Slimmed-down gyms take market share

The entrance to the Gym Group’s flagship London site resembles a high-security storage depot: automatic locking cylindrical doors, password activated keypads and a lone computer terminal instead of a receptionist.  Welcome to exercise without the trimmings, the fastest-growing niche of the UK fitness industry.  By cutting down on what John Treharne, Gym Group’s chief executive, describes as “unnecessary extras” – swimming pools, aerobics studios, fluffy towels – members can work out 24 hours a day, and with no annual contract, for less than £20 a month. That compares with a UK monthly average private gym membership of £43.

“We’re not designing them to be pretty,” said Mr Treharne, referring to the gym’s cavernous, stripped down interior covered in exercise equipment. “But everything works and it’s easy to clean.”

Budget gyms, which were virtually non-existent before 2008, accounted for £37.2m of Britain’s £3.81bn fitness market for the year to March 2011, according to figures from the Leisure Database Company, industry analysts.
That is set to grow dramatically as private-equity backed Gym Group and its rival Pure Gym both project doubling their respective number of sites by 2015. Meanwhile, Énergie, which has 20 no-frills gyms under its Fit4Less brand, hopes to float on the Alternative Investment Market to expand this number to 80 gyms by 2017.

“It is the fastest-growing sector partly because it didn’t exist before,” said David Minton, director of the LDC. “Although the impact is small because fewer members of the population are taking out gym memberships these new entrants are cannibalising the market to the detriment of middle-market operators.”

Fitness First has been the most conspicuous middle market casualty. The UK’s largest fitness company by sites this week confirmed it had appointed Andrew Cosslett, former head of InterContinental Hotels Group, as chief executive to help lead a revival. That’s come as deteriorating trading pushed Fitness First into a restructuring with creditors in which over a third of its 140 clubs face potential closure.

Several middle market Esporta gyms – 55 of which were purchased last year by Virgin Active in a £77.6m deal – are lossmaking, according to the company.

Last year Bannatyne Fitness, owned by the Dragon’s Den entrepreneur Duncan Bannatyne, saw pre-tax profits fall to £7.8m from £12m in 2010 at its 59 clubs as the consumer downturn took its toll.

By contrast more expensive clubs, such as David Lloyd and Virgin Active’s bigger own brand sites, have continued to grow earnings throughout the recession, according to the companies.

“The market has become polarised,” said Mr Minton. “We’ve still got a very strong top end and growth at the bottom end with the low-cost gyms.”

The budget gym business model relies on a high volume of customers. While an average Virgin gym could have around 5,000-6,000 members in a 35,000 sq ft site, Gym Group would expect to have up to 9,000 members in a gym half the size.

That density is, however, spread out since, unlike regular gyms, budget operators do not close at night. It’s also why they have seen a jump in applications from those working unsociable hours – policemen, restaurant workers, taxi drivers – who previously never had a gym membership.

In addition, the gyms minimise so-called “low usage” floor space – fitness studios, pools or saunas that might be used for only a few hours in a day.

“If you want to take your family to the gym or swim in a pool then Pure Gym is probably not for you,” said Peter Roberts, Pure Gym’s chief executive. “But if you want to stay fit and healthy and look after the pennies then we are.”

Pure Gym has opened 22 gyms since late 2009 and expects to have up to 65 gyms by 2013 after securing a £15m loan from Barclays earlier this year. To cut administrative costs all memberships are completed online.  Staff, which typically account for 25-30 per cent of gym costs, according to the company, are limited to two people at peak times and one person after 9pm. Optional extras such as nutritional coaches or fitness trainers are outsourced.

“We operate on the same principle as budget hotels,” said Mr Roberts. “We make all our money on memberships and you can only join online – it’s like the Premier Inn of the fitness industry.”

But not all budget gyms have prospered. EasyGym, opened last summer by EasyJet founder Sir Stelios Haji-Ioannou, has yet to expand beyond its two UK sites.

Nuyuu, launched in 2009, was a budget gym chain backed by the private equity investor James Caan. It was offloaded to Énergie the following year after it reportedly failed to hit membership targets.

