UK: TENNIS RACKET. - Through vision, expansion and aggressive pricing the former tennis pro has created a burgeoning leisure-centre empire. But what happens when the flow of eager new club members begins to wane?

by Chris Blackhurst.
Last Updated: 31 Aug 2010

Through vision, expansion and aggressive pricing the former tennis pro has created a burgeoning leisure-centre empire. But what happens when the flow of eager new club members begins to wane?

Ten o'clock on a Friday morning, and the sprawling car park at the David Lloyd Club in Raynes Park, south-west London, is full to overflowing.

Wall-to-wall family estates, racy hatchbacks and four-wheel drives lend the scene an air of comfortable prosperity. Inside, the place is heaving - all the tennis courts are in use, the gym is packed, the coffee-bar area is buzzing. Four mothers and their young children are using the swimming pool. In the other, outside pool, an elderly lady does her lengths.

The nursery is in full swing, other children are in the creche. The hairdresser, newsagent, finance broker - yes, it has one, right beside the courts - and in the car park, the car-washing service, are all doing good business. Only three areas are quiet: the function room that seats 200 people; the Lanes, a ten-pin-bowling centre, which is crowded in the evenings, and Laserquest, the laser shooting game that comes into its own after school and at weekends.

This is business, David Lloyd style. At first glance, it appears a sure-fire winner. Hundreds of people filling his club on a weekday morning is proof he has hit a rich vein. Lloyd, though, is playing a high-numbers game. Above all, what he needs are more people.

More people means new members, a joining fee and a payment straight to the bottom line. To keep pumping the profits the City has come to expect, and he has promised to deliver, he needs more centres. Finding big enough sites to take his clubs - to keep the returns climbing in years to come - is not easy. So far, he has succeeded. These, though, are still early days. One day, the wheels of David Lloyd Leisure plc could come off. 'If he can't get new sites and new members it may start to look very different,' says one corporate financier.

Last year, his profits grew 35%, to £7.6 million on turnover of £24.5 million. This year, Mark Finnie, leisure analyst at NatWest Securities, predicts another leap in profits, to £9.5 million. From one centre - opened at Heston, near Heathrow, in 1982 - Lloyd now has 18 either up and running or under development.

Most of that growth has come in the past four years. Heston may have opened in 1982 but it was a full seven years before Lloyd built his second centre, at Raynes Park. Since then, the new complexes have come thick and fast. In March 1993, David Lloyd Leisure made its stock market debut, selling the shares at 150p. Today, they are 260p. The company is worth £125 million and Lloyd holds 8.5%.

Sitting in the bar at Raynes Park with the man himself - looking just as lean and fit, with the tour pro's all-year tan, as he did in his prime - he oozes confidence. To borrow a sporting cliche, he talks a good game: fast, chirpy, cocky even, masses of will to win. His ability to drive a hard bargain can be judged from his service contract: he is paid £200,000 a year through his private company David Lloyd Associates and has a three-year notice period on his contract. If he is fired, he is entitled to £750,000 and he can set up in competition, provided he serves his notice. His wife does not lose out either. Her services are also supplied by her husband's private David Lloyd Associates. In 1994, the company received £287,000 for Lloyd's services as director, and other interior design and public relations work.

His appetite stems, he says, from starting as an amateur. When he began playing, tennis was not the easy-megabucks just-for-turning-up sport it is today. At 17, he was staying at the YMCA and hitch-hiking to tournaments. Towards the end of his career, when he formed a successful Davis Cup partnership with his younger brother John, he was too late: the big money was for the next generation.

In America, playing team tennis, he saw the potential of indoor tennis centres. This country had its courts on public parks, usually poorly maintained, and its snooty clubs with waiting lists, but little in between. There was nowhere that provided all-year-round tennis with guaranteed perfect conditions.

He raised £100,000 from mortgaging his house at Kingston-upon-Thames and raiding his savings. Even for a big name with the gift of the gab like Lloyd, obtaining the rest was difficult. 'People kept asking, why should it work or can I see an example?' he recalls.

His quest was not helped by his insistence on keeping full voting control. Eventually Barratt Developments and Midland Montagu Ventures came up with the £1.5 million he needed. Heston opened in October 1982. In the company's first full year of trading, to 30 September 1983, it made a pre-tax profit of £100,000 on sales of £885,000.

