Last year's top stories included acquisitions, private financing, and new players. Leading club operators look back and discuss the events that had the biggest impact on health and fitness in 1999.
How could 1999 possibly live up to the hype surrounding it? Between apocalyptic predictions and fear of the Y2K bug, nothing short of anarchy and horrific disaster would have met some people's expectations. No wonder the Artist Formerly Known as the Artist Formerly Known as Prince (or just Prince nowadays) once urged people to party like it was 1999. He must have had a premonition that the year promised chaos, possibly the last hurrah for humanity.
In the end, however, 1999 left nihilists and survivalists alike disappointed. When Jan. 1 arrived, the lights didn't go out. The earth didn't crack open and swallow us all. Aliens didn't even bother to make an appearance (unless you count the 24 Hour Fitness billboard). In fact, after 2000 arrived, the people who had curled up in their bunkers with stockpiles of firearms, canned goods and bottled water had to admit that maybe-just maybe-they really were a little paranoid.
Last year may not have brought the ultimate ending for planet Earth, but, in many respects, it brought a sense of beginning for the health and fitness industry. Acquisitions, partnerships and other events made 1999 feel like the start of something fresh, with new players and new financing changing the way that people viewed our industry.
More and more investors gained an interest in our industry in 1999, evidenced by the money that made its way into club companies. "One of the big pieces of news last year was the availability of private financing," says Rick Caro, chairman of Spectrum Clubs International. In addition to Spectrum Clubs International, Town Sports International (TSI), Fitness Holdings Worldwide (of which 24 Hour Fitness is part), Life Time Fitness and Gold's Gym all benefited from this type of financing last year.
Indeed, Brockway Moran & Partners, a private equity firm in Boca Raton, Fla., made quite an impact in the third quarter of 1999 by sponsoring the acquisition of Venice, Calif.-based Gold's Gym Enterprises. This led to the formation of Gold's Gym Investments (GGI) headed by the management team behind the G Group, a group of eight successful Gold's Gyms in the greater Washington, D.C. area.
The new Gold's regime has a different philosophy than its predecessor. Whereas Gold's Gym Enterprises only owned the original Gold's Gym location, GGI owns nine clubs-and made its plans to expand to 100 by 2005 quite clear in 1999. GGI also announced plans to franchise 1,000 clubs.
Mark Smith, TSI's CEO, believes the Brockway Moran deal has great potential since it brings professional management that can leverage the well-known Gold's brand. And it's significant that GGI wants to expand beyond franchising, growing into a larger club owner.
Kirk Galiani, GGI's president and CEO, agrees that the Gold's Gym restructuring was major news in 1999. He adds that another club company made significant headlines last year. "Spectrum was pretty big," he says.
What makes Spectrum particularly newsworthy is that the company didn't exist prior to 1999. Backed by Brentwood Associates, Spectrum first acquired the Racquetball & Fitness Clubs in San Antonio, then went to Los Angeles and bought the Spectrum Clubs (from which it gets its name) from the Sports Club Co. In only 90 days, the fledgling company had become a $60 million player with 18 clubs.
"For the first time a company was created that involved a combination of someone inside the industry along with an experienced private equity company that understood consolidations in other industries," says Caro, referring to himself and Brentwood. And with Bob Steele, formerly of Pepsico, joining Spectrum as CEO late in 1999, Spectrum began adding talent from outside the industry to the mix.
Spectrum's acquisition targets are clubs in the upper-middle and high-priced segment-particularly club clusters that can be used as platforms for regional growth. Its 1999 purchases demonstrated this strategy, as did its not-so-secret attempts to acquire WellBridge (formerly Club Sports International) this year. Although negotiations with WellBridge faltered recently (depending on whom you ask), they clearly showed Spectrum's aspirations. "It indicates how active they intend to be in the industry," says TSI's Smith.
As far as activity goes, when it came to acquisitions, few companies matched the frenetic pace of Fitness Holdings Worldwide last year. "We went into Asia and expanded in Europe," says Mark Mastrov, CEO of Fitness Holdings Worldwide.
