The fitness club industry saw little movement in the area of acquisitions during the recession as many small club operators closed their businesses because they were either not well capitalized, were not well run or could not find buyers. However, at the end of 2011, large, well-capitalized companies such as LA Fitness, Irvine, CA, Life Time Fitness, Chanhassen, MN, and Equinox, New York, began purchasing clubs from struggling companies. The differences in the situation between these groups may lead some to believe that the industry is heading toward two separate groups: the haves and the have-nots.
A Gallup poll in late 2011 revealed that 58 percent of Americans do not believe the country is divided into haves and have-nots. That compares to a 49-49 percent split on the same topic in summer 2008 as the country was headed for a recession. Despite these numbers, another Gallup poll shows that more Americans feel that their personal financial situation is getting worse, which could have a negative effect this year in the fitness industry. Just as they did during the heart of the recession, members may choose to forego their membership. If more members cancel, more clubs will struggle. With the economy not expected to turn around anytime soon, club operators also will find it difficult to seek financial assistance from banking institutions.
LA Fitness, Life Time and Equinox have no such difficulty. LA Fitness is backed by a group of private equity firms while Equinox is owned by The Related Companies, a real estate development firm. Life Time Fitness is a public company that had anticipated generating at least $1 billion by the end of 2011.
“Cash has always been king for the last three years,” says Rick Caro, president of Management Vision, New York. “Those people who have cash and have resources, even if it’s a two- or three-club group, they can access attractive real estate deals and obtain favorable debt financing based on their track record that others can’t do.”
On the flip side, the sale of 171 Bally Total Fitness clubs to LA Fitness greatly reduced Chicago-based Bally to 99 clubs, and Bally could sell off more of its clubs. Lifestyle Family Fitness, St. Petersburg, FL, sold nine clubs to Life Time Fitness and closed its remaining clubs in Indiana, Ohio and North Carolina, reducing its size from 55 to 33 clubs. The Sports Club Co., Los Angeles, is no longer part of the health club industry after it sold off its remaining four clubs to Equinox.
Calling Bally, Lifestyle and The Sports Club Co. have-nots may be a stretch. More accurately, the struggling one-club operators, some of whom closed their doors in 2011 after 20, 25 or 30 years in business, fit that description. Several of those operators cited the economy and growing competition for closing.
“If you’re undercapitalized, you may lack the ability to have dollars to reinvest, and you may not have dollars for working capital,” Caro says. “So you run the business in a sub-optimal way, or worse, you try to figure out how to exit the business when it’s fragile and not as strong and not as likely to achieve a high valuation compared to those who have resources.”
The LA Fitness, Life Time Fitness and Equinox deals made a big splash in the mainstream media, despite involving less than 200 clubs. Using the International Health, Racquet and Sportsclub Association’s estimated 30,000 fitness facilities figure as a barometer, the recent deals equate to less than 1 percent of the entire club market. Other club companies, such as In-Shape Health Clubs, Stockton, CA, and Genesis Health Clubs, Wichita, KS, quietly acquired clubs last year.
Also, according to Caro’s estimates, the top 10 non-franchised club companies cover less than 5 percent of the country. Consolidation may have started to take shape last year, but the industry is still fragmented, Caro says, proving it difficult to determine the haves and have-nots.
“The industry has always been characterized by any financial person anywhere, whether it’s investment bankers, private equity, equity analysts, economists—they all claim that it’s the most fragmented industry they’ve ever analyzed,” Caro says. “When people talk about a real consolidation play, some industries are down to five or six or eight or 10 major players and that’s it. We’re nowhere near there.”
The industry may not be at that point, but there are signs of change in the distribution of membership. Michael Scott Scudder, managing partner of The Fitness Industry Group, Taos, NM, says the bigger clubs are taking more members from the smaller ones. He compares the trend to Walmart increasing sales by taking away business from other stores.
“We realize that the big players are getting more and more market share every single year,” Scudder says. “The distribution of memberships is going to fewer [clubs].”
“It’s very conceivable within three years time,” Scudder adds, “that over 50 percent of memberships will be controlled by less than 10 percent of the clubs in the entire marketplace. Why would we not be like the rest of retail? We’re not all that unique.”
Art Curtis, former CEO of Millennium Sports Partners Management LLC, Boston, says the industry is becoming increasingly more segmented, due in large part to the continued growth of the high-volume/low-price clubs, also known as express clubs or budget clubs. That trend is showing no signs of slowing. In addition to Planet Fitness, this market includes Crunch franchised clubs, Gold’s Gym Express clubs, Blink clubs operated by Equinox, YouFit clubs and the new Max Fitness clubs. Curtis says the popularity of budget clubs extends to Europe as well.
“It’s hard not to get into a conversation with someone over there that somehow or another doesn’t involve budget clubs,” says Curtis, who left his position as a consultant with Millennium Partners last year to form his own consulting company.
Stephen Tharrett, president of Club Industry Consulting, Highland Village, TX, is one of the few observers who predict that the growth of express clubs will come to a halt in the next couple of years.
“It’s not a sustainable business model, particularly in the U.S.,” says Tharrett, who also analyzes budget clubs in Europe. “One of the players will still hang around, but they won’t all succeed. It’s a fad.”
The problem with express clubs, Tharrett adds, is that their turnover is too high.
“It was fine when Planet (Fitness) was the only guy in the game,” he says. “If you have two or three of them in the same market, they’re just going to be stealing from each other. How do you differentiate a $10-a-month club? It’s going to be like the real estate bubble. It’s going to go up, and then it’s going to just drop like a rocket. One guy is going to succeed, and it’s probably going to be Planet.”
The key for all club operators large and small in 2012 is differentiation. Tharrett says that the industry still has trouble differentiating itself, but a distinguishing brand can be established, particularly on a regional level. Wisconsin Athletic Clubs, DMB Sports Clubs in Arizona, and Telos Fitness, the Cooper Institute and the Houstonian in Texas are examples of strong regional players, Tharrett says.
“The real secret is for people to not have such grandiose plans, to focus on your community,” Tharrett says. “Find the niches that you can serve and become really connected to the people in your community.”
Caro adds: “The haves, in my view, are those that have a clear differentiation positioning and some kind of adequate resources to go forward. If they have good positioning and differentiation, they can often compete with the Goliaths.”
Personal training studios, group exercise studios and cycling studios are all finding niches in the industry today.
“Some of those studios are really wellness studios,” Scudder says. “I think they’re beginning to develop themselves as a niche industry and will benefit greatly in a few years when we finally get national health care figured out, in the fact that we’re going to have to reimburse or subsidize exercise programming.”
Niches. Differentiation. Positioning. Those are the concepts that are going to separate the haves from the have-nots in the industry in 2012 and beyond.
“It’s going to be a challenging environment,” Curtis says. “People need to be on top of their business. Those people that don’t have a strategy … they’re going to struggle. If there’s nothing special about what you’re doing, that’s going to be a dangerous position to have in the market for some time to come.”