Fitness Source Toronto shuts down as Forzani steps back in as owner-operator

Forzani has taken back control of the operations of the Toronto-area Fitness Source stores after the three men running the business for the last two years suddenly stepped out, SNEWS® has learned.

A few days ago, SNEWS started hearing all Toronto-area Fitness Source stores had suddenly shut down. Our prying eyes in the Ontario area of Canada told us the stores were dark with locked doors — even during business hours — but remained full of equipment. One source found a sign on a door that reported it was “under new management,” and the website (www.fitnesssource.ca) as of April was only a holding page with the message, “Online sales are temporarily discontinued due to reconstruction of the web site. Please check back soon.”

We reached Tom Quinn, Forzani president and COO, who oversees the company’s franchise operations, including the acquisition of Fitness Source in January 2006. He told us the attorney for the franchisees of the nine Toronto-area stores delivered a letter to Forzani (TSX: FGL) about 10 days ago rescinding the franchise operations agreement.

“This hit us as a bit of a surprise,” Quinn said. “Now we can do what we want to do.”

The franchisees — Mitchell Melnick, Frank Fallico and Peter Zambito — responded to requests for comment by SNEWS by email and phone only with a confirmation that the stores were indeed now back under Forzani operations after they handed back the control.

“We have nothing further to add at this time,” Melnick said in an email to SNEWS.

Canadian franchise law in Ontario seems to indicate a franchisee can rescind a franchise agreement without penalty or obligation if it is done within two years after entering into the agreement. The attorney for Forzani did not return a call by deadline to clarify what the next steps were legally.

Shut down, fired

On March 31, the stores’ staff members took inventory, Quinn said, and then they were all laid off and the stores were shut. But they aren’t to stay that way long, we were told.

“We took possession, and we’ll be opening soon,” he said. Quinn added the staff members had to be fired since they were officially employees of the franchisees, but Forzani will rehire many of them.

“We obviously need to staff the stores,” said Quinn, who said he expected they would re-open all of the stores in no more than two weeks. Some of the stores have leases that are coming due in the next 36 months so, as they near those dates, Forzani may re-negotiate some of them or move the locations.

That would enable the Canadian sporting goods company to transform its Toronto stores to resemble the new fitness concept it debuted at a store in Calgary in December 2008, he said. (Click here to see that Dec. 16, 2008, SNEWS Industry News Release.) That concept incorporates the fitness specialty element into a “mega” store concept with other sporting goods, also incorporating apparel, footwear and nutrition as well as training, workout demonstrations and consumer education. Quinn discussed in-depth Forzani’s plans for the concept, delayed several times over the last few years, for a June 18, 2007, SNEWS story, “Forzani plans dozens of Fitness Source franchises with new retail/training concept.” Originally, Forzani had discussed plans to launch its own fitness stores of this type in an Oct. 11, 2004, SNEWS story, “Forzani Group to take on specialty fitness in Canada with a twist,” before it acquired Fitness Source.

But this doesn’t mean a sudden closing doesn’t create a few glitches: One source in the area said there was a sign on the door of one store that said it would be moving about a half-mile south, without giving the address, and added it would be “unavailable” for a couple of months. The voicemail box at the store on Yonge had an automated message saying the mailbox was full, then proceeded to tell callers to “please hang up,” before it hung up the phone. We heard reports the service departments were open but SNEWS was unable to get a real person on the phone after calling a variety of numbers for four stores.

Quinn is apparently moving as fast as the company can to re-open the venues, buoyed by reported success at the Calgary retail test where revenues are above forecasts and margins have increased, he said. In contrast, the company reported in December that profit for its third quarter were down 33 percent despite sales being up 9 percent. (Click here to see that Dec. 15, 2008, SNEWS story.) At that time Forzani called the quarter “a roller coaster ride … as the financial crisis sent nervous consumers to the sidelines.”

“We continue to run the Fitness Source business,” Quinn told SNEWS, “and we see a substantial opportunity for development across the country, and we’re going to go after it.”

–Therese Iknoian

SNEWS® View: Although we are not lawyers and could not reach the Forzani lawyer for interpretation, there seems to be an indication in the law — the Arthur Wishart (franchise disclosure) Act of 2000 — that franchisees can claim losses and expect to be refunded the money when they rescind an operating agreement within two years. Per the law, the franchisor’s obligations on rescission include “compensat(ing) the franchisee for any losses that the franchisee incurred in acquiring, setting up and operating the franchise, less the amounts set out” in certain clauses. In addition, the law notes the franchisor will “refund to the franchisee any money received from or on behalf of the franchisee, other than money for inventory, supplies or equipment.” There are, of course, other clauses and exceptions. Considering the current economy that is also affecting our friends north of the border, we must wonder if the stores were not making a profitable go of it and the franchisees decided not only to get out of the agreement but also to do that within a time period that it seems could allow them to get their money back. We wouldn’t be surprised to see this case end up in court.

–SNEWS® Editors