This post is some musings on how I’d go about attacking my estimate that the Town should plan for 50% operating losses in a Vienna gym/pool facility.
How to attack this 50% loss estimate
In a previous post, I made the case that the proposed Town of Vienna pool/gym would likely have an operating loss of around 50%.
It’s not a bad argument.
- The cost side — operating cost per square foot of facility — is nailed down reasonably well, as these things go. Based on the data we have on hand, the proposed Vienna facility would have 33% of the size, but 71% of the cost, of the typical REC Center. Most people can fill in the rest. I would, of course, revise that estimate if more compelling data came forward.
- This issue of higher cost, due to smaller scale of operations, had a good “provenance”. This “economies of scale” problem for a Vienna facility was first raised by Council Member Kelleher, in the 2014 Town Council “no” vote on a pool at the Community Center.
- The results of my simple Econ 101 analysis “sounded reasonable”, at least to an economist. Price competition from the Fairfax REC Centers means that all the inefficiency due to the small size of the Vienna facility has to be borne by the taxpayers. Restated, all other things equal, if the taxpayers build themselves a “boutique” fitness facility, they’re going to have to pay for the the portion of operating average cost (per member, say) that is attributable to the smaller scale of operation.
- And, plausibly but far from proven, significant economies of scale is the very reason we have nine really big REC Centers for a county of 1.2M population. To me, the sheer size of the typical REC Center suggests that Fairfax was aware of the economies of scale issue when they built them. Fairfax was tasked with making them self-supporting. (For the REC Centers, user fees fully pay for operating costs.) I’m guessing that building them big, few, and widely-spaced was a conscious strategy.
But on the demand side — which I can summarize as revenues per square foot of building — I assumed that Vienna could not do materially better than Fairfax.
So, to say that my rule-of-thumb for likely taxpayer losses is way off the mark, you need some sound data and reasoning to suggest that Vienna’s one-third-scale rec center is going to collect much more revenue, per square foot, than the average Fairfax County REC Center.
I rejected the demand analysis provided to Town staff. For one thing, it was the seller’s numbers, that is, it was provided by (the chosen partner of) the people trying to sell Vienna this new building. As such, it was unsurprising that it made the building look pretty good. I identified a handful of fairly aggressive assumptions (e.g., no competition for the relevant pool dollar within the Town of Vienna, no acknowledgement that around half the proposed market area is actually closer to a REC Center than to the proposed Vienna facility, and the presence of what could easily have been a tuneable parameter of 20%, for the fraction of the pool dollar Vienna would collect from the nearby non-Vienna population). In addition, while the consultants suggested charging roughly the same as Fairfax for Vienna residents, they blithely assumed you could charge 25% more than Fairfax does, for people living outside the Town of Vienna. To which, all I can say is, you can try to do that, sure. But in reality, all that means is that revenues were overstated by 20% or so for the half of the market living outside Vienna. In other words, the rote assumption of a “25% up-charge to other-than-Vienna-taxpayers”, along with (e.g.) not even bothering to locate the three nearby REC Centers on their market area map, tells me that that demand study really, truly did not understand what Vienna is doing, in going into head-to-head competition with Fairfax County, using a one-third-scale model of the three much bigger Fairfax REC Centers that are within a reasonable driving distance of Vienna Town Hall. Taking all that together, and the fact that the resulting estimate was grossly at odds with common-sense benchmarks (e.g., what are the losses at the similarly-sized Reston indoor pool), I decided that it would be imprudent for the buyer (Vienna) to trust the seller’s estimate, in this case. Not with all of those red flags raised. That doesn’t prove that the seller’s cost estimate was materially biased, but the risk of that appears high enough that this is what I’d have recommended, if Vienna had been my client.
A brief discussion of some relevant issues.
There are certain elements of the demand-side comparison that the Fairfax REC Centers will surely win. Briefly, these are:
Advantage to Fairfax REC Centers, for paid demand.