Not only did Fitness Holdings Worldwide do well with acquisitions overseas-entering Asia for the first time and building a strong presence in Scandinavia-but the company kept quite busy in the states. "Its biggest success in 1999 was the acquisition of the Q Clubs," Caro offers.
Indeed, Q Clubs was one of the top 10 club chains in the country, in terms of revenue. Mastrov says that the Q Clubs complement 24 Hour Fitness. The average age of a 24 Hour Fitness member is 38, while the average age for a Q Sports member is 41. "We felt the market they go after is the market we go after: aging baby boomers," Mastrov notes.
The acquisition of Q Clubs was part of a $900 million recapitalization that occurred near the end of 1999. Through this recapitalization, Mc-Cown DeLeeuw-the lead investor in Fitness Holdings Inc., Fitness Holdings Europe and Fitness Holdings Asia-consolidated the three companies together into Fitness Holdings Worldwide. When the year closed, Fitness Holdings Worldwide boasted 350 clubs, approximately 240 of which were 24 Hour Fitness facilities.
Any article examining the acquisition activity of 1999 would be remiss without some mention of Bally Total Fitness. The industry's biggest company made some big news itself last year.
"Bally Total Fitness continued with their acquisition program and bought Sports Clubs of Canada in 1999, which was the pre-eminent club in the Toronto area, and a real departure for Bally since it was a club organization priced in the upper-middle segment of the industry," Caro says.
In addition to the 10 Sports Clubs in Canada, Bally made acquisitions that reinforced its presence in California, notably with the purchase of the George Brown clubs in Fresno, Calif. Not surprisingly, California was a hotbed for acquisition and competition in 1999. Jill Kinney, COO of San Francisco-based Club One, was in the thick of it, claiming that most of the action came from Bally, 24 Hour Fitness and her company.
Club One made plenty of headlines with its acquisitions in 1999. Although most club insiders cite the acquisition of the San Diego-based Frog's Athletic Clubs as Club One's biggest coup, it wasn't the only event of note, according to Kinney. Yes, Club One took over seven clubs in San Diego, but thanks to acquisitions and rebuilding, the company added three clubs in Silicon Valley and another three in San Francisco.
Club One also purchased Professional Club Management, a provider of corporate fitness management, in 1999. At the time of the acquisition, Professional Club Management carried 20 corporate fitness center contracts. "In the course of the year, we opened another 10 corporate fitness centers," Kinney says.
California wasn't the only area rife with acquisitions in 1999. Back East, Crunch got one step closer to its five-year plan of growing to 100 clubs with the acquisition of Sportslife, a six-club chain in Atlanta. GGI's Galiani says that this acquisition struck him as odd. "Their [Crunch's] M.O. has been urban, inner-city, trendy clubs," he explains, "and Sportslife were multipurpose facilities."
Still, Doug Levine, Crunch's CEO, says that the acquisition has been a good fit-although Crunch did change Sportslife's pricing structure. Before, Sportslife sold three-year memberships almost exclusively; now Crunch follows a monthly model, although this model doesn't apply to all members. Yet. Since some Sportslife members had already paid for their three-year memberships before the acquisition, Crunch inherited members who didn't owe dues. Levine is counting the days until he can sell those customers new memberships.
"We have a year and half to go," he says with a laugh.
Although the pricing has changed, Sportslife's members-who now can take part in Crunch's popular group exercise classes-have responded well to the new owner, according to Levine. "We've put time and energy and money into the clubs," he says. "It has been perceived in a positive way."
The Sportslife acquisition is not unique in that respect. Throughout 1999, club companies did their best to make transitions easier for the facilities they purchased. While each acquirer took slightly different approaches, they all emphasized sensitivity to member and staff concerns.
Club One's Kinney puts it this way: If a club is failing, then members may welcome a new name on the front door. But if the members feel loyal to the acquired club, they may not be so accepting. In some cases, putting the name of a big chain on the acquired facility will lead members to think that they won't get the service they received in a smaller community club.