With the budget market fragmented, industry watchers are predicting a wave of consolidation.

We all remember that South Africa was the centre of the universe for football fans in 2011 and no doubt Cape Town managed to ride that wave more successfully than anywhere else in SA.  But it seems a bit extreme that Cape Town has gone from hero to zero in just 12 months.  All this goes to suggest that London, 2012′s winner, might only be ‘top city’ courtesy of nothing other than the fact that the Olympics (and the Diamond Jubilee) is putting our capital city at the forefront of everyone’s mind when voting.  Will London experience the same ignominious departure from the top flight rankings in 2013?

Probably not.  Unless the airport queues are as shocking and lengthy as the pundits predict, and – if this is indicative of the UK’s ability to process paying guests – what about how well (or otherwise) the tens of thousands of sports fans are handled as they queue to enter the Olympic Park during the two weeks of the Games.  And then, of course, there’s the weather…

Let’s hope that the much publicised quote from  TripAdvisor spokesperson Emma Shaw doesn’t come back to haunt her (and all of us!): “To be crowned the world’s best destination in the Olympic year by millions of travellers is a tremendous honour for London. It’s fantastic to see the capital recognised and rewarded by those that have really experienced the city – travellers themselves.”

It will not be too long until we find out.  We all have our fingers firmly crossed that it turns out to be a truly successful year for UK plc and something upon which we can build on in future years.  In the meantime, here’s how the top 10 cities around the world fared in the TripAdvisor 2012 awards:

The 2012 TripAdvisor Travellers’ Choice Destinations winners:

Gym Group, with backing from Bridges Ventures, the private equity firm, opened its first club in Hounslow in July 2008 with a pre-opening membership of 6,000.  Although membership attrition is high, John Treharne, Gym Group CEO says this is a natural result of the way people used the clubs, claiming that the satisfaction rate among leavers was 85 per cent positive.   In comments to The Times on 23 April, he goes on to say:  “It’s about flexibility.  When it’s Ramadan a lot of people don’t use the gym but they come back in September. Equally, students only join during term time.  Net membership growth in our mature sites is 14 per cent.”

Another key facet, he said, was the group’s insistence on developing its own clubs.  Each cost about £1 million and pays a rent of about £150,000. “Converting existings clubs doesn’t work. A failed gym is a failed gym,” he said.

It is a formula that is now most definitely proven to work. Its clubs typically break even after two months, opening with at least 3,500 members and growing to as many as 9,000. Each club is used by an average of 1,500 members on a daily basis, with 15 per cent coming during the off-peak hours.

While Fitness First, the world’s biggest operator, faces a possible insolvency process in Britain (see my blog of last week) as it seeks to solve its financial crisis, Gym Group reported impressive results for last year. Turnover grew by 88 per cent to £13.5 million, with underlying earnings up 82 per cent to £3.1 million.

Gym Group has secured an extension of its revolving debt facility with HSBC from £12 million to £17.5 million, which will fund a further 25 sites.

Meanwhile, Pure Gym, which numbers Tom Singh, the New Look founder, among its investors, is also growing strongly, and Peter Roberts, CEO Pure Gym (who once upon a time worked with Mr Treharne at Dragons Health & Fitness) said that the key was not to let standards drop. “It may be cheap but people still demand high quality and are very unforgiving,” he said.

According to the Leisure Database Company, an industry consultancy, low-cost gyms still account for less than 5 per cent of the total number of sites, although that looks set to increase rapidly.  For further details about the size and shape of the UK gym / fitness market, see my blog:  budget gyms flex their muscles

Findings indicate that Virtuoso’s client base is a well-seasoned force, not easily dissuaded by rising fuel prices and hotel costs, as is evident by its continued support of Europe. Italy and France ranked as two of the most popular international destinations, with England joining the top five on this prestigious list for the first time.   The Diamond Jubilee and the Olympics no doubt being part of the reasoning.  Similarly, Virtuoso’s clientele showed a strong desire to explore new, undiscovered destinations with Cuba, for the first time ever, topping the polls as the most popular emerging destination. Similarly, Cambodia and Belize made their debut as new additions to this category, marking a distinct trend towards more intrepid travel locations than in previous years.

