It is not simply a matter of interest, or coincidence, that Sir Richard Branson, the knighted, billionaire, U.K. entrepreneur, is also a world-class balloonist.

In his business, as in ballooning, Branson seems to have an instinctive knack for dealing with the ups and downs, and utilizing the prevailing and errant winds, to his best advantage. In September, when everyone else was fretting about an imminent recession, Branson was managing the difficulties, but also preparing for the next exhilarating updraft. In the wake of the terrorist attacks on the U.S., he trimmed 1,200 employees from his Virgin Atlantic airlines, grounded five of its 747-200 jumbo jets, suspended service to Chicago and Toronto, and cut the number of daily flights to New York City by 20%.

But, at the same time, he announced that he had acquired an additional $44 million in financing to facilitate the opening of 17 additional Virgin Active (VA) clubs in the U.K. and Europe, which will fuel the company’s expansion for the next two-and-a-half years. Though some analysts noted that spending on fitness is one of the first victims in a recession, VA didn’t seem alarmed. “The Virgin Group has been calling for a recession for some time, and has been preparing for it,” explains Will Whitehorn, a VA spokesman. “We think Virgin Active is recession-proof.”

The company, a subsidiary of the Virgin Group, also revealed that it had converted 275,000 of the members of the bankrupt Health and Racquet Club (HRC) chain, in South Africa, which it purchased one year ago for $41 million; had hired three of the former stars of Wellbridge--Peter Brennan, now VA’s operations director; Dawn Shephard, group fitness director; and Jennifer Turgiss, international fitness director; and, in conjunction with the U.K.-based information technology (IT) provider Accronym, instituted an impressive, company-wide, customer relationship management (CRM) system. VA currently has 11 sites in the U.K. (eight VA and three Pure Fitness brand facilities), 80 in South Africa, some 4,500 employees, more than 300,000 members, and is expected to generate revenues of about $74 million this year, reaching break-even sometime next year.

… Not too bad for a company that, less than three years ago, didn’t have a single club.

U.K. origins, European ambitions
Like most of the items in the Virgin Group’s eclectic, and ever-expanding, portfolio, VA clearly reflects Branson’s character and personality--his interests, enthusiasm, humor, and flair for innovation. But, just as clearly, the company is largely the product of the person to whom he entrusted it: Managing Director Frank Reed who, earlier, had developed, and then sold, the U.K.’s 26-facility, LivingWell chain. In the process, Reed had earned a reputation for his outgoing manner, fiery competitive spirit, and determination to be the biggest and best in business. He and Branson seemed fated to date.
The atmosphere at Virgin is unconventional, light-hearted, often irreverent and provocative, and suits Reed well. Myths abound about management decisions being made over pints of ale at a local pub. Branson, for his part, generally avoids the media and product promotions, but often shows up at club openings to party with members and staff.

Branson’s commission to Reed was that the VA clubs had to be “different,” and, initially, he budgeted $85 million to achieve that goal. “Richard told us to leave no stone unturned. He said, ‘Just go and have a look at everything,’” Reed recalls. For two years, Reed and his team visited and sampled the industry’s wares worldwide--e.g., workouts in Manhattan, snow rooms in Germany, massages in Thailand. “Then we sat down, and decided how we could do things better,” he explains. The resulting concept was caught on a video, which Branson reviewed, and the approach approved. “He only had two suggestions,” says Reed. “He wanted something that his daughter could do at the club (we added more children’s amenities) and tennis courts on the roof (we passed because we didn’t think that they’d be profitable).”

Reed describes VA as being about “fitness, relaxation, and lifestyle choices--everything under one roof.

“It isn’t about airs and graces,” he explains. “It’s a product for the same sort of person who flies Virgin Atlantic… Our aim is to provide innovation, fun, great value for the money, and wonderful customer service.”

VA opened its very first club, a 58,000-square-foot Virgin Active Life Center, in Preston, in the north of England, in September 1999. The geography was dubious (the town had no experience with club chains, and was too far from London to attract reporters), but the demographics were promising (225,000 people within a 15-minute drive time, 7% of them viable prospects), and over time the concept--proved itself a success. On the day it opened, the club, with a capacity of 7,000 members, had presold a record-breaking 4,521 memberships. Since then, it’s become something of a model for other VA Life Centers. (The company’s new Pure Fitness brand is similar, but for a more urban market, and eschews swimming pools.)

“We didn’t get everything right from the start,” concedes Andy King, the manager of the Preston facility, “but, by making a concerted effort to pay attention to members’ feedback, we now have a thriving club.”

