Kiwi business stars earn their stripes in the US

More than 2000 US health clubs offer Les Mills programmes. Now the fitness empire is aiming for 5000 in the next few years. Photo / Martin Sykes

If you only read the headlines in the financial press, you could be forgiven for thinking the United States, and California in particular, is the last place you'd want to try flogging your wares right now.

The decision by Michael Hill to close several of its US stores is undoubtedly a sign of the times.

It's certainly true that many Americans are facing tough times in the wake of the global financial crisis, and that California is indeed on the brink of bankruptcy. However Kiwis already doing business in the US insist there are still opportunities for enthusiastic entrepreneurs.

It is, after all, the world's single largest market - for the time being anyway - and has the advantage of being not too far away, and sort-of English speaking.

Healthcare technology is one sector tipped to boom over the next few years, and there are plenty of other niches that New Zealand companies have managed to find.

All agree it's not easy to establish a new business in such an enormous country. But as their own success shows, it can be done - even during the most challenging financial circumstances in decades.

LES MILLS

It's 10am on a Tuesday, and a diverse group of mostly middle-aged Moms are getting sweaty to the sounds of some over-excited pop star. Their gorgeous young instructor goads them on, making the awkward moves with various barbells look almost effortless.

But for the fact that the Bladium Sports Club is tucked inside an old plane hangar in the middle of a giant navy base, you wouldn't know whether this was Oakland or Auckland.

The gym is one of more than 2000 health clubs in the US that offer the Les Mills Group Fitness System - the aim of which is to do nothing less than "change the way the world thinks about fitness".

Les Mills exercise-to-music programmes are taught by more than 70,000 certified instructors in over 13,000 licensed clubs around the world, and the US is a key market.

Last month the largest privately owned US fitness chain, 24 Hour Fitness, agreed to introduce Les Mills BodyPump classes to 400 of its clubs over the next six months.

The Auckland-based fitness empire has come an awfully long way since it was founded by former Olympic athlete (and later Auckland mayor) Les Mills back in 1968. It was the business nous of Mills' son Phillip that drove the gym's expansion in the 1980s, and eventually led to him being named Ernst & Young Entrepreneur of the Year in 2004.

But conquering the world's wealthiest and most fitness-conscious market has not been easy. With more than 30,000 gyms and health clubs in the US - around the same number as in the whole of Europe - it's a massive market, and one in which the company still sees huge potential for growth.

Simon Rickman has worked for Les Mills since 2004, originally in Auckland, then London, and now in San Francisco. In 2005 the Kiwi helped instigate a change in strategy in the US, switching from a single distributor to six regional agencies.

"It was a big development for the company," he says. "The US fitness market is the biggest market in the world and in my view one we underperformed in."

It was also a brave move; its previous US distributor, Body Fitness Systems, was then able to compete with Les Mills, which it did by developing and marketing its own group-exercise programmes.

Since then Les Mills has more than doubled its penetration in the US. However it has ambitious goals to be in more than 5000 facilities in the next few years, and the recession has not exactly helped.

While the economy is slowly recovering, Rickman does not expect consumer spending to return to the excesses of three or four years ago. "The indications we are getting are that people are starting to spend again, but they are going to be a little bit more cautious this time," he says. "We're moving in the right direction, but we've got some way to go."

It sees its biggest competitor as the plethora of freestyle aerobics instructors who work for individual gyms, as well as its former distributor.

"It's a huge country and trying to resource up to sell nationwide from one single point was a challenge," says Rickman. "Prior to 2005 we saw the world differently, and saw this market differently. There were some challenges around which brand we were building, so part of the change was also pushing the Les Mills brand, rather than the brands of our different programmes."

So far, most of its marketing has been done through trade events, and through Phillip Mills' own networks. The cost of television advertising is prohibitive in the US, so each region has its own sales team who spend most of their time on the road, meeting with potential clients.

Its products are identical around the world, although it does adjust its message slightly in the US.

"If you're talking about sales, how you position that to a US club owner or club operator is different, and I think one of the big learnings for us has been getting that messaging right to the target that we're going after. It's making sure the message is about the customer and how we can help the customer, and not so much about us."

While the company's New Zealand roots provide a talking point, it's not something Rickman pushes too hard. "It's an interesting point of discussion but then you need to move quickly on to acting like a US business."

One of the advantages of hiring in the US is that you get to choose from thousands of applicants, and Les Mills' staff certainly exude an extraordinary passion and enthusiasm for their jobs. However, Rickman insists this isn't unique to the US.

"People fall in love with working for Les Mills because it's such a great product. You can do so much good for the world with it as well, so people are really committed to the product and their reason for coming to work each day. And if you get that piece right, everything else follows from that."

