Some of the promotional things we are doing within clubs now, we are starting to see vendors that want to come to us to sell their merchandise and consumer brands that never would have happened before, but our scale has changed at 18.5 million members, 2,500 locations. I’m going to harken back to my insurance build that Tom likes to laugh about. But I got paid $425,000 last year for business insurance. And my quote that came in 4 days before due renewal came in at $850. Total claims over the last five-years is less than $800,000. But with 23 gyms, I don’t have the leverage to lean on an insurance company and say, that is not acceptable. But with 2,500, we have got an opportunity to work with some of these people to get the best product at the best price and that goes across all different things.
So that is leverage. The other thing that we need to do a better job with this marketing. We talked about earlier is branding as well as promotional marketing. We need to do that to make sure that we have an opportunity to get our story out there, because these Gen Zs and what have you are much more into value but also into what do you stand for? And that brand is very important to us. So those are just some of the things we need to do a better job of in order to really grow this brand. So I have a big believer in this brand, and we have to be really innovative in the way we look at putting new things in clubs, testing our pricing – different iterations of our pricing to make sure that we are getting the maximum value that we can to augment the customer experience.
So those are some of the things we need to do. And if we do those well, this brand will be around for at least another 30-years.
John Heinbockel: Guys, one quick follow-up since you brought up marketing, right? That is always looked like an opportunity right? As you get to $300 million of spend and higher, right. To restructure that more national, maybe provide relief to franchisees, right. They can spend 100 basis points less. How do you think about that? And is that not a near-term opportunity, it is down the road?
Craig Benson: It is – we need to grow into this brand thing a little bit better. We are not ready right now. At the hull, I talked about changing the mix. And I said it is coming, because we have to be much more about branding and a little less with promotion. And by the way, we are going to probably spend closer to $400 million next year. So it is getting to be a big nut. And we need to spend it effectively. We are, by far, the biggest spender and marketing of anybody else and $0.09 of every member dollar goes into marketing. So it is a big expenditure, but it is also a big opportunity. Chris used to call it the flywheel. I’m not sure I would use the same term. But what the term I do is we have some ways to communicate with people that nobody else does.
Thomas Fitzgerald: And John discussion that Craig is mentioning that was just merely taking the nine and remixing it, not lowering it. We still think there is a lot of folks to get into fitness before we start thinking about reducing the rate.
Operator: Our next question comes from Rahul Krotthapalli from JPMorgan. Please go ahead with your questions.
Rahul Krotthapalli: Tom, can you just clarify what your comments meant to the equipment margins? I know you talked about protecting the dollar profits in the segment. Is there a way where you can probably pass through the cost you buy the equipment from to the franchises at least on a case-to-case basis or is it something differently how you are thinking about it?
Thomas Fitzgerald: Yes, I think what I was trying to convey there is as we continue to evolve the mix of equipment, you may have heard us talk about where the Gen Z clearly seems to prefer strength and functional workouts versus cardio. Treadmills still get about the same use, but things like elliptical and bikes are getting far less used. So we have been – we took a first swing at this to readjust the mix or to adjust the mix to have less cardio, more strength. We are now taking a bigger move on that because it is given, Gen Zs are 25% of our member base and millennials have similar habits though not quite the same and because strength costs less than cardio and because, in some cases, the functional areas just have more open space so people can work out.
Overall, the revenue per new store will come down. And so what we have done is adjusted our margin that we charge, so that the dollar margins that we earn on that new store placement are roughly the same. That is what I was trying to convey. So we have done that historically. We will continue to do that, and we will see how it all evolves. But that is what I was trying to convey.
Rahul Krotthapalli: Got it. And follow-up on the changes to the growth model. So looking at the math here, it looks like this uplift and cash-on-cash returns over the life of the period is close to up 200 bps and it is translating close to $0.5 million per new store build in terms of present value of savings. So is it fair to expect that this improves the visibility by like 15 to 20 stores each year, at least on back of envelope, is this the right way to think about it?
Thomas Fitzgerald: Yes. I think there are 2 different things, right. One is the CapEx dollars. As you know, this model is a CapEx heavier OpEx way lighter model compared to most, our flow-through and all that and margins attest to that. But we have – in light of the inflation and higher interest rates and the usage patterns that have changed in our stores, we thought it was appropriate to look at the reinvestment cycles, read cardio and strength 3 equips and also remodels. . And back to what I was saying before, Rahul, on the cardio, not all stores are created equal either when it comes to remodeling. Prior to 2016, we didn’t really have a design standard. And then 2016 and forward, the stores that were built look like stores we are building today, much closer to them.
So the cost to remodel those prior stores is going to be more than the cost to remodel the stores that were built 2016 and forward. So again, we can’t apply a one size fits all, but there are some stores that, frankly, when we go in them, we are not happy with them. So those stores will still need to be remodeled, and that is what we are calling sort of brand damaging. But you can’t really translate the improved store returns and improved economics, admittedly starting from a pretty darn strong place to begin with. To incremental new store units. That is the work that is ahead of us working with our franchisees, as Craig and I talked about earlier.
Craig Benson: And I just want to bring up one thing that is maybe not clear to everybody. Remodels, there is no margin in it at all for corporate. So it is a nice new box. It looks nice and it hopefully attracts more members, and therefore, we get better royalties from that. But there is no direct margin that comes from our remodel.
Thomas Fitzgerald: There is no revenue or margin implication.
Craig Benson: Yes.
Operator: Our next question comes from the line of Chris O’Cull from Stifel. Please go ahead with your questions.
Christopher O’Cull: Tom, can you quantify the impact on the cash-on-cash returns you are expecting from this new growth model changes? And also, can you describe what changes are being made to reduce the $3 million investment by 5% to 10% beyond just the elimination of the initial franchise fee?