Despite that success, expansion was slow - Midland Montagu, which owned 72%, was reluctant to put more money in. The crunch came in 1990, when after opening Raynes Park, Lloyd had planning permission for four new centres but only enough cash to build one. An Irish company, Leisure Holdings, came to his rescue and bought out Midland Montagu - the connection was not entirely severed, as Midland Montagu's Ian Taylor, who sat on his board from 1981 to 1990, later became his managing director. In 1993, on flotation, Leisure sold its entire stake for £45 million.

The float raised £13.6 million for the company - enough, with its bank borrowings of £15 million, to be able to open five centres. And open them Lloyd will. 'Tennis is the ninth-biggest participation sport in the UK; it is second in France, number one in Holland,' he gushes. 'Fewer than one million people play it here; in Holland, which has a population of just 13 million, they have one million tennis players.' Transpose that ratio to the UK and his eyes positively twinkle: 'Over 12,000 indoor courts.' At present? 'Only 700.' Over 12,000 may be pushing it, as even he acknowledges, 'but you've got to think of at least 5,000'.

Working from a US industry yardstick, there should be one private court for every 150 members. In some places, he has beaten that; in others, he is short. 'Here,' he waves to the courts through the window, 'we have 200 per court but at Finchley we've got less than 100.'

Traditional British antipathy towards tennis is not a problem, he claims. Yes, it is true that for many people a game of tennis comprised a half-hour run around with much whooping and screeching on a park court during Wimbledon fortnight. He gestures to the courts where a middle-aged lady is gamely wafting a racket in the direction of the ball. The racket is circa 1960s. It has not been used for years. That is not the point, says Lloyd. She is enjoying herself and that is all that matters. 'Sixty per cent of our members can't play tennis at all,' he says. 'But give them smart surroundings and a court that is not prone to puddles and gusts of wind and they are hooked.'

There is more to Lloyd the company than mere tennis. Ask him how on earth he can make money out of tennis clubs and he smiles. 'We're not a tennis club, we're a sporting city.' You know what he means but it still sounds faintly ridiculous - we are, after all, sitting on the edge of a big hall in Raynes Park. Outside there are some outdoor courts and not much else.

On another analogy he is surer footed. 'We're the five-star Marks & Spencer of leisure. We give five-star quality at three-star prices.' On average, a David Lloyd club compares favourably with the top-of-the-range, local opposition. Membership of Raynes Park, for example, with use of all the facilities, is a one-off initial payment of £280, plus £618 a year.

Lloyd shows an aggression that would make even M&S wince. His membership fees go up 3% above inflation each year, come what may. 'He's taking the mickey out of his punters,' said a venture capitalist with experience in the leisure industry. 'At some stage, he will have to stop.'

Not so, says Lloyd. It is justified, he says, because each year each club improves. 'We aim to give the customer more satisfaction, so we will upgrade the facilities, buy new furniture, resurface the car park.' Running the clubs is 'like painting the Forth Bridge, it never ends'. Every year, at least £50,000 is set aside for each club just for repairs.

Then there are the major additions. Laserquest at Raynes Park, cost £140,000 to instal - like bowling, it is open to the public via a separate entrance, with members getting a discount - and makes £100,000 profit a year, says finance director Keith Furphy. Likewise, the 40-children nursery nets £150,000 a year. The gym at Raynes Park has just been expanded from 4,000 to 10,000 sq.ft. 'We're a developer - year on year no club is the same,' says Lloyd.

He says this without a hint of a smile. But it is hard not to laugh. For Lloyd is being disingenuous. The point, surely, is not to please the existing members - who must have liked the club as it was, or else they would not have joined - but to increase the cash-flow by bringing in the public, to attract new members and to justify the price increases to the current ones. 'We had organic growth of 12% last year,' says Lloyd. 'Here, at Raynes Park, it was 30% because we added ten-pin bowling.'

Not all members are so willing to pay up. In 1991/92 the 'churn' rate - those members who did not renew their membership - was 22%; in 1992/93 it was 18% and in 1993/94 it was also 18%. So almost one in five of his members walks away.

In theory, the lower the rate of churn the better: it shows satisfaction and a feeling from members they are getting value for money. But, equally, high churn implies new members, which in turn means more income - the initial joining fee is non-refundable. If the club is new and not full to capacity, it does not make sense to push up prices and churn. In an older club, says NatWest's Finnie, 'where demand is strong and memberships are sought after, then clearly the club has the facility to be more aggressive in terms of pricing'.