Its main focus is to persuade fitness facilities across the US that its unique programmes, commitment to training, and behind-the-scenes support will help them overcome the international phenomenon of "new year resolution syndrome" - people who join a gym, then quickly lose interest.

"We've got to show them that we can improve their return on investment in two ways: by hanging on to the members they've already got, as well as attracting new members."

In cities such as San Francisco, where many people have lost their previously lucrative finance industry jobs, that isn't easy. But it's still a worthwhile goal. Last year Les Mills helped federal authorities break up a group that was pirating its products.

"For us as a company, globally we have to dominate here in the US if we want to achieve the goals we've set, which are big, and aggressive," says Rickman. "So it's a case of we've got to succeed in the US. It's a really, really interesting country. There's a huge, huge opportunity, heavily driven by just a massive population of people, so it's mostly a numbers game."

AUTHOR-IT

Paul Trotter likes to joke that he has "two lives, one wife". He means that he spends up to a third of each year overseas, and two-thirds in Auckland, where his long-suffering family have become used to his frequent absences.

It's a sacrifice he's prepared to make for a bit longer yet, to allow him to focus on a crucial growth phase for the software company he founded 14 years ago in a spare room at home.

What began as a single product to make desktop publishing easier to manage has evolved into a sophisticated solution for content management which is used by some of the world's biggest companies, such as Coca-Cola, Computer Associates, and HP.

Trotter knew right from the beginning that he would have to target overseas markets, as New Zealand was simply too small.

"[In the US] you can sell a million-dollar deal to a company because they can see a $2 million saving in two years' time, whereas New Zealand companies don't tend to have that long-term view. They look at it as an expenditure, not as a way to reduce costs. It became pretty clear it was almost a waste of time trying to sell to anyone in New Zealand."

He began by attending trade shows in the US - but not the sort that are covered by the mainstream media, which he believes many New Zealand companies get sucked into attending. Instead, he stuck to the smaller events, usually combined with a conference, where experience taught him he was more likely to make a sale.

It took at least two years of persistent effort for Author-it to develop a following, but it soon employed more than a dozen staff.

At first it had no choice but to use resellers as agents. Trotter avoided the high-volume "box-movers", preferring to deal with companies that had little software experience but could provide stronger customer support.

By 2006 it had expanded into Europe, the Middle East and Asia, but the US remained its largest market and it became obvious it needed its own sales staff.

"We were successfully making decent sales - five- and six-figure deals over the phone from New Zealand - but it wasn't enough. We had to come to the country to do a proper job."

In 2007 Trotter hired Steve Davis, who had previous experience breaking into the US with Kiwi software firm Econz, to set up the American arm of the company.

They initially targeted California because it was easy to get to from New Zealand. These days they own an apartment and a car there, to save costs.

While the global financial crisis has set back their growth plans by up to two years, they have used it as an opportunity to refine the business and rethink their strategy.

"In a down market the most important thing is to become hyper-efficient at everything you do, because there is no space for fat, no space for mistakes; there is no space for anything," says Davis.

It was Glidepath founder Ken Stevens who originally persuaded them that being on the ground was not only vital from a cultural perspective, but also to keep up with trends. NZ Trade & Enterprise also put them in touch with some well-connected businesspeople in the US who provided valuable advice.

As a result, they are now convinced that most clients will soon prefer to access their software via the internet, and are therefore launching a software-as-a-service model.

Davis isn't sure that New Zealand has yet woken up to the fact that "cloud computing" is revolutionising the software industry.

"There's a lot of people in New Zealand who don't realise the change that has happened in the last 12 months and it comes back to this message of being in-market," he says.

Its US competitors have been known to infer that coming from the bottom of the world is a major handicap - and have at times been quite malicious about it. In a big country like the US, such fierce rivalry is par for the course, says Davis.

Being from New Zealand does have its advantages. Americans love the Kiwi accent, he says, and have a high regard for New Zealand and our ability to think laterally. However it also important to be seen as an American business, with American staff.

"We get a multiplier out of that because we're able to form relationships really easily, but they also know there's an American base behind us in terms of sales staff, service delivery staff, client support and so on."

Networking skills are absolutely vital in the US and business deals almost always come down to who you know, says Trotter. Hiring salespeople with good networks is therefore essential, and you have to be prepared to pay them well, he says. Although base salaries have dropped lately, it is still common for top salespeople to earn more than a chief executive.

"In New Zealand, sales is not seen as a profession, but here it is an absolute profession. And if you're not prepared to spend the money, and you're upset that your salesperson might be earning more than you - get over it. It's just the way it is."