This year’s report demonstrates that international travel continues to be the most popular type of trip in 2012, with high-end river cruises being named as the second of five biggest emerging travel trends, just behind family and multi-generational travel, which continues to sell strongly among this class of traveller and takes the number one spot in this category.

Unsurprisingly, following the boom in luxe hotels in Miami over the past 18 months, Miami and predominantly South Beach joined the list of top five U.S. destinations, coming in at number five on the list after Maui, New York City, Napa Valley & Sonoma and Las Vegas.

For families travelling in 2012, joining Italy and England, which ranked highly in 2011, were Turks & Caicos and South Africa, both were first time arrivals to the family travel list replacing Alaska.  Also included in this category were Hawaii and Costa Rica.

The most popular destinations for romantic travel continue to be Italy, French Polynesia and France; however, the 2012 report saw both Bali and the Seychelles join the top five, again demonstrating that long haul travel is not a problem for hopeless romantics seeking their slice of paradise.

Of those booking travel, top motives influencing travel choices were similar to those in the 2011 Luxe Report including: seeking authentic experiences in new destinations; rest and relaxation; and personal enrichment – further supporting the increase of family travel, which remained the biggest travel trend in the 2012 report.

The Luxe Report also affirms the value that high-end travellers place on working with a professional travel advisor.  This, of course, bodes well for my client The Healthy Holiday Company which launches a new bespoke travel service in May, aimed at the UK’s affluent traveler.  When booking holidays, Virtuoso found that the largest influences on consumers’ travel decisions are recommendations from friends and family combined with their travel consultant’s advice on the right destination, the offer of once-in-a-lifetime experiences and also value for money.

If you would like to be notified when The Healthy Holiday Company launches its experiences and destinations worldwide, please register here

That’s quite a change from just a few months ago.  Everything seemed to be going well for CEO Colin Waggett last August. Together with his colleague Duncan Tatton-Brown, the pair had been touring Asia to meet investors interested in buying shares in Fitness First, one of the world’s largest gym chains, where they were the two most senior executives.

With days to go before pushing the button on a £1 billion listing on the Singapore stock exchange, their sales pitch had worked a charm. Plenty of fund managers were ready to buy shares.  Finally, it looked like one of the big fitness chains was about to cash in, pay off their debt (£550m), and make a bunch of people very rich.

However, mainly courtesy of the topsy turvy Eurozone crisis, stock markets around the world were being battered and the float was postponed.   Now, 8 months later, Fitness First is in deep trouble and is about to be taken over by its two largest creditors and BC Partners, the buyout firm that purchased the chain in 2005 when credit was cheap and readily available, could lose several hundred million pounds on the deal and has already written off a significant sum.

The loans to Fitness First carry conditions — and the longer the loans exist, the more restrictive those conditions become.  This became problematic for the gym chain, which has 430 clubs and 1.2m members globally, after the float was shelved. An alternative plan to raise money to refinance the debt was to try and sell the group to another private equity firm but, despite plenty of initial interest, those considering a deal could not raise sufficient funds to finance a takeover.

Fitness First has operations across Asia, the Middle East and Australia as well as Europe and it was trading reasonably well, particularly in the Far East, but the debt noose around its neck was beginning to tighten.

Scenting an opportunity, two big debt investors, Oaktree Capital and Marathon, began buying up Fitness First loans. Oaktree knew the company well, having invested in the debt a few years earlier. The two firms secured more than 75% of the loans. After the lenders allowed Fitness First to skip an £18m interest payment last month, Oaktree and Marathon were able to start calling the shots.

Seeing the writing on the wall, BC Partners had already begun to take action. It drafted in Alix Partners, the restructuring adviser, and changed the company’s management, replacing Waggett with Chris Stone, a turnaround expert who had previously run Northgate, the IT company.  Tatton-Brown also departed.

