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2015 Fitness Club Market Analysis


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2015 Fitness Club Market Analysis

  1. 1. Challenging Times Ahead for Fitness Clubs By Zach Brown Feb 19, 2015 Gyms/Sports Clubs Slump US sport clubs and fitness centers need to get off the couch to combat recent sluggish results. Despite the positive trend in active fitness participation, people are spending less money at the gym. The fragmented 27 billion dollar fitness industry is full of its fads and trends, but if the big box fitness clubs aren’t willing to evolve fast, they will get left behind. Consumers are willing to pay high membership fees for fitness clubs that contain variety, social atmosphere, specialized group classes, and amenities. The biggest threats to the core business model of mid-priced big box sports clubs are the growth in low-price gyms; the shift towards boutique workout studios, outdoor boot camps and online do-it-yourself fitness media; and the increase in rent expense. Declining Industry Sales Sports clubs reached their peak revenue growth back in 2004 and sales trends have been deteriorating ever since. Aside from the 2008/2009 recession that saw a decline in all consumer expenditures, Americans cut their spending on sports clubs for the first time at the end of 2013 and revenues have been in decline since then. The key forces driving the decline in consumer spending on sports clubs are (1) the increase in do-it-yourself fitness programs guided by online content and fitness trackers, and (2) the emergence of low-priced gyms like Planet Fitness. Below is an illustration of the impact of low-price gyms on the overall industry. These cheaper gyms are affecting the fitness club market in three ways: membership growth, declining revenue per member, and the emergence of a price war. This trend will create a bifurcation in the industry where the winners are the low- priced, “bare minimum” gyms and the high-priced, luxury fitness clubs. The sports club market is very fragmented and becoming more elastic. The top three players (24 Hour Fitness, L.A. Fitness, and Life Time Fitness) own less than 20% of the market. The only two publicly traded fitness chains left are Town Sports International (CLUB) and Life Time Fitness (LTM). Town Sports and Life Time could not be more different in their business models, but both have plunged into negative same-store sales growth; reflecting real declines on stores open thirteen months or longer. Because these two companies must freely share their financials, we will take a
  2. 2. closer look at their trends and formulate some industry-wide takeaways. Quick Study of Town Sports and Life Time Fitness Town Sports owns and operates 159 mid-value clubs on the East Coast through the regional brand names New York Sports Clubs, Boston Sports Clubs, Philadelphia Sports Clubs, and Washington Sports Clubs. Town has actively managed the recent trend towards specialized group classes through fee-based course offerings of Pilates, TRX, Kettlebells, and VBarre. In addition to the courses, Town recently allocated existing square footage to an “Ultimate Fitness Experience” (UXF) that can be used as a cross-functional training zone. Town’s new “BFX” initiative demonstrates its adaptive qualities by opening smaller boutique fitness studios focused on specialty group classes and personal training that should yield improved revenue from increased membership and course fees. Despite Town Sports’ efforts to cater to the growing demand for small, social fitness classes, it has struggled to produce comparable store sales growth. In the last twenty-four quarters, Town has grown same store sales only six times. The chart above illustrates Town’s underperformance to the industry since the 2008/2009 recession. Life Time Fitness has a starkly different business model aimed at creating a community fitness center with diverse offers ranging from spas and cafes to fitness centers and organized endurance sport competitions. Even though Life’s approach to the fitness club business appears too varied and unfocused, it grew same-store sales for eighteen quarters straight before dipping negative in mid-2014. The focus on family membership and different levels of club luxury to meet local demographic demand has outperformed the industry for over six years. Life Time operates 108 stores spread out across twenty-nine major markets with a higher percentage of locations in Minnesota, Texas, and Illinois. Instead of proposing a single fitness club format, Life Time Fitness has Bronze, Gold, and Platinum fitness centers as well as Life Time Athletic centers for Onyx and Diamond platforms. This varied level club format is a double-edged sword offering the consumer a range of premium choices while matching the local market’s appetite for luxury with the appropriate club format. The amenities, services, and activities that make Life unique include: squash courts, spas and swimming pools, rock climbing walls, massage therapy, athletic leagues, martial arts, summer vacation camps, and dance classes. Industry Trends Seen in Town Sports and Life Time Fitness Town Sports and Life Time Fitness highlight many recent developments in the fitness club arena. The most current evolutions are in pricing structure, revenue mix, and joining fees. The single greatest challenge fitness club operators face is the bifurcation of the industry into low-price and luxury markets. This spread will squeeze middle market fitness centers causing margin compression on the low end and industry consolidation for clubs that can’t adapt or compete. The bifurcation of the fitness club market is driving the change in the landscape more than any fitness fad. Gyms like Planet Fitness, Retro Fitness, and Crunch Fitness grab memberships from mid-priced fitness centers and have caused clubs to offer more competitive pricing options. Although this pricing is great for the consumer, the quality of the fitness club usually matches the value paid. Premium fitness clubs such as Life
