Yesterday, I wrote about WCC’s revenue generation plans and why they’re unlikely to benefit the College. In short, public-sector entities know very little about managing financial risk. They don’t have to because a public sector entity doesn’t need to make a profit.
The profit motive is very unforgiving, and the market responds rapidly to a profit-seeking firm. There is no long game; either the money comes in or it doesn’t. But when a public sector entity competes directly with for-profit entities, it may miss unmistakable market signals of trouble. It may continue to operate long after its for-profit counterparts have either left the market or adjusted their strategies.
Why Peloton matters
For example, the pandemic has been very hard on the fitness industry. Health clubs usually develop a very dedicated clientele. Clients pay an annual fee and monthly costs to use a facility.
Most states required (at least for a time) that health clubs cease operations or severely reduce their operating capacity. But typical businesses don’t have the capital to hibernate indefinitely. After health clubs shut down in 2020, their services “went away” but the demand for their services didn’t.
People still wanted to work out, so they pivoted from working out at the health club to working out at home. They found substitutes for the perceived value they’d previously gotten from their health clubs.
People bought connected health equipment, like Peloton bikes, and Tonal Personal Trainers. These devices cost thousands of dollars, and require a subscription for training content.
Health clubs have re-opened, but the pre-pandemic subscriber rates haven’t returned. People are working out at home, having transferred their health club subscriptions from a physical place to online services. They’ve invested in expensive exercise equipment. And because the investment is so large, they’re not going to walk away from it.
Fitness industry analysts estimate that the market may be 40% smaller post-COVID-19. Peloton is building a factory in Wood County, OH, just south of Toledo. When the Peloton bike factory opens in Troy Township in 2023, Peloton bikes will be exceedingly easy to get in Ann Arbor.
The pandemic permanently closed 20% of all gyms that were operational in January 2020. For a private-sector health club operator whose facility spent most of 2020 unused, and who is now trying to entice members to return even while the pandemic roars on, news that Peloton is plopping a bike factory 55 miles south of their facility would constitute a five-alarm fire.
A public sector entity doesn’t take important cues from the private sector
But that’s not how the quasi-private health club at WCC operates. The facility is supposed to generate a profit for the College. WCC has contracted a firm to operate the club, but it appears that no one is managing the risk. No one established a guaranteed revenue stream outside of the building’s operating funds to pay the bond debt. No one developed a business plan, or modified the strategy post-pandemic. Nobody created an exit strategy.
A real for-profit entity would have overhauled its business plan to address the loss of subscribers. It would have developed counter-strategies for Peloton, Tonal and other in-home systems. And it would have addressed the $4.5M financial loss that the club recorded.
Not too many private, for-profit health clubs can sustain a $4.5M loss and keep rolling. That’s one of those “unmistakable signs” that business isn’t going so well. But the public sector entity isn’t intelligent enough to be either debt-averse, or risk-averse. Instead, it pulls $4M out of a federal relief grant to make the accounting work, and keeps rolling. Its for-profit competitors don’t have the federal government to bail them out. So, a $4.5M loss in one year might be a sign to fold.
Public sector oversight is essential, yet absent at WCC
But because WCC is a public sector entity, it is willing to dump $4M into a black hole, jut to find out what happens. The Administration does not have the sense to know when the game Is done. The Board of Trustees does not hold the administration accountable for its lack of business acumen because the Board itself is asleep. As a result, the Health and Fitness Center rack up huge operating losses for years. There are no safeguards to prevent it, and there is no action plan to stop it. Worse, there is no plan to exit, so the taxpayers are committed to covering its debts indefinitely.
This is a very real example of the public sector’s inability to judge risk. It is, by far, the best reason for WCC to avoid “other revenue” generators. Especially in the context of the excessively permissive oversight environment the Trustees have created. To maximize the benefit of a public sector revenue generation strategy, the overseeing body must establish and enforce inviolable operating guidelines. It must recognize and mitigate the strategy’s inherent risks and limitations.
It must also be willing to stop.
Photo Credit: Tony Webster , via Flickr