On the surface, fishing appears to be a lazy man's past time, but ask a true fisherman about it, and you'll find out that fishing is more complicated than you think. A fisherman's lure has to match the conditions (water temperature, air temperature and approaching weather fronts). Those conditions affect the type (live vs. artificial), size and color of bait used. They also affect how fast or slowly the fisherman reels in the bait. Most importantly, a fisherman has to know where to fish, since the old adage says that 80 percent of the fish are in 20 percent of the water.
On the surface, the fitness industry appears to some to be an easy way to make a buck. Open a building with cardio and strength equipment, a spin room and locker rooms and you're set, right? However, just like in fishing, this industry is not for novices, especially these days as competition increases and membership numbers remain stagnant. The success of fitness facilities lies in the “bait” used to attract members and their ability to retain them based on the results they achieve. Programming, customer service and facility presentation are the bait, and that bait must match the market conditions and the demographics' needs. Unfortunately for the industry, too many clubs may be fishing in too small of a pond.
The state of the industry in 2007 is one of growing competition made more difficult by the possibility of another year of stagnation in membership numbers. Low-priced clubs and express clubs are flooding the market. Many of the big clubs are getting bigger through private equity investment and expansion. A growing number of seniors are joining facilities for health reasons rather than reasons of beauty — and that senior market will continue to expand as more Baby Boomers reach 60 years old.
Ten years ago, the U.S. surgeon general released the Physical Activity and Health Report of the Surgeon General, and yet today, 64 percent of American adults are overweight or obese, and 70 percent of Americans don't get enough exercise, says Anthony Scaglione, COO of Quick Fit Products LLC, which is a partnership between Richard Bradley, the creator of the Quick Fit program, and L&T Health and Fitness, a fitness management and health promotion company.
“Sadly, the health and fitness industry has had no impact on improving the health of physically inactive Americans,” Scaglione says. “This might be a bold statement, but the truth in the statistics exposes that we have only found creative ways to impact the already physically active, not the sedentary, at-risk population.”
To prevent the health of Americans from worsening, the fitness industry must change its philosophy, Scaglione says.
“Every commercial club, work-site wellness program and community outreach center needs to preach ‘health fitness’ rather than ‘athletic fitness’ to their members, both active and inactive,” Scaglione says.
Fitness facilities also must implement programs that target the sedentary and deconditioned population. Rather than spending money on the latest industry fad or piece of equipment, fitness facility owners should invest money in figuring out what motivates the physically inactive and developing programs that incorporate life-time physical fitness, he says.
“We must unite and pledge to address the greater majority of Americans who are not physically active and really need our help,” Scaglione says. “We must stop making exercise too complicated with its many types of equipment and activity formats. We must create programs that people can finally see themselves doing on a regular basis. We must dedicate our efforts to reversing the deadly trend of physical inactivity and obesity in adults and children. After all, we are role models for everyone, not just those who are already physically active.”
Club owners and staff members must let go of the fear that members will discontinue their membership if they teach them fitness skills that they can use away from the club, says Allison Flatley, COO of L&T Health and Fitness in Falls Church, VA.
“I believe the opposite will happen — clients will become more reliant on the club,” she says. “The industry will not grow if we continue to focus on the highly motivated and ignore the majority of the population — the deconditioned and sedentary.”
Casting a Larger Net
Although member numbers were stagnant in 2004 and 2005 (2006 numbers had not been released as of press time), the industry hasn't had trouble growing its club numbers. Almost 30,000 fitness facilities — both for- profit and nonprofit — are operating today, according to American Sports Data. The industry should expect more new clubs in every category this year but particularly in franchise and express clubs, says Rick Caro, president of consulting company Management Vision, which is based in New York. The most popular franchise facilities will be women-only facilities, led by Curves, Waco, TX, he says, but he also expects Planet Fitness, Dover, NH, and Anytime Fitness, Hastings, MN, to continue in popularity. Curves recently celebrated its 10,000th club opening. Planet Fitness grew to 140 clubs in about three years and now has 300 more clubs with last October's announcement that the company is purchasing World Gym. Mike Grondahl, CEO of Planet Fitness, has said the company is looking at additional purchases.
