4. WRITING ASSIGNMENT: FITNESS FIRST

1. Review the chapter 2 closing case, “Fitness First and the UK health and fitness club industry” (pg. 73 in the hard copy version, your page in the e-version may be different).

2. Submit your responses to the questions below by Sunday of week 3 (5/24):

Closing Case

Fitness First and the UK health and fitness club industry

In July 2014, John Wartig, the chief financial officer of Fitness First Ltd, was preparing for a meeting with his CEO, Tony Cosslett, to review Fitness First’s capital expenditure plans for the next five years. Both were relative newcomers to the company: following the acquisition of Fitness First by private equity firms Oaktree Capital and Marathon, Cosslett was installed as CEO in June 2012; Wartig was appointed CFO six months later. Fitness First claimed to be the world’s largest privately owned health club group with 540 clubs and over one million members in 21 countries. In January 2014, Fitness First announced a £350 million five-year programme of capital investment which would include £50 million on upgrading and rebranding its UK clubs and £64 million on expanding its presence in Asia, including entry into China. John Wartig’s concerns related to Fitness First’s UK operations: given the intense competition within the UK health club sector, would Fitness First’s investment in upgrading its facilities and repositioning within the market yield a satisfactory return to its owners?

Fitness First Ltd

In 1993, Mike Balfour established the first Fitness First health club in Bournemouth, England. The company’s floatation on London’s AIM in 1996 fuelled rapid expansion, initially in the UK, Germany and Belgium and then into Australia, Hong Kong, Spain, Malaysia, France, Holland and Italy. However, rapid expansion strained its finances and, following a steep fall in its share price, it was acquired by Cinven, a private equity firm in 2003. Following two years of restructuring and refocusing, Fitness First was bought by another private equity group, BC Partners, for £835 million. Yet, despite its market leadership in the UK, financial performance was poor. By 2011, Fitness First was teetering on the brink of bankruptcy and in 2012 was acquired by Oaktree Capital and Marathon Asset Management. The new management team closed some clubs and put others up for sale. By 2014, there were 80 Fitness First clubs in the UK, down from 161 in 2009. During 2014, CEO Tony Cosslett initiated an upmarket repositioning of the chain in an effort to enhance members’ experiences and to avoid direct competition with budget chains. The new strategy comprised using IT to provide fuller information and a more customized experience, rebranding to establish Fitness First as a ‘national authority’ on fitness and exercise, a redesign of the clubs and retraining staff to enhance their knowledge and customer orientation.

The UK health club industry

Development

As in other countries, gymnasiums with facilities for weightlifting and general exercise and for sports such as gymnastics, boxing, wrestling and judo had long been a feature of the social infrastructure of urban Britain. Gymnasiums were operated both by local government authorities and by not-for-profit clubs. The emergence of health club chains owned and operated as business enterprises dates from the early 1980s and was associated with the rise of young urban professionals (‘yuppies’) as a social and cultural group.

The contrast between the new health clubs and the old gyms was stark. Gyms were typically scruffy, male-only facilities with limited equipment and very basic changing and showering facilities. The private health clubs featured sophisticated, technologically advanced exercise equipment; pools, saunas and steam rooms; individual and group instruction in a range of activities from yoga to weight training; individual consultation through personal trainers; and luxurious relaxation facilities including cafés and juice bars.

Early entrants into the industry were typically start-up companies which began with a single establishment then used venture capital funds to expand. These were often founded by individual enthusiasts and former sports personalities.

Early leaders such as Holmes Place (1980), David Lloyd Leisure (1982), Fitness First (1993) and Esporta (1994) initially drew upon venture capital finance and were later listed on the London Stock Exchange or AIM. Subsequently, many were bought out by private equity firms: their erratic profitability but good cash flow potential made them attractive, but more to private equity financiers than stock market investors. In addition to these start-ups, a number of established companies entered the industry. Richard Branson’s Virgin Group entered the business in 1992 when it acquired South Africa’s Health and Racquet Club. JJB Sports, a retail sportswear chain owned by Mike Ashby, opened JJB Sports Clubs (later to become DW Sports Fitness), and several hotel chains (including Marriott and Hilton) introduced health clubs within their hotels. Most of the leading chains owned and operated their individual health clubs, but some, such as the Swiss-based Kieser Training, adopted a franchising model.

Facilities, costs and pricing

Clubs differed in the sophistication and luxury and in the range of equipment and services they offered. Some clubs emphasized particular sports. For example, the David Lloyd club emphasized racquet sports (tennis, badminton and squash). Some clubs were women only.

While a small fitness club comprising an exercise room and changing facilities could be opened in leased premises for a start-up cost of around £400 000, a full-service health club of the type offered by the major chains involved an investment of around £2 million. The principal costs were converting the premises to install facilities such as a pool, Jacuzzi, showers and so forth and the cost of the equipment. Exercise machines have advanced substantially in sophistication and cost – individual items of equipment can cost over £25 000. Leading suppliers include Life Fitness (USA) and Technogym (Italy).

The typical pricing policy for health clubs was through annual membership contracts. These usually involved a one-time registration fee and a monthly fee of between £30 and £80. Because the costs of operating a health club were much the same irrespective of usage, health club operators were under considerable pressure to generate revenue through signing up new members. Competition took many forms. While health clubs were reluctant to compete on published membership fees, substantial discounts from list prices were offered. Initial sign-up fees were often waived, generous incentives were given to existing members for introducing new members, low-cost family deals and off-peak memberships were common and heavily discounted multiyear membership deals were offered.

An important source of profit for the industry was from consumers who signed up for membership but subsequently used their clubs rarely, if at all. However, this source of revenue was under attack. In a May 2011 court ruling, membership contracts of more than one year were declared unenforceable on the basis that such contacts were ‘a trap into which the average consumer is likely to fall’.39

Widening competition

As the market grew, it was also becoming segmented among different groups of providers. A major challenge to Fitness First and the other market leaders was the emergence of a new group of budget fitness clubs. The Gym Group, Pure Gym, Fit4less and easyGym (owned by the EasyJet Group) offered monthly membership for £15 or less and even offered one-day memberships.

Growing competition also came from publicly owned gyms and sports centres. Many local government authorities had invested heavily in sports and fitness centres, including upgrading swimming pools by adding new gym facilities. Typically, these public sports and fitness facilities were much cheaper than private health clubs, even if they did offer less luxury and fewer services. However, the trend to outsource their management to not-for-profit social enterprises had brought greater efficiency, innovation and customer focus to these public facilities. Not-for-profit operators, such as Greenwich Leisure Ltd with 100 leisure centres, were equal in size to some of the biggest private chains. Table 2.3 compares private and public sectors within the industry.

Within the private sector of the health and fitness industry, Table 2.4 shows the UK’s leading operators, while Table 2.5 gives financial information on selected companies.

Reflections

As John Wartig browsed through the most recent survey report of the UK health and fitness sector, he was struck by the basic contradiction that perplexed many of the entrepreneurs and investors who had flocked to the sector. In a society that was becoming increasingly health conscious with greater willingness to spend increasing amounts of disposable income on exercise and well-being, why was it that the private chains of health and fitness clubs found it so difficult to make money? Looking to the future, there were some positive signs – notably the increased growth in health club membership and the consolidation of the sector as the weaker players were bought out by financially stronger companies. At the same time, the prospects for the industry still looked precarious. The rise of the budget health clubs demonstrated the ease with which new companies were able to enter the industry. Even more worrying was the recognition that health and fitness clubs were not the only routes to health and fitness. Digital technology had enhanced the ability of individuals to conduct exercise programmes in their own homes, while traditional and new exercise forms such as running, cycling, yoga, Pilates and martial arts offered a vast array of possibilities that did not necessarily require membership of a health and fitness club.

Table 2.3 Private and public health and fitness clubs in the UK: 2011 and 2014.

Private Public

2011 2014 2011 2014

Number of clubs 3146 3269 2706 2750

Number of members 4.43 4.80 2.91 3.10

(millions)

Average monthly fee £38.39 £41.35 £29.57 £30.45

Sources: Leisure Database Company, Leisure Industry Academy and other sources.

Case Study Questions

-How could this industry be segmented? Is Fitness First right to move upmarket and offer an enhanced range of services to its members? Are there alternative strategies that Fitness First could pursue?

-In what ways could Fitness First influence the course of the industry’s evolution to its own advantage?

-What do you think are the key success factors in this industry?