The Startling Closure of Alexander Health Clubs

"There was literally nothing I could do. If I'd had the choice, I wouldn't have done it like this," sobbed Alexander chair Candy Tang at an informal press conference. Due to mounting losses, the company's empire of 17 Alexander fitness centers, three Aegius Clubs and one Jun Spa all around Taiwan shut down on December 10, with no timetable for re-opening. Tang is striving to find a new owner to restore membership and employment privileges. The weary expression on the face of this prominent business leader was a stark contrast from her energetic, sunny image of bygone days.

The group's 21 branches boasted more than 70,000 long-term members. They had paid membership fees in the tens to hundreds of thousands, totaling at least hundreds of millions, which has raised suspicions of a "fly-by-night" closure. The company was still actively recruiting members on the eve of the closure, and the Taipei District Prosecutors Office proceeded with a fraud investigation, barring Tang and Lee Yung-hua, recent purchaser, and now chair, of Aegius Club, from leaving the country.

Tang says that the recent economic slump in Taiwan, compounded with a rash of credit-card defaults, led to a fall in sales and continual losses over the past two and a half years, with annual sales falling from NT$250 million to NT$80 million. On top of this, the government started requiring health clubs to sign fixed-term contracts with consumers (drafted by the Consumer Protection Commission and other business authorities). To weather the storm, Tang instituted corporate cutbacks, sought the investment of business partners, and transferred the share options of the Alexander clubs in China, bringing hundreds of millions in capital back to Taiwan in an attempt to rescue her business.

Advertising hoardings are all that remains of the once-prosperous Alexander Health Club.

Who will take over?

Tang claimed she would seek financial support within ten days in order to resume business as soon as possible, but it is unknown at this time which organizations might come to Alexander's aid. Negotiations appear to be hindered by the differences in how memberships will be managed, depending on whether individual clubs are sold as franchises or disposed of outright. Either way, members interests will be affected.

After the incident, the Consumer Protection Commission (CPC) and the Taipei-based Consumers' Foundation fielded constant complaints. The two consumer protection organizations, one public and the other private, will join forces in filing a class-action lawsuit in January 2008. It is predicted that this will be the consumer dispute with the most litigants in Taiwan's history.

As to whether Tang and Aegius Club chair Lee were involved in fraud and embezzlement of corporate funds, investigators are currently scrutinizing the financial paper trail.

The closure has hit the credit-card industry hard. Alexander collected monthly fees from its members to the tune of over NT$60 million a month. Many members who had paid by credit card or in installments but not yet paid their card bills applied to their card issuers to stop the payments, while those who had paid their bills but whose contracts have not expired (such as those who are one year into a three-year membership) have given notice to their card issuers that they will apply for refunds for "services not rendered" if Alexander really goes under. This cost would have to be absorbed by card issuers.

In addition, people in the real-estate industry have commented that the closure or bankruptcy of numerous major neighborhood health and recreation centers in recent years-Alexander's crisis follows on the collapse of another gym chain, JiaZi Fitness Center-is sure to affect consumer willingness to buy into upmarket housing developments that incorporate a fitness center, thus dealing a blow to the future market prices for such communities.

Advertising hoardings are all that remains of the once-prosperous Alexander Health Club.

The Alexander story

Alexander Health Club, founded 26 years ago, was first known as Arts Aerobic World, specializing in women's dance instruction. Eventually it became a unisex gym. Importing many health-club concepts from overseas, Tang was a pioneer in style, adding various leisure services likes spas and aromatherapy to relieve the stress of urbanites, while touting the club as suitable for family members of all ages. Tang was one of the movers and shakers of Taiwan's fitness culture.

Alexander grew fast, spreading all over Taiwan over the last decade with the rise of the urban fitness trend, and becoming Taiwan's largest health club chain-the pride of Taiwan's homegrown fitness industry. Aegius Club, launched in 2000 and targeted at upper-class businesspeople, was also very popular for a time. Tang soon began expanding boldly into the Chinese market, opening luxury health clubs in the best areas of Shanghai and Beijing.

According to media reports, the classes offered by Alexander were fully booked throughout Taiwan. The company seemed to be thriving, with popular classes taught by top-notch instructors. The company's meltdown was attributable to overly quick expansion and a lack of awareness of changes in the overall business climate, such as the closure of JiaZi two years ago, the rise of privately owned health clubs, and the entry of overseas companies into the market. A serious incident involving a carbon monoxide leak at Alexander's branch on Taipei's Tunhua South Road during the 2006 Chinese New Year holiday, leading to one death and 11 injuries, was taken as a sign that management competence and service quality had waned after Tang turned the focus of her business to China.

The fitness-center business is one with large capital outlays and slow returns. The advance payment system is one of its major weaknesses, because once the rate of new memberships slows, cash-flow problems can easily result.

Victim of its own success

In truth, the rapid expansion of Alexander's domain depended on this advance payment system. That is, they received advance fee payments from members and continually invested in expansion, then in turn received fees from the newly opened branches. As the right hand received money, the left hand spent it, driving a constant cycle of expansion.

But the "fixed-term contract" requirement of August 2007 compounded the problem.

The CPC and Sports Affairs Council drew up standard fixed-term contracts for fitness centers with the aim of addressing past abuses of the advance payment system. Among the new rules is a performance bond requirement, mandating that advance payments exceeding NT$50,000 and covering a period of more than a year must be paid into a special bank account in compliance with the Trust Act. Management is then restricted to drawing designated amounts from the account, effectively freezing most of the advance fees and inhibiting the short-term expansion cycle. Even though Alexander had not signed fixed-term contracts with its customers, this regulation nevertheless affected Alexander's financial operations.

Facing wave after wave of closures in the service industry and the proliferation of advance payment schemes used in the market, such as gift certificates and vacation centers, the CPC warned the public that if they are thinking of buying high-priced, long-term products or services, they should first understand their rights and responsibilities, and check whether the fixed-term contract has a performance bond system, to safeguard their rights.

Most people are not pessimistic about the future of the fitness and leisure industry. But the government should take this opportunity to strengthen the relevant legislation and seek to improve the soundness of businesses, so that the fledgling industry can continue to thrive in Taiwan.