Anytime Fitness, which began franchising in mid-2002 and ended 2003 with $52,000 in corporate revenue, earned $3 million in revenue in 2005 and had 320 franchised clubs in 46 states at the end of November 2006. Jeff Klinger and Chuck Runyon, Anytime co-owners, told the Minneapolis Star Tribune recently that they have sold franchises for 600 more clubs that are expected to open this year, a pace that could put the franchise second only to Curves International in terms of the number of franchises opened. The two also estimate that 2006 revenue will top $10 million.
This year, 24 Hour Fitness is expected to open clubs in states it hasn't entered before and to do so in the mid-range price, which will put pressure on other mid-range clubs, says Caro.
Despite projected club openings, some in the industry see the beginning of the end for a large number of clubs this year. Jim Booker, a former club owner and industry veteran who lives in Atlanta, noticed several club closings in 2006 and expects that trend to continue this year.
“I think that will be the story of 2007 — the clubs that close,” says Booker, who has been in the industry for 35 years. “You will see a big shakeout in 2007. There are too many clubs in the market.”
The number of clubs is expanding faster than the membership base or the members, he says, adding that many Americans now have home equipment, and competition is popping up even in apartment complexes and churches.
“The biggest threat to these businesses is there is a club on every street corner,” Booker says. “They're six blocks or a mile apart. If you draw a circle around them, they're not all making money.”
Because of economic concerns, more competition and a lower membership increase overall, Caro estimates that revenue will be flat in 2007, especially for independent clubs. Respondents to Club Industry's Fitness Business Pro's (CIFBP) annual State of the Industry report are generally optimistic about their own revenue outlook for the year. The survey of 199 for-profit, nonprofit, university and government/military fitness owners or managers found that 73 percent of respondents expect their 2007 revenue to increase from 2006. The expected increase is an average of 24 percent. Respondents projected that their 2006 revenue would be an average of $819,000. Single-location club owners estimated average revenue of $595,000 while clubs with two or more locations expected average 2006 revenue to be $1.8 million.
However, if Caro's prediction of flat revenue occurs, it could lead facility owners and managers to control expenses. Expense control could be especially important because Caro foresees increased costs — payroll (especially if minimum wage increases on a federal level as Democrats have promised), real estate taxes, insurance increases on health and business insurance categories — and capital expenditure pressure, meaning cost of renovations will be higher than in the past. That leads to one key financial conclusion — greater pressure on EBITDA (earnings before income taxes, debt and amortization), Caro says.
“It will be harder to make the same profits as in the past,” Caro says. “It doesn't mean clubs won't do better, but they will have to control costs and do a better job of increasing revenue from new members, getting more revenue per member and holding onto existing members longer.”
Caro also anticipates that fitness facility owners will have more difficulty negotiating favorable leases.
“More landlords believe the cycle has changed, and they are more in the driver's seat,” Caro says. That change in perception may mean that landlords who make improvements to spaces will want that investment back in rent. Rent may also increase because landlords will face higher real estate taxes, insurance costs and other costs.
“It will be more difficult for clubs without substantial resources and for independent clubs to get the leases that they like so they may not be able to add new clubs,” says Caro, adding that startups might need to raise more money to get launched.
However, not all facility owners are pessimistic about expansion in the new year. Forty-six percent of CIFBP survey respondents plan to physically expand their facility in the next 12 months, which is an increase from last year when 37 percent planned an expansion. Fifty-one percent of facility owners planning an expansion this year will expand the existing building while 43 percent will open a new location, and 7 percent will acquire another club (some will do a combination). Last year's survey showed that 57 percent of club owners who planned to expand in 2006 would do so by expanding their existing buildings, and 48 percent planned to open a new location while 13 percent planned to acquire another club (again, some planned a combination of these methods of expansion).
Nonprofits aren't staying away from expansion. The YMCA of Southern Nevada, Las Vegas, is just one of the Y groups that is opening another branch this year. The Bill and Lillie Heinrich YMCA is spreading its budget a little thinner by investing in a new facility, says Brandon Schroeder, health and fitness director at the Y, which is also undergoing a remodel.
The Air Force also is adding to its fitness center numbers. Next month, the Air Force will open the first of four fitness centers this year. The Navy will do some minor renovations to some of its fitness centers. The Army and Marines did not respond to requests for fitness center information.
Despite any pessimism about expansion and revenue, for- profit clubs may see more private equity investment this year, but government funding for military fitness is mixed, and universities continue to rely on student fees.
Current private equity firms will invest more in the industry this year, Caro says. New private equity firms will enter the industry now that so much private equity exists, and the industry has demonstrated some attractive exit calculations for private equity firms, which should mean more growth for players such as LA Fitness, 24 Hour Fitness, Crunch, Spectrum Clubs and Gold's Gym Corporate, he says.
Private equity firms often search for an ideal platform, which would be one of significant size, one that is in more than one region, one that offers financial results that indicate a club model that works, and one with proper documentation so they can understand how to grow the company to its next plateau, Caro says.
“Unfortunately, the ideal is larger than many of the companies that we have in this industry,” he says. “So that means [private equity firms] might want to buy several regional companies and put them together. So in some ways more private equity is coming in but not nearly as great as if there were perfect platform companies for the private equity firms.”
In the Navy where funding is strictly government-dependent, funding is not a major concern, says Kelly Powell, head of Navy Mission Essential Branch, Commander Navy Installations Command.
“The [Bush] administration is attuned to what is going on. We're going to have sufficient funds to have everything we need,” Powell says.
However, funding for most Air Force fitness centers was cut for this year, says Major Danielle Taylor, fitness and sports branch chief of the Air Force Services Agency. The cuts will affect intramural sports programs and fitness classes. In addition, some bases cut the cleaning contracts for their fitness centers.
“These cuts caused a decrease in the quantity/quality of our programs,” Taylor says.
The Air Force is undergoing a transformation to prepare for the future, Taylor says. The program budget directive and the Air Force Smart Operations for the 21st Century (an overarching program guiding continuous process improvement) have changed the climate of the Air Force to include fitness and sports. This year and for the next few years, bases will take a hit in quality-of-life programs, which will mean a sacrifice in convenience rather than a wholesale reduction in quality of life, Taylor says. For example, most fitness centers will no longer have towel service, and intramural sports officials may be mostly volunteers. However, some base fitness centers will decrease the amount of group exercise classes and intramural sports to the minimum required.
In the university fitness setting, the funding is a much different game than in the commercial or military sectors because student fees fund most recreation centers.
“There doesn't seem to be any movement away from the student-fee model, but there has been a clear trend towards requiring recreation departments to generate funds to supplement student fees and/or university support,” says Maureen McGonagle, director of Chicago-based DePaul University Campus Recreation and board member of the National Intramural Recreational Sports Association (NIRSA). “This has resulted in activity fees, membership fees for non-students, rentals, sponsorships and even a focus on development activities.”
The national YMCA and Jewish Community Center Association were both contacted for this story but declined to comment about funding.
No matter how fitness facilities pay the bills, some economists predict a short recession starting as early as late 2007, which would most likely affect all fitness operations. If that happens, companies might implement layoffs, which could affect corporate and individual memberships. Fitness facilities may not raise rates as much as usual because of concerns that members and potential members will be concerned about job security or salary increases, says Caro.
“A lot of clubs will be shy about normal increases,” he says. “Rather than going up $3, they'll go up $1, which means they'll have to find additional members to offset the lack of increase or [they'll have to] push ancillary revenue more.”
Of the club owners surveyed, the average monthly membership in 2006 was $46.50. That compares to an average monthly membership fee of $42 in 2005.
However, any concerns about the economy and expenses aren't stopping club owners from spending this year. The surveyed facility owners expect to spend an average of $40,000 this year on equipment. Club owners with more than one location will spend on average $51,000 during the year.
In addition to new equipment, many fitness facility owners and managers plan to add or increase programming at their facilities. In fact, 72 percent of survey respondents say they plan to add or increase programming this year. Sixty-two percent of those will add or increase group training, 44 percent will add or increase personal training, 39 percent will add or increase senior programs, and 33 percent will add or increase children's programming. Twenty-five percent will add or increase traditional aerobics.
“We're seeing more niche programs (for the elderly, women, teens, etc.), mind/body exercising and outcome measurement,” says Miriam Rinn, communications manager for the Jewish Community Center Association, New York.
The Bill and Lillie Heinrich YMCA is launching the Total Athlete program aimed at teenage athletes. In the program, the teens will do plyometrics, strength training, speed drills and other athletic drills, says Schroeder.
The Air Force is starting a new training/certification class that emphasizes group training, says Taylor. The class will teach fitness personnel how to work better with unit physical training leaders, design group exercise sessions and emphasize circuit training among other items.
The Navy has plans for the senior market using an over-50 initiative that includes strength training for active duty and retired staff, Powell says.
Universities are keeping up with commercial clubs in the variety of their offerings and services, says Chris Arterberry, associate director, fitness and wellness at DePaul University Campus Recreation.
“As for programming trends, collegiate recreation has been mirroring the fitness industry's shift toward a holistic approach to health and wellness, reflected through massage therapy, mind/body classes and increased collaboration with other campus departments to create an all-around well environment for students,” Arterberry says.
One of the staple programs at most fitness facilities has been group exercise. Club owners surveyed say an average of 16.6 percent of their membership participates in group exercise, a large decrease from last year's respondents, who said that 28 percent of their members participated in group exercise. In addition, a recent IDEA survey found that traditional aerobics classes continued to decline in popularity, with all types combined (high-, low- and mixed-impact) being offered by roughly half of the respondents.
However, Sara Kooperman, CEO of SCW Fitness Education, predicts a resurgence in group exercise during the next few years and a decline in personal training, in large part because a group fitness instructor can train 20 to 100 members at a time while a personal trainer can train only one member at a time.
“Further, our population is more and more obese and requires motivation and education, and not everyone can afford personal training,” Kooperman says. “It makes economical, financial and humanitarian sense for club owners and facility managers to encourage group exercise.”
A possible resurgance in group exercise will come from choreographed group exercise programs because fewer people are becoming instructors and those who do don't stay in the field for as long as they used to, Kooperman says.
“Time constraints, a lack of financial remuneration and rising credential requirements make it virtually impossible for fitness instructors to maintain their education, find music, choreograph routines and sustain high-quality instruction while even hoping to show a profit at the end of the year,” Kooperman says.
Choreographed programs offer affordable instructor training, convenient continuing education, high-quality DVD support materials and music CDs that make choreographed systems a valuable option for club owners, she says.
Don Jones, executive director of Fitness Centre & Day Spa, Orlando, FL, also praises the pre-choreographed group exercise programs. His hospital-owned facility uses them because the programs have changed to meet the times, he says.
“We literally pack our studio whenever we have new program launches at our club,” Jones says. “Everyone is excited about it — whether it means new music or a new routine, and they all come to socialize as well as exercise.”
Fitness facilities can have all the latest equipment and still be behind the curve if they aren't offering quality group exercise programs, Jones says.
McGonagle says that participation has been strong in group exercise classes at university rec facilities because group exercise routines continually change and adapt to keep participants interested. More recently, specialized or instructional programs have also been successful.
A resurgence in group exercise or not, personal training should stick around for quite some time if survey numbers are correct. An IDEA survey found that personal training remains the most frequently offered program at clubs. Eighty-four percent of the respondents offer personal training services in which one trainer works with one client. Sixty-four percent of the surveyed fitness professionals said that personal training would continue to grow.
In addition, CIFBP survey respondents say that an average of 15 percent of members at the clubs surveyed participate in personal training. More importantly for club owners, non-dues revenue most often comes from personal training, according to the survey results. Sixty-nine percent of clubs surveyed say that personal training accounts for at least part of their non-dues revenue while 53 percent say that class fees account for at least part of non-dues revenue.
“Personal training has come a long way since its infancy,” says Jones. “Core training and functional fitness programs cannot be readily taught by just anyone, and we are seeing more and more people who want to improve their lifestyle by acquiring training skills to improve their flexibility — hence, their golf swing, etc. It's no longer just about looking good.”
Jones also points to the growing trend of online personal training, which he says has created better opportunities for access than ever before.
In addition, he sees more health coaching occurring in his facility.
“More and more clients view their relationships with their personal trainer as just that — personal,” Jones says. “Hence, they look to their trainers for guidance on more things than just how to improve their flexibility and muscle tone.”
Of course, scopes of practice must be considered so that trainers don't overstep boundaries, but the reality is that clients are going to ask trainers questions, so trainers must be better trained to answer properly, even if it means taking a health coach training program, Jones says.
As personal training grows and the number of senior members grow, it's no wonder that some fitness facilities are seeing a growth in seniors participating in personal training. Valentin, owner of Pilates Body by Valentin, San Francisco, has seen growth in seniors signing up for personal training at his studio, growing from one senior client to 20 today.
“The main goal is to get them ‘functional’ and maintain a level of quality of life where they continue to be independent and still enjoy the activities of a social and energetic lifestyle,” Valentin says of his 65- to 70-year-old clients, some of whom suffer from conditions such as emphysema, Parkinson's and lower back pain.
Seniors aren't the only market the clubs are focusing on. Valentin sees more focus on programs to help alleviate youth obesity. He will be teaching a Pilates class to eighth graders at a local school this year with hopes of eventually initiating an after-school program.
The Navy also is focusing on youth fitness.
“We're partnering with youth professionals (within the military service) to promote more youth and family fitness,” Powell says, noting that family fitness pilots at two bases were successful and will be moved into other bases soon. “Most of the installations now are undertaking in some form or fashion family fitness programming.”
While many fitness facilities are initiating new programs and implementing expansion plans, most will face several challenges in 2007, namely more competition and possibly flat membership numbers. It's become more challenging for clubs to simply cast their line and reel in members. Fitness facility owners now need to troll for profits and create new ways to attract and retain members as they wait to see whether their optimism about revenue comes true. A possible recession late this year, coupled with waves of clubs flooding the marketplace, will make it more difficult for fitness facilities to land that big catch in 2007.
Trends in 2006
What trends did the industry see in 2006?
Marketing leads for clubs at all price points and all locations were harder to get and were fewer in numbers, says Rick Caro, president of New York-based consulting company Management Vision. The no-call list and spamming regulations dealing with e-mail play a part in the difficulty, but other hurdles also exist. The industry has a lack of marketing expertise, Caro says. Often, general managers serve as marketing managers, and many general managers aren't skilled or trained as marketers.
Some of the tried-and-true direct-mail campaigns aren't pulling as well as they used to, Caro says. The industry hasn't been good about creating meaningful campaigns that are significant to people or about marketing to the right people at corporations about the health cost benefits of exercise.
Negative word of mouth is catching up with the industry. Thirty-five percent to 40 percent of members leave each year, some because of negative experiences. “Eventually, some of that negative word of mouth stops people from coming in who might have been considering it,” says Caro.
Group exercise increased in volume and importance. Caro has seen numbers from clubs who are requiring group exercise instructors to keep better track of participants in the classes. The facility owners are then charting their group exercise participants and comparing the numbers to previous years. Many of the clubs also contact members who discontinued their memberships to do an exit interview. They are finding that a high number of those who left did not participate in group exercise and were only equipment users.
The clubs that did better during the year were those who got people into more group exercise, says Caro. “I assume that's because of more connectivity with people,” he says.
Mind/body classes continued to be popular and became more diverse as facility owners offered more introductory and advanced classes rather than just one level of classes. Instructors also did a better job of creating the right environment for the mind/body classes (i.e., dimming lights, turning up the heat).