Stone is now working furiously to present a new business plan to Oaktree and Marathon, which have waived loan agreements while this work is carried out. Options under consideration include staging a company voluntary arrangement, a process that will allow the group to shed underperforming British clubs but leave the landlords, who would have to give consent for such a deal, with empty buildings.

The debt holders believe that, despite the business’s problems, it remains fundamentally a good one and that it is a long-term “hold”.

One source familiar with their thinking said: “They think there is value in the company over the longer term. It’s still number one or two in each of its markets.”

They would also be prepared to invest money in the slimmed down business, with Oaktree understood to be willing to underwrite a £100m investment in upgrading the remaining British gyms. Many of these, particular in London and southeast England, are trading well despite the harsh economic climate.

But there are problems, such as increased competition from the slew of budget gym chains that have sprung up over the past few years. Fitness First has attempted to deal with this by launching its own budget brand, Klick Fitness.

BC, which has backed several of its companies through successful floats in recent years, has not yet decided whether to put in more money. Oaktree and Marathon are willing to have the buyout firm as a minority partner.

Like the gym chain’s customers, BC knows the value of a warm-up. Now the real exertion is about to begin.

Last year

Colin Waggett, Fitness First’s chief executive, said: “Our business is performing very satisfactorily in London, in particular, but it’s more challenging elsewhere. This is really a bit of R&D [research and development] addressing that.”  Mr Waggett, who is preparing the business for flotation in the near future, said that if the experiment worked, the company would look at further conversions to the Klick Fitness format, although he refused to be drawn on how many.  He emphasised that it would be an entirely new concept rather than a scaled-back Fitness First club, with each conversion costing about £600,000 to £700,000 — a combined spend of up to £7 million. “We’re taking everything out,” he said. “We’ll create more training space and reduce space given over to saunas, steam rooms, lounges and locker rooms.”

As part of the budget formula, the number of full-time equivalent staff will be scaled from about fifteen per club to four, while the capacity of each club will be increased from the present limit of about 2,000.

Mr Waggett said the move was part of a wider strategy aimed at pepping up the company’s UK division. At its peak, Fitness First operated 162 clubs in Britain but that number has come down to 150 in the past three years. It sold a small number of clubs to FitSpace, the first low-cost gym chain to enter the UK market five years ago, and took a 30 per cent stake in the company.   Mr Waggett admitted that he had considered selling more clubs in non-core locations to FitSpace, but had decided “we’d rather do it ourselves”.   Asked whether Fitness First could end up buying out FitSpace if the Klick Fitness experiment proved successful, he replied: “It’s possible, but it’s not under discussion.”

This year:  Several Klick Fitness facilities are now open for business.  Sites now operating are in Stoke, Wakefield, Sheffield, two in Manchester, Bromborough (in the Wirral), Bradford and Aintree.  Further south, Klick Fitness has sites now open in Leicester and Ipswich.

The Klick Fitness website looks like a crazy mess but is fairly easy to use.  My local club in Ipswich is being promoted with a £20 joining fee and a monthly subscription of £15.99 (if you don’t want a fixed term contract) or £12.99 per month if you’re happy to commit to 12 months on direct debit.  For both options, if you elect to pay £1 more per month, you can have access to all Klick Fitness establishments.  Although I would expect that anyone choosing to join Ipswich would be unlikely to take advantage of this upgrade, bearing in mind where all the other clubs are located.

I’ll be having a look around my local Klick in the near future, and will let you know my thoughts about the facilities, atmosphere and styling then.

This continues the upward trend in sales at The Healthy Holiday Company, with turnover for calendar year 2011 up over 30% on 2010, with all of the brands contributing strongly to performance.  This is very exciting as we are about to launch a new luxury tailor-made healthy holiday service that we anticipate contributing directly to the bottom line in the coming year.  The existing brands – in:spa retreats, Fitscape fitness holidays and destination yoga holidays are all fixed date offerings.  In other words, if the dates don’t suit you or if a particular trip is fully booked, we have to offer the potential client different dates.  However, the new brand – to be called The Healthy Holiday Company – will no longer be the name of the holding company but will become a consumer facing brand in its own right.  This launches in April and we expect it to have instant impact, courtesy of the 12,000 people we now have on the database, and the similar number of unique visitors that visit our websites each month.