Kinney points out that it doesn't always behoove her company to slap Club One banners all over an acquired club. For example, when Club One bought the Frog's facilities last year, the purchased facilities become Frog's Club One. "We needed to recognize that the community down there cared more about the Frog's name than the Club One name," Kinney says.
Similarly, since acquiring Q Clubs, Fitness Holdings Worldwide has studied whether to change the name to 24 Hour Fitness. Thus far, the clubs carry the Q name. "We kept their name and brand, so their membership has been uninterrupted," Mastrov says.
Acquired clubs that kept their names were common sights in '99. When Spectrum made its launch with the San Antonio acquisition, the Texas facilities remained Racquetball & Fitness Clubs. Furthermore, programming, staff and price stayed the same, so the change in ownership was hardly noticeable. Caro explains that this approach allows a certain comfort level to set in. People accept the new ownership, so if change were to occur eventually, members would be receptive because their initial fears of change were never realized.
Caro also explains that new owners must communicate with members, to put them at ease. The same approach is advisable when dealing with the staff of the acquired club, an approach that Bally demonstrated in 1999. According to Bill Fanelli, Bally's executive vice president of operations, the key is spending time with employees, telling them what they can expect from the new owners and what opportunities they will have in the new company.
When Bally is about to acquire a company, it brings in employees from previously acquired clubs. For example, when Bally was buying the Toronto clubs, managers from Pinnacle-a major acquisition that Bally made in 1998-came to meet with the managers from the Sports Clubs of Canada. This way, the managers could talk candidly about the transition process and Bally's corporate team.
"They threw me out of the room so they could say whatever the heck they wanted to say about me," Fanelli recalls, laughing.
Other clubs went to similar lengths to appease management in 1999. There was a sound business reason for going to this kind of trouble. During many of the larger acquisitions in 1999, the buyers wanted existing management to stay on board.
"One of the reasons why 24 Hour Fitness has been successful is they have acquired clubs with good managers and encouraged them to stay on and grow the business," Levine points out.
Although buyers may welcome the managers and entrepreneurs who built the acquired businesses, the old guard may have trouble adjusting to the new corporate structure. For that reason, one industry executive, requesting anonymity, sees a potential downside to acquisitions. He notes that the creativity and business methods embraced by entrepreneurs may not fit into an organization where financial backers are more interested in numbers than ideas.
John McCarthy, executive director of IHRSA, echoes this concern, acknowledging that strong independent operators such as Sports Clubs of Canada and Racquetball & Fitness Clubs of San Antonio now answer to new bosses. "Our hope in the industry is that we don't lose the creativity and creative genius of these important players now that they are part of much larger entities," McCarthy says.
While some may argue that financially backed acquisitions could quell creativity, Levine points out that the growing consolidation trend has broadened operators' options. Before, if you wanted to sell your club, the logical buyer was the club competing across the street, he says. Now the logical buyer is a large national chain.
"When you have an industry that is consolidating and backed by financial players, there is an exit strategy for any club operator," Levine notes. "That's a huge positive."
If nothing else, the acquisition activity of 1999 was the next natural step in the evolution of a fragmented industry. "Acquisitions are inevitable," Galiani says. "We are a maturing industry, and these things will happen."
Besides, Galiani adds, not all club growth came in the form of acquisition in 1999. Green-field openings were also en vogue last year. Mastrov of Fitness Holdings Worldwide cites Minnesota's Life Time Fitness as an example. In 1998, Life Time owned five clubs; last year, green-field buildings brought that number to 12. And Life Time clubs aren't small; they are 100,000-square-foot multipurpose facilities. "Life Time Fitness built some big monster clubs last year," Mastrov notes.
TSI also broke quite a bit of ground last year. Literally. Although TSI completed many acquisitions in 1998, the company quietly bought four clubs last year. However, the East Coast juggernaut built 14 clubs, keeping its focus on its four markets: New York, Boston, Philadelphia and Washington, D.C. According to Smith, TSI wants its clubs in those areas to be within a 5-to-8-minute drive for members, and its 1999 green fields brought that goal closer to reality. That's why Caro describes TSI as a leader in its Eastern markets-areas that were unaffected by 1999's major acquisitions.