A large part of VA’s appeal has to do with its business model--high-volume, endless amenities, no initiation fee, no contracts, and low monthly dues ($62 for the Life Center, $53 for Pure Fitness). Because of its month-to-month philosophy and its heavy student population, VA’s attrition rate runs about 47%.

“It’s affordable, fun, and high-volume,” observes Reed. “We’re competing with Fitness First Plc--we make no bones about it--because we think that’s what this market wants. The difference is that we have the Virgin brand.” (Fitness First, also based in the U.K., has 100 facilities there, and 100 in other countries.)

A second VA facility opened in Leeds, but, after two years, Reed’s plans for aggressive growth seemed to have been premature. “It’s been very frustrating, taking us longer to get approval for new sites than we’d thought it would,” he acknowledges. At the same time, Virgin was riding, as deftly as it could, the inevitable ups and downs of business. Virgin Trains were criticized because of their poor on-time performance; Branson’s bid to run the national lottery was a failure; and a book appeared that questioned the legitimacy of his success. But another dilemma--the demise of LeisureNet, the owner of HRC--provided an opportunity for VA to jump-start its stalled expansion. The acquisition of HRC added 85 facilities, making VA both the major chain in South Africa and an international player, and placing it squarely among the IHRSA Global 25, a list of some of the world’s largest club companies.

The company has also opened nine new clubs in the U.K., including ones in Manchester, Northampton, and Nottingham. The recent infusion of capital--$30 million in senior debt, $12 million in mezzanine financing, and a $3 million credit facility, all arranged by Heller Financial, a U.S. investment firm--will allow it to add 17 more in the U.K. and Europe. VA has said that, in the U.K., it plans to launch units in Wandsworth, Islington, and Acton, all in London; in Bristol, Southampton, and Raleigh, in Essex; and in Bath, York, Glasgow, and Newcastle. It has confirmed that it has an interest in Germany, but denied rumors linking it with France, Italy, and Spain. The implications of VA’s initiative and accelerated momentum have not been lost on its U.K.-based competition, including Fitness First, Holmes Place Plc, and Whitbread Plc.

“Since its opening two years ago, Virgin Atlantic has come to represent a new standard of choice and affordability to the relatively fragmented health and fitness sector,” notes Branson. “This financing will enable us to become one of the top players in the industry worldwide.”

South Africa to fund more expansion
VA’s decision to become an international operator was prompted as much by philanthropic as financial interests. When LeisureNet began to fail, Branson had initially indicated he might buy HRC, but, after examining its predicament more closely, reconsidered and withdrew his offer. A phone call from his friend, Nelson Mandela, the former president of South Africa, who was concerned about the effect that the chain’s collapse would have on its nearly one million members, as well as the country’s economy, induced Branson to take a second look. What he found were attractive, well-equipped, and, in many cases, well-managed facilities that were bearing the brunt of LeisureNet’s financial excesses (e.g., the sale of long-term, heavily discounted memberships; some 80,000 members were paying less than $7.50 a month).

“The operations, we think, are quite good, and the South African market is passionate about health and fitness,” notes Reed. “We believe that over 20% of the market exercises, which surpasses the participation rate in the U.S. Some of these clubs are getting 4,000-5,000 visits a day.”

VA purchased HRC last December, completely reengineered its business model, spent more than $1 million on an extensive, and imaginative, marketing campaign, and earmarked more than $10 million for the revamping of its facilities. “The process that we’re now going through is very challenging,” admits Reed. “The business was overstaffed, had too many regional offices, and had no purchasing policy or cost controls--it was rather bizarre to find out how much was wrong. But it also afforded us a huge opportunity to go in there and clean things up.”

VA already owns 92% of the South African market, estimates Reed. “It will take 2-3 years to get things right,” he predicts. “Then, we’ll be able to take about $30 million a year out of South Africa to drive our expansion into Europe and the U.S.” Other future possibilities for the company include clubs in Australia and India. “Richard’s suggestion is that we go wherever Virgin flies to, because we’ll obviously have brand awareness there. The Virgin brand travels very well--as long as Richard continues to do his thing. I hope he’ll avoid any more balloon flights in the near future, because that’s kind off worrying.”

With respect to VA’s long-term prospects, Reed observes, “Richard, ultimately, is there for the exit,” says Reed. “He likes having fun; he likes going into new markets and spreading the brand. But, in the final analysis, he’s going to sell this business or take it public--it’s not a question of if, but, rather, a question of when.”

Catherine Larner is the editor of Health Club Management magazine, which is published in the U.K.