The "fiscal cliff" storm clouds that threatened the economic structure of this nation—and the fitness club industry, for that matter—still hovered in the final weeks of 2012.
President Barack Obama and House Speaker John Boehner reached across the aisle in mid-December to work on a compromise to eliminate scheduled tax hikes and automatic government spending cuts that would reduce the budget deficit. Had there been no effort to rectify the economic situation prior to the New Year, many experts predicted a return to a recession, which would have an enormous impact on the fitness industry.
Even before a resolution to the fiscal cliff situation, fitness club operators perhaps faced more questions in 2013 than in previous years. Will more clubs consolidate in 2013? Will there be more high-volume, low price (HVLP) clubs? What other competitors will challenge the traditional for-profit club model? What economic challenges will members face? And how will the industry address the obesity epidemic?
Despite those questions, insiders in the fitness industry were hopeful for an improved economic outlook in 2013, and that was before fiscal cliff negotiations intensified.
"I think 2013 is going to be a wild year," says Thomas Plummer, founder of the National Fitness Business Alliance, Marstons Mills, MA. "Everybody's going to feel good this year. Most of my clients I've talked to—and we deal with people in a little over 30 countries—they're mostly happy. It was a good year [in 2012], a good run. All the indicators seem to be leading to a very, very good year coming."
Mark Mastrov, co-founder of New Evolution Ventures, Lafayette, CA, which runs a variety of club concepts, including Crunch, Crunch franchise clubs, UFC Gym and Madonna's Hard Candy Fitness, says a lot of factors will play into the decisions club operators will make in 2013.
"It's going to be one of the more interesting years that we've seen," Mastrov says. "I think a lot of us coming into 2012, there was a lot of enthusiasm around the economy improving, and I think our businesses, for the most part, saw improvement [last] year. I think it's a year that you have to be very careful on where you're spending your capital, whether it's growth or acquisitions, or whether it's improvements in existing facilities, or whether it's increased labor."
For those club operators and private equity firms wanting to take a wait-and-see approach to the likely domino effect of a sale of 24 Hour Fitness, they'll have to keep waiting.
That's because the San Ramon, CA-based company announced last month that parent company and private equity firm Forstmann Little, New York, decided to take 24 Hour off the market. A sale of 24 Hour during the current market conditions was not in the best interest of the shareholders, 24 Hour said in a statement. Perhaps the decision had something to do with the unresolved issues relating to the fiscal cliff, perhaps not. Forstmann Little is putting another company in its portfolio, IMG Worldwide, up for sale, according to reports last month.
Private equity activity in the industry is expected to continue this year, as will more mergers and acquisitions. LA Fitness, Irvine, CA, made the biggest splashes in 2012 by acquiring Lifestyle Family Fitness, St. Petersburg, FL, and Urban Active, Lexington, KY. LA Fitness, backed by three private equity firms, is poised for further growth in 2013. As Michael Scott Scudder, managing partner of The Fitness Industry Group, Taos, NM, says, more "cherry picking" of smaller club chains by bigger club companies could be in store.
Other market activity is expected regionally throughout the industry. Besides 24 Hour Fitness, the other club company that was expected to sell in 2013 was Western Athletic Clubs, San Francisco, which is owned by private equity firm KSL Capital Partners.
No official announcement has been released regarding the deal between Planet Fitness, Newington, NH, and private equity firm TSG Consumer Partners. Once that becomes final, Planet Fitness is expected to continue to be the market leader in the HVLP arena. Planet Fitness is expected to open 200 clubs in 2013.
Planet Fitness is certainly facing more competition, from the Crunch franchise clubs to the Gold's Gym Express clubs to several operators of former Gold's Gyms, including Fitness Connection, Max Fitness and Xperience Fitness. Even with an expected boost in the economy, the $10-a-month budget clubs will continue to attract members, insiders say.
"It would not surprise me that over the next number of years, the low-price, high-volume model might not represent as much as 25 percent of the industry," says Art Curtis, president of consulting firm Curtis Club Advisors LLC, Brookline, MA, and the former chairman of the International Health, Racquet and Sportsclub Association (IHRSA) board of directors. "What will ultimately start to happen is you'll start to see some differentiation among the low-price, high volume kinds of operators."
It appears more stratification will continue in 2013, growing more competition for the traditional mid-market, for-profit fitness clubs. In addition to the budget clubs, competitors include 24-hour, keyless entry clubs, led by Anytime Fitness and Snap Fitness, as well as boxing clubs, kickboxing clubs, mixed-martial arts clubs, Pilates, yoga and cycle studios, personal training studios and microgyms, such as CrossFit. Plus, many nonprofit competitors, such as YMCAs, and university rec centers have amenities that rival neighboring for-profit clubs but enjoy tax-exempt status.
Plummer says that microgyms, even some with only 300 clients, are high-revenue generators. Some members pay $300 a month to $1,000 a month, and they will continue to pay large sums of money as long as they continue to see results, Plummer says.
"The membership portion of the business that we've been so dependent on in the last 50, 60 years is starting to evolve into necessity because of competition, because of failing programming, because of the low-price models that have evolved," Plummer says. "It's the perfect storm. It's forcing a new generation where you have to start really chasing a different way to do business now, and that's seeking a higher return per client and starting to realize you can make a lot more money with a lot fewer clients. The consumer is starting to, in significant numbers, gravitate toward a results-driven environment and away from a do-it-yourself fitness environment. That's going to spell bad news for some of these old-style chains."
Mastrov, for one, acknowledges the growth of microgyms, but he wonders how long people will pay hundreds of dollars a month to those gyms. Others in the industry wonder how much discretionary income people will have in 2013 to pay for those memberships.
The employee Federal Insurance Contributions Act (FICA) payroll tax is expected to revert back to 6.2 percent in 2013 after it was reduced to 4.2 percent in 2011 and 2012. The current maximum wage base for the calculation is $110,100 for 2012 and is set to rise to $113,700 for 2013, according to StaffMarket.com. The reduction in the FICA tax has saved the average family $933 each of the last two years, but it has also cost the government $120 billion per year, according to the website.
Health care costs have been on the rise for many Americans, too. According to a report last month by The Commonwealth Fund (a private foundation that supports independent research on health care issues), average premiums for employer-sponsored family health insurance plans rose 62 percent between 2003 and 2011, from $9,249 to $15,022 per year. Health insurance costs rose faster than incomes in all states, according to the report. Employee payments for their share of health insurance premiums rose by 74 percent on average, and deductibles more than doubled, up 117 percent between 2003 and 2011.
Insurance costs only will get higher, as family premiums will reach $24,740 by 2020, an increase of 65 percent from 2011, according to the report.
"To some extent, 2013 is going to be a wake-up call—and a scary one—for people who have taken no interest and have no knowledge of medical expenses because their employer has really taken care of the brunt of that," says Rick Caro, president of consulting firm Management Vision, New York. "It will be the beginning of educating people about the fact that they're going to have to make choices not only where to have their insurance but also how to spend money on preventive rather than just direct medical or rehabilitative services."
Statistics such as these could lead to partnerships between corporations and the fitness club industry to help lower insurance costs.
The New York Times, citing information from the U.S. Labor Department, reported that from 2001 to 2011, the numbers of personal trainers increased by 44 percent, to 231,500. Furthermore, the Bureau of Labor Statistics (BLS) reported last summer that the employment of fitness trainers and instructors is expected to grow by 24 percent from 2010 to 2020, faster than the average for all occupations.
"As businesses and insurance organizations continue to recognize the benefits of health and fitness programs for their employees, incentives to join gyms or other fitness facilities will increase the need for workers in these areas," the BLS reported.
Health club members and prospective members also have to factor the rising costs for basic necessities, such as food and gasoline, into their purchasing decisions.
"The middle-income family has less discretionary income now than they had in 2006 and 2007, and they will have even less discretionary income in 2013," Scudder says.
Other concerns focus on the U.S. unemployment rate, which showed signs of improvement in 2012. The national rate dipped to 7.7 percent in November 2012 from 7.9 percent in October 2012. Economists cautioned, as reported by The New York Times, that the decrease in the unemployment rate was the result of a shrinking labor force as opposed to the creation of jobs. With so many seasonal jobs in December and many corporations continuing to lay off workers at year's end, the industry will have to continue to monitor the unemployment rate early this year.
"I personally believe that our real unemployed rate—not unemployment, but unemployed rate—is probably more like 11 to 12 percent," Scudder says. "We have thousands of people who are now not officially being counted because they're two years without work. I really wish Washington would tell us the truth about unemployed numbers. And of course, they won't, because the minute that they did, we'd have a run on the stock market."
Despite small signs of progress in this country's battle with the obesity epidemic, there remains a huge mountain to climb.
The signs of improvement relate to childhood obesity. A report from the Robert Wood Johnson Foundation last fall noted signs of progress in childhood obesity in the cities and states of Philadelphia (4.7 percent decline), New York City (5.5 percent decline), Mississippi (13.3 percent decline) and California (1.1 percent decline).
Adult obesity rates have increased, however. The Robert Wood Johnson Foundation reported last fall that adult obesity rates could exceed 60 percent in 13 states by 2030.
If obesity rates continue on their current trajectories, 39 states could have rates above 50 percent, and all 50 states could have rates above 44 percent, according to the report.
The marriage of diet and exercise may never be as important as it is today. Several club companies already have a focus in this area, such as Anytime Fitness, Hastings, MN, with its AnytimeHealth.com website, and Life Time Fitness, Chanhassen, MN, with its LifeCafes, among other initiatives. After it made a deal with Curves International, Waco, TX, private equity firm North Castle Partners made a point to continue the company's Curves Complete 90-day weight-loss program. Jill Kenney, co-founder of Club One, and Brent Knudsen, managing director of Partnership Capital Growth, co-founded the U.S. version of iTrim, a Swedish-based weight-loss company, in 2011.
"As you look at the problems with obesity, and you look at the results, diet by itself hasn't been particularly effective, and exercise by itself hasn't been particularly effective," Curtis says, "but the two of them when done together are much, much more effective."
Technology could play a bigger role in the weight-loss sector this year. Bryan O'Rourke, consultant and CEO of Integerus, Covington, LA, says one of the leaders in this sector could be Retrofit, Skokie, IL, which is a weight-loss business model that incorporates video conferencing with wellness experts, daily readings from wireless devices, a wireless activity tracker and a Wi-Fi body composition scale. Retrofit says clients will lose 10 percent to 15 percent of their weight and keep it off through the end of its 12-month program.
"I think that's a great example of the kinds of new business models that are going to emerge in the months and years ahead to tackle the real problem of obesity," O'Rourke says. "I think it's going to be interesting to see how the health club market copes with that and what the implications are going to be. I think it's going to be good. The more kinds of different competition you have in the market makes everyone figure new things out."
The key for all club operators in 2013 is the same as it was for 2012, 2011 and in any year, regardless of growing competition, economic circumstances, financial pressures on members and the obesity epidemic. A strong work ethic and a willingness to adjust to industry trends, member wants and needs and the latest in technology will carry them through this year and beyond.
"In the slowdown recessionary period, the fitness industry performed extremely well and garnered a lot of attention," Mastrov says. "It created career paths for people. It created employment and a safe haven for those who wanted to come in and get their minds cleansed and their bodies in great condition. From the standpoint of health and wellness, we're still in a great place. We have an obese nation, and we haven't found a way to get people to move more and burn more and eat less. That's our mission at hand, and that's what we're all after."