"The reality is that none of those acquisitions had any impact on our markets and the way we did business," Smith says.
Larger club chains may have made the biggest deals of 1999, but clubs of all shapes and sizes were busy last year. According to Caro, operators who owned one or two clubs continued to increase their involvement in the industry by either acquiring or building clubs. There were several reasons for this, he says. The economy was strong, financing was available and the industry was growing. Furthermore, there were more members, prices could be raised, and money from new programs and services meant clubs could generate income beyond membership dues. In some areas, more clubs were needed, while aggressive operators realized that they could purchase, then turn around, clubs that had not been living up to their potential.
While American clubs, large and small, enjoyed a strong year in 1999, the public companies in the U.K. and Japan witnessed a true boom. IHRSA's McCarthy explains that the companies in the U.K. are trading at more than 20 times earnings, compared to 10 to 15 in the United States. One such U.K. company, Fitness First, earned the coveted Price Waterhouse Award for being the U.K.'s most entrepreneurial company in 1999. In McCarthy's opinion, Fitness First received the highest award ever given to any club company in the history of the industry.
With that kind of performance and recognition, it's no surprise that the public markets overseas currently hold pure fitness companies in higher regard than the U.S. market does. Still, the events of 1999 make Wall Street's esteem seem like an obtainable goal for U.S. clubs. As McCarthy explains it, companies such as TSI, Club One and Spectrum are all approaching the critical sales and earnings mass for going public. And Bally, our industry's top public player, has been posting a steady increase in financial performance. "We're very happy with the results we had in 1999," Fanelli says.
"The best omen for improving the public market perception of the industry is the continuing progress of Bally Total Fitness," adds McCarthy. "Their performance is starting to send a message to their own investors and to the investment community as a whole that this industry is worth watching closely."
An Entertaining Year
Technological advances made an impact with members in 1999.
"You know why I want to join your club? Because of all the acquisitions. To be honest, the behind-the-scene wheeling and dealing going on with club companies has made me want to get into shape in 1999."
OK, you didn't hear any new members say that last year. The major acquisitions of 1999-while having a major effect on the industry-probably didn't help you sell any memberships. They probably didn't even cause much buzz among consumers. So what did get members, prospects and operators equally excited last year?
Two words: entertainment and the Internet.
Both Netpulse and E-Zone-providers of entertainment that offer everything from television to the Internet-really began to come into their own last year. Crunch was one club that took advantage, according to CEO Doug Levine, using both products to bring information and entertainment to members.
In December of 1999, TSI signed an exclusive agreement with E-Zone that calls for TSI to put E-Zone systems on every piece of cardio equipment in its clubs. "The results have been very impressive in terms of member utilization and member feedback," says Mark Smith, TSI's CEO.
Both E-Zone and Netpulse have adopted an advertising-based model, with each willing to give away technology to clubs that can guarantee a steady flow of members who, while using the entertainment systems, will see the advertising that the companies sell. Since TSI occupies the major metropolitan markets of New York, Boston, Philadelphia and Washington, D.C., it's the perfect testing ground for this business model.
"Between our four markets, we have some of the strongest demographics, so our member base is the perfect rollout for E-Zone for proving their revenue model," Smith notes.
Smith is quick to add that there are more to these entertainment systems than advertising revenue-and entertainment, for that matter. "Entertaining is the first step," he says. "It is a communication tool for both members and staff. It's a totally interactive network. We're going to use it as an intranet for our staff and Web portal for members."
Indeed, the entertainment aspect of the E-Zone and Netpulse systems was only part of the reason these products garnered so much attention last year. Due to their very nature, they are perfect tools for keeping track of member activity and using the Internet to stay connected with members.
Not that clubs need entertainment systems to stay in touch with members via the Internet. Many of the fitness-based dotcoms that came into existence last year showed just how much functionality was available. "A lot of the online services started in '99 obviously have had a big impact on people's thinking about the opportunities in the industry," says Jill Kinney, COO of Club One.