- Scope of services. Fairfax can afford to (and does) offer a broader range of services at their facilities than is planned for Vienna, and at a larger scale. In addition to the core pool/weight/cardio, drop-in child care, ball courts, indoor track, spa, sauna, and so on, they offer (e.g.) nutrition therapy, mini-golf, banked indoor running track. Spring Hill advertises that they have more than 400 different exercise classes weekly, everything from youth fitness (e.g., tumbling classes) to classes oriented toward the elderly. and have more than 50 different cardio machines in their 15,000 square foot cardio/weight room. You get the drift. If membership decisions are driven by breadth of services available, and one membership gets you entry to all three local facilities, Vienna is obvious at a disadvantage regarding breadth of exercise options offered.
- Ability to host swim meets, swim teams, and so on. The Olympic-sized pools, diving platforms up to 5-meter, large amounts of parking, and so on, allow Oakmont and the other nearby facilities to host regional swim meets, as well as local swim team practices. I have no idea how much revenue these events and swim team practices generate for the County, but that’s revenue unavailable to Vienna.
- Lower likelihood of congestion. It’s a classic finding of operations research that, for a given average level of use, hour-to-hour and day-to-day variation in demand matters more for smaller facilities than for larger ones. If you are committed to serving people whenever they show up, this means that total memberships have to be limited to a lower fraction of some theoretical maximum, in a smaller facility, compared to a larger facility. (This is why, for example, that large urban hospitals can and do operate at a much higher bed-occupancy rate than small rural hospitals.) The REC Centers can sell more memberships per square foot without randomly exceeding facility capacity limits — and so having to turn away people at the door — than a smaller Vienna facility can.
- Avoidance of Maple Avenue commercial district traffic. Just eyeballing the maps, traffic congestion on Maple seems like more of a problem for the Vienna facility than for the REC Centers.
- Less directly-nearby competition from private providers. Vienna has two private outdoor pools and several private gym facilities with a short drive of the proposed new facility. The REC Centers, by contrast, are in less densely populated areas, and are not directly adjacent to commercial districts, and so face less direct competition from nearby private providers of gym and (outdoor) pool services.
By contrast, I see these factors as an advantage to Vienna, for paid demand:
- Greater population density nearby. There are a lot of people who live within a 10-minute drive of Vienna Town Hall. By contrast, the nearby Fairfax REC Centers are all located or or near large tracts of publicly-owned land, either park land or school land. Although the travel times are typically a lot faster outside the Town of Vienna, that does not make up for the sparser population density outside the Town of Vienna.
- More homogeneous population. Presumably, somewhere around half the people you might meet at the proposed Vienna facility will be residents of the Town of Vienna.
- Civic pride. Presumably there will be some draw for this facility, from Vienna residents, purely because it is a Vienna facility.
An important unanswered question: Overlap of market segments.
On the one hand, a proposed Vienna facility would have more people nearby to it, than to the typical nearby REC Centers.
On the other hand, compared to (say) Oakmont, the Vienna population is also closer to many plausible private substitutes for a public gym/pool, including numerous private gyms, two private pools within the Town boundary, and two just outside of it. (And, in general, many studies show a positive correlation between population wealth and density of exercise facilities per capita, both public and private.)
A big unanswered question is the extent to which these private facilities effectively substitute for a public facility.
If true, the location of the Vienna facility near two private pools and several private gyms in the nearby commercial district may reduce demand for Vienna relative to the typical REC Center. In other words, you may have a lot of people in Vienna who have already made acceptable indoor exercise arrangements or swimming arrangements, and the fraction that has done so might plausibly be larger for Vienna, than for the REC Centers.
To put this in perspective, the Town of Vienna has about 5500 households (reference). The two outdoor pools literally within the Town of Vienna already enroll 1200 families, which is more than the number of pool/gym memberships that Vienna expects to obtain from the in-Town population.
The only point being that if those private pools are even a partial substitute for Vienna indoor pool facility membership, that could materially reduce Vienna facility membership.
Finally, I would not oversell the potential demand based on the existing study commissioned by the Town. It’s hard to argue from these two pictures at the top of this post that the existing study consists of a careful analysis of likely demand.