One downside of doing business in the US is the bewildering bureaucracy of employment and taxation laws, which often differ in each state.

"Establishing the business was actually quite easy, then all the pain started," says Trotter. "It's just diabolical, and it takes up so much time."

Davis is only half-joking when he says he is considering writing a book about his experiences. "We can never complain in New Zealand about howhard it is to run a business," he chuckles. "[In the US] you can waste a lot of money on lawyers and accountants, and still not get the advice you actually need."

However both agree that what they have achieved has been worth it.

So far the company has been able to expand by relying on its cashflow, and by raising some debt. Last year it also received $870,000 from the Foundation for Research, Science and Technology, and this year the pair may consider a deal with an American investor to fund further growth.

Their plan is to continue to double revenue each year, aiming for US$100 million in sales within the next five years.

In the early days, says Trotter, he ran the business "on the seat of my pants", but has come to appreciate the importance of planning, and regularly reviewing the plan.

Davis agrees. "You'll make enough mistakes anyhow even if you plan, and if you don't plan it could be catastrophic. I can say without a shadow of a doubt that we are a much better company now than we were in 2008, even though we were doing amazingly well back then."

RIGHT HEMISPHERE

Like Author-IT, Right Hemisphere keeps most of its R&D staff in Auckland, and most of its sales staff in the United States.

The company, founded by Kiwi IT entrepreneur Mark Thomas, is at the forefront of the 3D revolution, developing visual software that is particularly useful in helping large companies grapple with complex engineering processes.

In 2006 it received a controversial $14 million loan from the Labour Government, in the hope it would help to develop a cluster of companies here specialising in 3D graphics. The loan is due to be paid back next year, but in the meantime the company has inevitably had to accept money from the US as well, and is now majority-owned by American investors.

Its clients include one of the world's largest dental equipment manufacturers, A-dec, which uses its software to automatically generate interactive 3D PDFs of its furniture orders. The world's largest supplier of commercial aeroplane assemblies and components, Spirit AeroSystems, also uses its software to generate animated, visual instructions for building fuselages.

Bob Merlo is the company's US-based head of worldwide marketing. He insists it has coped with the economic climate remarkably well, largely because many of its major clients had long-term contracts to fulfil. "We really hit the right niche, I think, to help us weather that storm."

Clients such as Caterpillar, Komatsu and P&H Mining are also benefiting from federal strategies to boost the economy through spending on infrastructure, he says.

Nevertheless, he admits he has been disappointed by its sales growth of 20 per cent in the last quarter, compared to the previous year. He is finding deals are taking longer to close as a result of the recession, and clients won't even consider deals with a payback time of more than a year.

While diversification can be important, Merlo believes it is vital for small companies to remain tightly focussed, which is why Right Hemisphere has decided to stick to the three main industries where it is already well represented: aerospace and defence, heavy plant and machinery manufacturers, and medical systems companies.

His advice to other start-ups is to forget about chasing "the shiny balls". In his opinion, companies serious about tackling the US need to define a realistic strategy, and aim at vertical rather than horizontal markets. It also helps to have a partner, and to relate what you're doing to specific clients. And it is vital, he says, to be able to demonstrate a believable return on investment.

One area he is currently working harder on is quantifying in more detail how Right Hemisphere helps its clients be more productive, and more efficient.

At one stage, software company Adobe was a partner, and Merlo has watched Adobe's progress with interest.

These days, his company's main competitors are traditional suppliers of computer-assisted design (CAD). Unlike most of its rivals, Right Hemisphere doesn't lock its clients into any particular type of CAD equipment. However it can be difficult getting that message out, and Merlo is sure many companies would dump their old suppliers if they only knew what Right Hemisphere had to offer.

"Building awareness and making sure we're on the map, not just in New Zealand but everywhere in the world, is pretty important, but when you're a small company it's also pretty challenging."

He concedes the transition from 2D to 3D has taken longer than expected, but believes momentum is now building, which should provide opportunities as potential customers rethink their entire systems.

"For us, we're going to focus on the manufacturing business and grow that piece of the market, rather than grow with ... games or video or movies and that market, but I do think all of that will fuel this whole utilisation of 3D assets into the public consciousness."

That said, existing clients such as Gulfstream Aerospace are finding new ways of using the software - for sales and marketing, for example.

"It's really wonderful to see Gulfstream jets, which are just beautiful US$60 million jets, rendered in our technology."

As a result, the company is placing more emphasis on providing entire visual solutions these days, and less on specific products.

"Those are the sort of things that will continue to set us apart."

- Karyn Scherer travelled to the US as a guest of NZ Trade & Enterprise.