Yoga Yoga International Hong Kong Yoga firm goes belly up
Staff reporter Thursday, April 01, 2010 The sudden closure of a popular yoga school in financial difficulties has left students who have already paid for classes feeling sore. Yoga Yoga International, which has schools in Causeway Bay and Tsuen Wan, closed its doors on Tuesday. Notices from director Edmund Leung Yun-ki said the school "will soon be placed into voluntary liquidation" and known creditors will be notified soon about a meeting. There were also contact details for a consultancy and a law firm for those who want to know more. But there was no mention of membership or subscription fees and whether these will be refunded. The Consumer Council confirmed it has received a complaint from a member who paid HK$13,000 in July for a two- year course. The yoga school's official website was deleted yesterday. But a discussion forum showed that Yoga Yoga had opened its Tsuen Wan school only at the end of last year. Yoga Yoga originally had three directors - Edmund Leung Yun-ki, Alyssa Cheng Hiu and Lau Pik-ling - a company search revealed. But Lau resigned on March 16 this year, or two weeks before the closure. A student named Chan said she signed on for a two-year program and paid HK$10,800 last year. But as she attended classes for 17 months she reckoned her loss was only around HK$4,500. She had also seen trouble ahead. "One day I decided to join an evening class at seven and I was the only student there," she said. "I realized then business was not so good." Another student, also named Cha n, paid HK$16,000 in February last year for a two-year membership to attend eight classes every month. "The coaches are very good and almost all of them are Indians," she said. "I was persuaded by staff to join the membership for two years and to make a one- off payment to enjoy a big discount." The Consumer Council has received 97 complaints so far this year about yoga courses, with late or non-delivery of classes accounting for 74 of them. Complaints about yoga courses last year reached 188, with the closure of yoga schools drawing 48 of them followed by disputes over charges (46) and sales practices (42) http://www.thestandard.com.hk/news_detail.asp?pp_cat=30&art_id=96566&sid=27599309&con_type=3 Yoga, default probabilities, and The MatrixPosted on April 1st, 2010 by gvozimodo in HK, LookMaNoBrains, Thoughts The news that a HK yoga studio had become insolvent and left its members with losses on their pre-paid membership fees is hardly a matter of geostrategic importance. But it seems to have wound me up more than the lifelong tragedy of Middle East politics ever has. At least I can propose a solution: better risk disclosure. By this, I don’t mean merely re-stating the obvious fact that Please check this box to acknowledge that you have read our terms and conditions blah blah blah in the event of a winding up of Winner Luck Jolly Fortune Limited (doing business as Yogagreed Ltd.) before the end of this membership you will become an unsecured creditor junior in priority of claims to secured lenders like banks and equipment suppliers and pari passu with other unsecured creditors that have seriously large unpaid claims like for instance the landlord blah blah blah so that your likelihood of recovering more than ten (10) cents on the dollar in such instance would be similar to the probability of snowboarding naked down the North Face of Mt. Everest. Anybody paying an up-front fee for a service runs a similar risk: you are buying something that doesn’t exist yet. If it never exists then you never own it. Seems like common sense would prevail in this case, right? Apparently not in the case of “a student…named Chan, [who] paid HK$16,000 in February last year for a two-year membership…” so that she could “enjoy a big discount”. Ah, greed, it conquers even the lusty spiritualism that many people think yoga is supposed to embody. The siren song of declining marginal cost claims another victim at retail. This Ms. or Mr. Chan might have benefited from proper disclosure by the yoga studio or any other subscription-based service provider. People don’t seem to understand that paying for a service that doesn’t yet exist is exactly the same thing as lending money today for payment later. Since fitness clubs more generally have a long and storied history of ponzi behavior culminating in bankruptcy, I think that people making up-front payments should be required to acknowledge thefinancial risks they are taking just as if they were making an investment. Because most people aren’t loan officers, not the people in HK yoga studios anyway, they aren’t going to understand that the “big discount” they are being offered for an up-front payment is a signal of the amount of risk they are taking. This part pisses me off particularly because it is another example of how naïve people are duped into handing over money to people who couldn’t give a rat’s ass for whether that money ultimately pays for the service it is supposed to. I detest the fact that fitness clubs have transmogrified into a small-scale version of The Matrix where there members are like a Borg cube