doing in the sector, some of these costs could be cut on a day-to-day basis and supplemented with periodic, specialist deep cleaning, which in aggregate would be much cheaper. The typical cost of deep cleaning the wet side floors of even a medium-large local authority leisure centre twice a year (our recommended frequency based on this model) to bring them back to an “as new” standard is around £10,000 annually. Compare this to the cost of one full time cleaner, recreational assistant or lifeguard and think of a cost benefits analysis: what will you get in return for each investment?
You’ll see that you could cut half of an FTE member of staff and still make savings, but at the same time comfortably afford for professional deep cleaning to take place twice a year to drive up standards to as close to “as new” as possible.
It means that rather than having to clean on a day-by-day basis, your staff instead can simply seek to maintain that standard. This is a much quicker, easier and cheaper job. To achieve additional efficiencies in this, you should seek to find an appropriate floor cleaning machine. Whilst many of these aren’t suitable for deeper cleaning, many will be perfectly fine for your daily maintenance once floors have been brought up to the right standard to begin with.
Based on the current general level of standards across the sector, it simply isn’t realistic for in-house staff, or even outsourced daily cleaning staff, to achieve the required uplift in standards to drive a positive effect on sales, customer experience and retention. There are a variety of reasons for this, including:
- Typically, in the leisure sector a “deep clean” simply means a bunch of people staying late one night, ordering take away pizzas, and giving the floors a bit of a thorough deck scrub. This simply won’t remove ingrained contamination.
- A lack of time, i.e. manpower resource, which will only get worse from April 2020.
- Cleaning typically being done during the day and therefore, limiting the nature of the method of cleaning that can be used.
- Lack of equipment or the right kind of equipment.
- COSHH issues around the strength of products that can be used, particularly when members are present.
- Environmental drivers, such as seeking to use green chemicals, which, in all honesty, can’t really be effective at cleaning and solving problems in these environments, but could well be used for maintaining on a daily basis if supplemented by periodic help with more specialist cleaning.
As well as producing an overall cost saving, evidence suggests that this hybrid approach would also boost your top line. In 2019, for example, following a deep clean we undertook, Parkwood Leisure saw a 13% increase in new memberships. New joiners rose from around 2,500 in March to nearly 3,000 in July. It’s worth noting that we aren’t comparing January (when you’d expect new joiners to be huge) to a random month.
This equates to an incremental annual revenue of £150,000 pounds just in that month following the deep clean alone. I would expect that they saw continued growth thereafter too. All achieved for an investment of around £6,000. This is an ROI in month one alone of 25X.
That’s not to mention, of course, retention. The IHRSA says that 3% of a club’s membership base leaves every year due to cleanliness. In the UK, with an average membership base of 1,500 members that equates to a loss of turnover of £22,500 pounds, not to mention the net detractor effect on their friends and family. And yet, whilst 68% of members, believe that floor cleanliness is important, only 5% of members perceive their own club’s floors as being clean.
Net promoter score is a key metric in the sector. What does cleanliness do to this?
- The IHRSA reports that members who believe their club is unclean have an NPS of 26% whereas if a member perceives that club as very clean, this increases to 77%.
- Sport England data, via the National Benchmarking Survey, paints an even stronger picture: NPS for the dirtiest quartile of clubs is 0.2% whereas for the top quartile it is 56.7%
All the evidence suggests that by doing things differently we can have a dramatic effect on our club’s standards and financial performance.
Whilst many boards and senior managers may be worrying about the changes coming in April 2020, for those that are willing to embrace not “doing what we’ve always done, the way we’ve always done it”, this moment could well provide a fantastic opportunity. An opportunity to drive up standards, to improve customer experience and uplift NPS, to reduce day-to-day complexity and operational costs, and to do not just all that, but also to drive higher profits.
Sounds like good business to me.