These opportunities come in the form of e-commerce and ways in which clubs sell new services and create new profit centers. As an example, Kinney points out that clubs can use the Internet to do online health risk appraisals and programming that allows clubs to reach people who aren't interested in a membership yet want some fitness guidance. Clubs can then bridge the gap and ultimately get these people into the club.
This same strategy can be used to connect to existing members. People who can't get into the club all the time can communicate with their trainers over the Internet. Bill Fanelli, executive vice president of operations of Bally Total Fitness, believes that 1999 showed clubs how they could keep relationships alive with members once they leave the facilities.
"We got a taste of what the Internet could do for own business," he says. "Through the Internet, we can have deeper bonds with members."
1999 at a Glance
A synopsis of last year's top stories.
* Alleged mobsters pleaded guilty to a scheme that artificially drove up the stock price of HealthTech International, a Mesa, Ariz.-based owner of health clubs. Later in the year, a Manhattan federal judge convicted Gordon Hall, HealthTech's chairman and CEO, of 12 counts in the case, including racketeering, and securities and wire fraud.
* Crunch acquired Sportslife, a six-club chain in Atlanta.
* A group of overweight advocates protested a 24 Hour Fitness billboard that depicted an alien and read, "When they come, they'll eat the fat ones first." In an interview published in April, Craig Pepin-Donat, Northwest division president of 24 Hour Fitness, told Club Industry, "Obesity is second only to smoking as the leading preventable cause of death in this country, affecting hundreds of thousands of people each year at an estimated cost of $100 million per year. A lot of people think that we think that it's funny, but in fact, we think that it's a very serious issue-although we used the ad as a tongue-in-cheek, humorous approach to raising the level of awareness."
* Club Sports International (CSI) acquired the WellBridge Co., a chain of wellness centers. Later, CSI would change its name to WellBridge.
* At the IHRSA trade show in San Diego, association officials and leading club operators announced plans to raise $1 million to battle the opening of tax-exempt fitness centers in affluent communities.
* Anne Marie Capati suffered a stroke while exercising at a Crunch facility and passed away later that night in a New York Hospital. Alleging that her death was the result of a diet supplement that her personal trainer encouraged her to take, Capati's family filed a $320 million lawsuit against the supplement manufacturer, the supplement seller, the personal trainer and Crunch. In an interview with Club Industry published in August, CEO Doug Levine pointed out that Crunch has a strict anti-supplement policy. "It's going to be very, very, very bad for the industry if the club is held liable," he said. "It would be bad if the club were held liable and we sold supplements. Can you imagine what it will do to the industry if we are held liable and we don't sell and recommend supplements? It makes the liability out of control."
* San Francisco-based Club One acquired Frog's, a leading club chain in the San Diego area.
* Brockway, Moran & Partners, a private equity firm, sponsored the acquisition of Gold's Gym Enterprises and the formation of Gold's Gym Investments. Kirk Galiani, John Galiani and Jeff Skeen-the management team behind the G Group, a leading licensee of eight Gold's Gyms-took over the new Gold's organization.
* Rick Caro, a top industry consultant, and Brentwood Associates, an investment firm, launched a new club consolidator. In the course of 90 days, their company acquired the Racquetball & Fitness Clubs and the Spectrum Clubs. Following the latter acquisition, the company took the name of Spectrum Clubs International.
* As part of a $900 million recapitalization, McCown DeLeeuw consolidated Fitness Holdings Inc., Fitness Holdings Europe and Fitness Holdings Asia into Fitness Holdings Worldwide, a company with 350 clubs, 240 of which were 24 Hour Fitness facilities. At the same time, Fitness Holdings Worldwide acquired the Q Clubs chain.
* Bally Total Fitness bought the Sports Clubs of Canada and seven George Brown fitness centers in California. The company finished strong in 1999: Net income for the year increased to $1.56 per diluted share compared with $.19 in 1998.