Which leads on to another aspect of Lloyd's business: joining fees are written up into that year's figures; lifetime subscriptions are spread over five years in the accounts. It is hard not to escape the conclusion that Lloyd is more interested in attracting new members because they go to the bottom line than in keeping existing members sweet - especially while he is operating in a market which, as he admits himself, is so desperately under-supplied.

In the placing document issued for the flotation the company hints at wanting it both ways. Pointing to a 'renewal rate' of 82% - or churn of 18% - the document says: 'This renewal rate provides the company with a high level of recurring income but also allows greater scope to accept new members with the consequent receipt of additional non-refundable joining fees.' Provided the numbers keep on rising, the City is not bothered. 'A non-returnable joining fee is a sale, the same as any other retailer selling something. I don't have a problem with that,' says Finnie.

Currently, Lloyd is in that rarefied state of being able to do no wrong. His finance director, David Gray, resigned recently. Normally, such a departure would cause the shares to fall. Lloyd's did not even blink. As it happened, Gray's reasons for leaving appear to be a combination of the company moving to new offices and him not wanting to have to relocate his family, and not always seeing eye to eye with Lloyd. 'There was a personality clash,' says Finnie. For once, Lloyd's demeanour slips and his facial muscles appear to tighten at the mention of Gray. 'He was brought in for the flotation and saw it through. He felt his time had passed,' says Lloyd, who thought it was better to make a fresh start in the new offices with a new man.

The City does not quibble, either, with some of Lloyd's accounting policies - though perhaps it should. Interest on loans taken out specifically for the development of a new club - they cost £6 million a time to build - is capitalised over the period of the construction and included in the cost of the club. Clearly, they contribute nothing to the value of the club which cannot appear in the books at a market price, but analysts do not mind. 'Although one is wary of this type of accounting, with a return on capital of 20%, and no club failures as yet, this seems fair enough,' says Finnie. In 1993-94, there was £170,000 capitalised which took the cumulative total to £1.97 million.

The buildings themselves are written-off over 125 years - far longer, surely, than their useful lives. 'Depreciation is more of an issue,' declares Finnie, 'and is open to question.' Food retailers, who also erect giant hanger-type structures, depreciate them over 40 years, which seems more reasonable. 'One hundred and twenty-five is stretching it slightly,' says Finnie. 'But its significance is immaterial - we are talking about quite small numbers.'

Lloyd's advisers should have known better: perhaps, as a former professional sportsman, he is used to going to the limit. 'There has been an education process with the City, and the depreciation issue indicates something that should never have been allowed to happen,' says another analyst. It doesn't matter - Lloyd can walk on water at present.

'This is not a net asset value play,' exclaims one share trader. 'The earnings growth is so strong and the value of the buildings themselves is not an issue. People aren't buying the shares because the buildings might be sold to someone else for an alternative use, they are buying because of the earnings growth.'

One day, the City will turn against Lloyd. By then, it may well be too late. The moment will come when he cannot get new sites, has exhausted growth at the ones he has, finds that members are leaving and not being replaced, and is being hit hard by competition. Those are a lot of ifs. For the time being, he is riding high. Competition is virtually non-existent and as for difficulty in finding suitable sites that is not a problem at present. Councils, he claims, are actually queuing up for him to open in their areas.

If anything, the councils' queue will get longer. As the new Davis Cup captain, Lloyd is in charge of Britain's efforts to put its tennis back on the world map. 'It's a very big plus to the company to have someone with a high-profile job,' he says. 'My name is very important. We don't need to advertise, we have a brand name.'

By the end of the decade, predicts the venture capitalist, Lloyd will have 300,000 members nationwide. 'Don't forget they will all have joined because of him. Without Lloyd there would be none. That is a hell of an achievement for one guy, starting from scratch with no money.'

What if one of those 300,000 were to win Wimbledon and go on to win the Davis Cup in a team led by Lloyd? You can already hear the cash register starting to ring. And if Lloyd runs out of new members and cannot find sites, and his profits begin to shake? You should not be surprised.


Turnover* (£m)

Tennis & fitness 19,953

Ten-pin bowling 2,897

Golf 778

Other 904

Total 24,532

Profit before tax 7,636

Shareholders' funds 40,652

* to year-end 30 September 1994.

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