  3. 3. Time’s Diamond luxury fitness centers and Equinox gyms are performing well by offering better products, services, and classes. Life’s CEO Bahram Akradi claims they are capturing the top 20% of the market and are providing a far better experience than the boutiques. One of the key differentiators between luxury and mid- priced fitness clubs is the quality of personnel operating the gyms and teaching classes. Equinox is famous for its celebrity fitness trainers who are commonly found on highly rated fitness videos. Life Time’s executives claim that employee retention is highly correlated to membership retention so they focus on superior staff and have determined that its worth the cost. Town Sports is drastically changing its core business model and implementing a new “High-Value, Low-Price” initiative that will affect forty percent of their existing clubs. Town executives suspended their highly anticipated “BFX” club rollout in order to focus all energy on the lower price-point offering gyms. Town estimated membership will increase at new “HVLP” centers from 2,500 members to 6,000. Town Sports CEO Bob Giardina commented on industry pressures, stating that consumers are starting to have more choices in terms of their exercisability not only with clubs, but also with studios and outdoor boot camps. The change in revenue mix is a clear winner for all sports clubs. Gyms are growing revenues through in- store offerings such as personal training, health supplement products, small group training, child centers, and health/fitness diagnostics. Over the last eight years, the combined share of auxiliary sales as a percent of total revenue for Town and Life has steadily grown from 22% to 28% over eight years while membership dues as a percentage of the revenue mix have fallen from 73% to 67%. The model is quite simple: get the consumer in the door and then increase the share of his/her wallet through
  4. 4. products instead of membership dues. Non-membership revenues generate higher profit margins due to the use of existing capital or the sale of low cost products. Joining fees are declining at medium-price fitness centers because consumers frequently view the initiation fee as too great of a financial barrier for entry and gym operators see it as a governor on membership. The reduction in joining fees complements the increased focus on non-membership revenue by generating sales each time the customer enters the club. How to Stay Relevant in the Middle-Market Mid-priced fitness clubs face some serious challenges in 2015 and beyond. Three strategies middle market gyms may pursue to exist in the future bifurcated industry: 1) reduce square footage, cut staff, and squeeze operating expenses to slim down to the low-price model; 2) diversify store offerings similar to Life Time Fitness in order to capitalize on luxury demographic markets and low-price competitive arenas; and 3) strengthen brand name through superior service that clearly differentiates from low-priced market, offer high value low cost amenities on a monthly basis, attract frequent/committed members, and focus on quality club level offerings over quantity of stores. “If you can’t beat ‘em, join ‘em.” Cutting down a mid-priced chain of fitness stores to a low-price model has some competitive benefits. The initial slimming of excess square footage, staff, corporate costs, and premium products will be painful, as will the loss of mid-level members, but the ability to offer slightly better existing equipment for no extra capital cost can generate a small but meaningful margin over low-end competitors. This is not the most glamorous approach for most mid-tier gyms, but it’s better than closing the doors permanently. Life Time Fitness has proven that the diversified club portfolio strategy can be successful. The strength of this model lies in the flexibility of the format to meet the local market’s appetite for luxury. Premium offerings executed properly yield higher margins. The challenges to this approach exists in the executives’ ability to effectively manage such a wide range of club formats. The potential mismatch in offerings or execution of offerings is detrimental to either membership numbers or profitability. The third strategy hinges on the ability of the company to clearly differentiate a better product offering than the low-price gyms. This is a real challenge that is never complete because even if a chain of fitness centers is able to creatively differentiate itself, the low-price competitors will attempt to mimic the successful plan and eventually close the gap. Management must stay one step ahead of the game by being very creative, forward- looking, and incredible executors. A viable strategy to prove value over low-end gyms is to offer free or low cost amenities on a frequent basis. This could be in the form of free towel services, one free thirty minute personal training service every quarter, discounted supplements, free sports drinks, etc. Consumers will pay more for a strong brand name supported by superior customer service. A strong tactic in this strategy would be to attract high-usage customers that workout multiple days a week and leverage the in-store offerings of auxiliary products to boost high margin sales. Lastly, sustainable growth would be better achieved through managing same-store sales growth at quality club locations versus mass store portfolio expansion. A slow store expansion would ensure ideal locations that target demographics that will chose a mid-priced fitness over low- price gyms. Here is a quick example a middle-market fitness club could employ that incorporates many strategies listed above: supply members with free advice on useful ways for fitness bands/trackers to be implemented into their fitness plans and used in daily workouts. Trackers could be given to members for a free week trial of the product. This example demonstrates a product offering that differentiates the club, adds value for little to no cost, gives the customer the satisfaction of a “perk”, and leverages in-store sales through the eventual sale of fitness bands and trackers. This would be a creative strategy that embraces the new tech trend instead of competing against it. Note: at the writing of the article the author is not aware of any current offerings of this example in any gyms.
  5. 5. Chart Addendum