of miniature ATMs. What should the febrile Consumer Council and interested HK legislators do about this? Mandatory information about the risks to up-front payments is fairly obvious because it attempts to level the playing field without interfering in private transactions. For example, Ms./Mr. Chan of the “big discount” fame might have wanted to know that s/he was actually being offered something like a 138% interest payment for lending Yoga Yoga International Limited just over HK$5000 for two years. While this might sound like an encouragement for everyone to run out and loan money to their nearest yoga studio, it actually means that the yoga studio gives itself nearly a 2/3 chance of going bankrupt before the end of the two years! Ms./Mr. Chan probably wouldn’t have like that too much, and that’s of course why nobody soliciting up-front payments will ever explain how they come to be so generous in offering discounts to their customers. So how does a, let’s say, 30% discount for a two-year yoga membership suddenly become a 138% interest payment and an admission that the company itself sees a high chance of not being around to deliver? Like this: 1. Using a previous pricing example for a Yoga Yoga program, it seems that a “normal” hourly rate for yoga classes should be in the neighborhood of HK$120 (a HK$24,120 payment for a 200-hour program). Prices from a prominent competitor make this look like the right guess. 2. The package of 8 classes (and I’m assuming one-hour classes for this package due to the total cost) per month for 24 months would therefore cost HK$23,040 if paid at that HK$120 hourly rate. Maybe this is too high because very few clients actually pay full price: in that case, the amount of the discount and the resulting calculations shown below would have to be reduced. 3. Since Ms./Mr. Chan is only being asked to pay HK$16,000 for the package, s/he is “saving” HK$7,040 compared with “full price”. Since handing over money today for the promise of being given something in return at a later date is a loan, I call this “discount” the interest payment on the loan. 4. A HK$16,000 loan for 24 months means that if Mr./Ms. Chan took the full amount of classes s/he had subscribed to, s/he would have been lending Yoga Yoga an average of HK$5,111 for the entire period. You find this by time-weighting the outstanding balance of the up-front payment as it was reduced by lessons. In the formula below, time t is the number of the month from 1 to 24. 5. Taking the HK$7,040 as an interest payment, it equates to 138% of the average loan amount of HK$5,111. On an annual basis, that would look like a 54% interest rate. Now, why would a small yoga studio want to borrow money from its students at 54%? 6. The interest payments on loans everywhere in the world are calculated to compensate the lender for the risk that the borrower never pays them back. This applies to yoga studios in HK as much as to the bank where your paychecks are deposited. It is not through the goodness of their hearts that a group of for-profit entrepreneurs are offering this kind of a discount i.e. interest rate. But most people wouldn’t think that this is directly related to the probability of default, nor that this probability can be readily calculated. If you plug in 16,000/23,040 = 69.44 as the price in the calculator linked to above, 100 as the face value, 54% as the coupon rate, 1 as the number of payments, 2 payments remaining, 0 recovery because I’m cynical, and the HK prime rate of 5.25% as the “risk free” interest rate (you ain’t gettin’ any lower on an unsecured loan that’s for sure), this calculator spits out an implied default probability of 45.4%. I estimate a 62% implied default probability, using a formula that is more suited to this purpose (per Duffie and Singleton). Take your pick. Many clients will not care much if they read a form telling them that they are making a high-yielding unsecured loan to a yoga studio. Or that the bigger the discount, the bigger the implied probability that the studio goes out of business before they finish the lessons they just paid for. I forked out an advance payment to a studio myself a few years ago and left with nothing more than a credit card receipt to prove I’d done it. Being that it was the Landmark Mandarin Hotel, I felt reasonably secure taking that risk. That’s one of the reasons I think that mandatory risk disclosure would not have any impact on reputable firms who try to use the cash flow from subscriptions to improve operating conditions for their clients. The reality is that investors in fitness clubs use the memberships just like shareholders of listed companies use loans to pay themselves dividends or buy back shares. When it’s done in the open, financial professionals price the loans accordingly. But the fitness club people need only scrape together relatively small amounts of money to set up a shopfront, hire instructors, and start taking subscriptions without having any guarantees to offer their clients. The big guys are heavily regulated already; why do the small guys get to treat yoga practitioners like human ATMs? http://blog.gvozimodo.com/?p=150
