Telling It Like It Is

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At first glance, the 13th annual IHRSA Financial Panel, moderated by Rick Caro, didn't appear to lend itself to a lot of zingers and one-liners. Intended or not, the session that painted a sometimes not-so-rosy picture of the financial status of the industry actually produced a few laughs.

It started with Caro, who introduced the four panelists: Peter Rottier, vice president of Summit Partners; Ed Moss, managing director of Lincolnshire Management; Hugh Paisley, director of Global Consumer Products and Retail Group of UBS Investment Bank; and Chris Gagnon, managing director of Global Leisure Capital Partners.

Caro went on to say that given the current economic climate, he did not invite a representative from a lending firm or an equity analyst, which got a chuckle from the audience. The thinking there is, for the most part, banks don't have much money to lend, and all an analyst would do is tell us how poor the stocks are of publicly traded fitness companies, such as Life Time Fitness and Town Sports International. No need to rub salt in an open wound.

In his opening remarks, Caro rattled off a list of 20 headlines in the industry from 2008, most of which reflected the struggles the industry is having in this economy. A few headline topics centered around the deep recession of the U.S. economy (that's a no-brainer); sales, net memberships and non-dues revenue are all flat; U.S. debt markets are limited and hard to access; and there are fewer new builds, fewer major club deals and fewer new equity players in the industry.

One of the new equity players is Summit Partners, which invested in Snap Fitness last year. Summit's Rottier, who was introduced after Caro's headlines, joked, "A lot of cheery news from Rick there."

Rottier said what many of his fellow panelists said—that fitness tends to be a resilient consumer discretionary spend. Rottier added that at Snap, attrition levels have been maintained. "We're doing OK at the store level," he said. Snap Fitness targets small- to mid-size towns and has the 24-hour key-card model that has become one of the fastest growing segments in the industry.

Lincolnshire invested in The Alaska Club in 2007. Moss said Lincolnshire liked The Alaska Club's family club model. Believe it or not, the company's location in our 49th state was attractive, too.

"We also like the weather (in Alaska) because it's so bad," Moss said, producing some laughs. To put it simply, bad weather enhances the need for indoor recreation.

UBS has affiliations with a number of club companies, including Gold's, Life Time Fitness, Spectrum and Virgin Active. Paisley of UBS talked about the four C's that are affecting the industry today: Capital is in short supply, Convergence trends are accelerating, Consolidation activity will hasten as leading platforms continue, and the Competitive environment is in transition, with new models emerging.

Paisley said health and fitness is outperforming other retail sectors, and that while the fourth quarter 2008 results for Life Time and TSI were down, they were "fantastic" compared to other retailers, Paisley said. Paisley also noted in retail specialty segments, some companies that were the major players 15 years ago have been unseated in their sectors. Best Buy has supplanted Circuit City, Staples has supplanted Office Depot, and Bed, Bath & Beyond has supplanted Linens 'n Things. Bally was the top dog in the fitness industry in 1996, but it is not any longer. What club company has emerged? Maybe 24 Hour, but there is no definitive answer.

Gagnon of Global Leisure Partners said his company loves the fitness industry, the people in the industry and adds that the industry has "a ton more to go" to reach its potential. Global Leisure Partners invests in Fitness First, the largest non-U.S. club chain in the world.

Gagnon noted the growth this decade of programs such as yoga, Pilates, boot camps, kettlebell and sports-specific training. What they all have in common is that they are results focused, functional, community based and are inclusive, Gagnon said.

The question-and-answer portion of the panel session was brief but enlightening. The final question was most intriguing: Can you build a model of a club that is not dependent on memberships? Caro pointed out that once upon a time, racquet clubs started out as a pay-as-you-play business. The panelists said that the model would be much harder to finance and that a company runs the risk, if there were no memberships, of having everybody come to the gym at 5 p.m. on Monday.

Given the state of the industry and the economy, do we need to come full circle to those racquet clubs that started this industry years ago?

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