Personal training participation and revenue continued to rise. Some clubs are doing a better job of keeping personal training clients in the mix for longer, says Caro, but facilities also are doing a better job of introducing people to personal training by offering options like a three-pack personal training session.
Group training became more popular at many clubs even though it can require greater trainer skill to work with two-three people at one time, Caro says.
Some of the club companies grew and some of the big club companies grew even larger. For example, Life Time Fitness grew by (??) clubs in 2006 while it grew by (??) in 2005 and some of their clubs' sizes are getting larger. XSport moved from opening Chicago-area clubs to opening them in New York and Washington, DC, in 2006. TSI, which was not growing for a period of time, has stated plans to grow by 10 clubs per year.
“So big club stories continue to grow and grow fast despite any other negatives in the industry,” says Caro.
A Glance Back at the Biggest Stories in 2006
Before anyone can look ahead, they must look behind to see where they've been. Below are the biggest fitness industry stories of last year (in no particular order) and a comment on each from Rick Caro, president of consulting company Management Vision, New York.
- Member numbers in United States showed no growth for the second year in a row.
No growth in membership is a concern to many in the industry, but the reason for this lack of growth is unknown, says Caro. It could be a blip in the industry's growth, or it could signal a decline. How clubs respond to this lack of growth interests Caro.
”Is it a case where clubs will do a better job of retaining members and grow it there?” he says. “All of that will not be known for another year, but it will be interesting to see where the flattening out of members will take us and whether it's temporary or whether it will now rise up again or whether it is a decline.”
- Town Sports International launched its initial public offering.
“That public play was exciting because it was a pure club story that went public that wasn't a big-box story like Life Time,” says Caro. Town Sports International (TSI) also differs from Life Time because TSI is more regional (their clubs reach from Boston to Washington, DC) and their model is one of convenience because in many cases they have many clubs within a metropolitan area to allow people to use their clubs where they live and work. “So it's a very different story from the Life Time or Bally stories,” says Caro.
- Bally Total Fitness finalized its sale of Crunch Fitness, New York, to Angelo, Gordon & Co. and Marc Tascher.
In January 2006, Chicago-based Bally Total Fitness finalized the sale of 21 Crunch clubs, two Gorilla Sports Clubs and two Pinnacle Fitness Clubs to Angelo, Gordon & Co. and Marc Tascher for $45 million.
“The Crunch sale was an opportunity for another private equity or hedge fund to enter the industry for a brand that needed reinvigoration,” says Caro.
- Planet Fitness purchased Dover, NH-based World Gym.
The industry waits to see what Planet Fitness' purchase of World Gym will mean, says Caro.
“It's not clear whether current World Gym franchisees will stay or leave entirely or become a Planet Fitness franchisee,” says Caro. “It's also not clear how the benefits of having one corporation run two organizations will take place…and whether this becomes a platform for faster growth for one or both companies as far as franchisees go.”
- Club Corp was sold to KSL Capital Partners LLC in October.
KSLCapital Partners LLC, which purchased 170 clubs and two resorts from Dallas-based Club Corp, is a private equity firm that invests in travel and leisure businesses. KSL management hasn't made it known whether they will keep all the properties and manage them, spin off some properties or do a joint venture.
“If they keep them, it will be interesting to see how they use their expertise in running resorts to run them differently or better,” says Caro. However, they have stated they will commit $150 million in the facilities.
- Bally Total Fitness struggled throughout the year.
Chicago-based Bally dealt with the departure of Paul Toback, former CEO; shareholder disputes; and overtime pay issues. Despite these issues, the fitness chain still garners interest from the financial industry even though their model is different from many clubs in the industry, Caro says.
- Curves reached 10,000 clubs worldwide (8,000 in United States).
“The Curves story is a wonderful story,” says Caro. “It continues to be one of the fastest growing companies in the country.” Most of its growth is overseas now, which will show how other countries respond to the Curves model and formula.