It has taken over a year to put all the necessary agreements and expert ingredients in place for the launch of The Healthy Holiday Company website, and everyone is very excited about the prospects.  There will be loads of amazing holidays on offer for both adults and families, such as ski safaris in the Italian Dolomites, mountain biking in the Atlas Mountains, luxury villas in Marrakech and Cape Town, spa retreats to Bali, wellness holidays to Thailand, golf tours to South Africa, surfing in Portugal, yoga in India, dude ranches in Montana, desert safaris in Dubai, detox retreats in Austria, Spain and Germany, sailing in Croatia, white water rafting down the Zambezi, multi activity holidays in Mauritius etc. etc.

If you would like to be notified of when the new site goes live, please click here

Once you step through the doors of this boutique 14 bedroom residence, you enter another world.  Its stylish and elegant design, high beamed ceilings, thatched roof-tops, tinkling water and liberal sprinkling of giant Buddhas all create the sense of being on another continent.  It’s bizarre, but delightfully welcoming and instantly calming.

Tucked away in a shallow valley, surrounded by rolling hills and open countryside, Shanti Som lets you escape the hustle and bustle of modern life and immerse yourself in all things healthy and peaceful.  The food is delicious, nutritious and healthy; the spa offers an excellent array of treatments and therapies; the yoga pavillion is a triumph; the hillside pool is a tranquil oasis and the bedrooms are supremely comfortable, and all with stunning en suite shower rooms.  In addition to the 12 standard deluxe bedrooms, there are two larger suites, both with spacious wrap-around terraces.

As it’s only recently opened, Shanti Som is clearly struggling to generate business at the moment.  So much so that I swiftly agreed that ‘destination yoga’ (The Healthy Holiday Company’s specialist yoga holiday brand) would host a 5 night retreat there over New Year.  As a result, Liz Lark will be teaching guests on this retreat, with morning and evening classes every day.  Prices will start at £745 per person sharing, to include 5 nights accommodation, brunch and dinner every day, all yoga classes, and free use of the sauna, steam room and pool.

We plan to establish several more destination yoga weeks at Shanti Som during 2012.

A travel survey has revealed that ‘financial protection’ is the second highest rated consideration to British holidaymakers following in first spot ‘safe and secure accommodation’.

Surprisingly, bearing in mind present economic conditions, ‘lowest price’ only rated tenth in the wish list forming part of the 2011 ABTA Consumers Trends Survey.  Mark Tanzer, ABTA Chief Executive, commented: “Even in a year when customers are tightening their belts the lowest cost is not their number one consideration. The message from our customers is loud and clear: financial protection is a top consideration when booking their holidays.”

The survey asked consumers which booking elements are essential or important.  The top 10 were:

The market is forecast to be worth £2.7 billion this year, 17 per cent higher than five years ago, according to Mintel, while membership numbers have risen by 15 per cent over the same period. About 7.3 million people, or 11.9 per cent of the population, are members of a private or local authority gym (according to the Fitness Industry Association).

The pressure on consumers’ disposable income has paved the way for budget gym chains, which typically charge about £15 a month, far less than even mid-market chains, such as Fitness First and Virgin Active.

There are around 55 budget gyms in Britain out of a total of about 2,650 clubs. One of the higher-profile ventures is easyGym, set up by Sir Stelios Haji-Ioannou, the easyJet founder, which has opened two clubs in Slough and Wood Green, North London, and plans to open ten annually from next year.

Meanwhile, Pure Gym recently raised £9 million from Barclays and private investors to nearly double its estate to 28 by early 2012. It charges £24.99 a month with no contract for gyms that are open 24 hours a day.

David Stalker, of the Fitness Industry Association, said that the rise of budget chains could attract existing members from other chains and put pressure on established players to be “very precise” about their market position and offering.

The British gym market continues to be highly fragmented, with the top seven operators accounting for only 23 per cent of clubs and 39 per cent of members, according to Mintel, which says that there is significant scope for consolidation.  Here’s how the top seven shape up: