As the U.S. economy improves, several financial experts are predicting a better future for the fitness industry—but perhaps not until next year.
That was the consensus during the annual financial panel held at the International Health, Racquet and Sportsclub Association conference, which occurred last month in San Francisco. The panel, moderated by Rick Caro, president of Management Vision, usually serves as a litmus test for the economic state and overall mood of the industry.
“There’s finally light at the end of the tunnel,” Pete Moore, managing partner of advisory firm Integrity Square, told a standing room-only crowd.
Chronicling the industry headlines for 2010, Caro acknowledged that the U.S. economy showed some progress but was still in recession mode. However, club membership rose from 45 million to more than 50 million in 2010, one of the biggest increases in recent memory, according to a report from IHRSA.
Unlike recent years, no major club bankruptcy filings occurred in 2010, yet no equity firms made major investments in clubs and no major club deals or consolidations occurred. Despite noting a heightened optimism in the industry, Caro said 2011 may look a lot like 2010, unless unemployment lessens and debt becomes more available and attractive.
Moore said that club owners are becoming more disciplined with their operations, whereas in the past, clubs grew too quickly. Moore noted the sustainability of high-end clubs, such as Life Time Fitness, and the impact of Planet Fitness, which Moore said “changed the game,” in terms of leading to the growth of more low-price clubs.
Club operators that are “caught in the middle” in terms of price point could, Moore said, start considering changing their business model by removing services and lowering prices. They also could raise capital and sell the value of the club by becoming a regional power or seek potential buyers by reaching out to competitors.
In analyzing the industry’s top two public companies, Life Time Fitness and Town Sports International (TSI), Moore praised Life Time’s ability to differentiate and produce good margins, mainly because the company owns more than half of its 90 facilities. He also said TSI is “in a lot of trouble” because of its more than $300 million debt, adding that Planet Fitness and other clubs are opening near TSI clubs.
Josh Comer, vice president of JP Morgan, which has had advisory, financing and capital markets experience with 24 Hour, Bally, LA Fitness, Life Time and Gold’s Gym, says the national unemployment rate, which dipped to 8.9 percent in February, according to the Bureau of Labor Statistics, remains high despite being lower than its October 2009 peak of 10.2 percent. A stagnant housing market is hindering the economic recovery, and the economy could remain under distress if consumers continue with minimal spending, Comer said. Consumer behavior has undergone a permanent shift, he added, thanks largely to the Internet.
“The consumer owns everything, knows everything and has access to everything,” Comer said. “There are no secrets anymore. Consumers will find out.”
Overall fitness industry revenue could increase 3 percent to 5 percent through 2012, Comer estimated, increasing the market size to $22.5 billion next year.
Steven Wayne, managing director of investment firm Oak Hill Partners, said the industry is still feeling the effects of Bally’s two bankruptcy proceedings in recent years as well as the company’s past accounting issues. (Comer added later that the industry is “probably one of the messiest in terms of accounting.”) Wayne did say that debt currently is not at a bubble period and that it is easier for companies to borrow large amounts of money—say $100 million—than a small amount, such as $5 million.
“The best time to raise financing is when it’s available, not when you need it,” Wayne said.
One silver lining for for-profit clubs, Caro said, was that little growth occurred for nonprofits in 2010. In the tax-exempt competition forum at the IHRSA show, Helen Durkin, IHRSA’s executive vice president of public policy, said this is the best time for for-profit clubs to take on the non-exempt status of nonprofits.
“As the economy slumps…tax-exempt organizations find it harder to fundraise,” she says.
Because fewer Ys have been built during the recession, for-profit club operators may have opportunities to grow, making people feel that community centers, nonprofit hospital wellness centers and YMCAs are less necessary in the future, said Tom Richards, senior public policy manager for IHRSA.
City and state government revenue shortages have put government entities under financial strain, Richards said, so some for-profit club operators have pointed out how much revenue is lost from the tax-exempt status of nonprofits and the necessity of ensuring these facilities are meeting their obligations as nonprofits.
“Now is the time to strike,” Rodney Steven, owner of Genesis Health Clubs, Wichita, KS, said during the forum. He has been fighting the tax-exempt status of Ys for 10 years. “The climate has changed drastically. The government needs the money.”