Behind the Scenes
2017 in the Fitness Industry Photo by Thinkstock.

2017 in Review: Studio Growth, Health Club Changes, Fitness Industry Legalities

Every year brings change to the fitness industry. That change can be in the form of growth or decline, new ideas or recycling of old ones, moves in and out of the industry, and loss or gains of movers and shakers in the business. In 2017, the fitness industry experienced some of each of these plus more.

Last week, we noted the stories that drew the most page views in 2017, but just because a story gets a lot of clicks doesn't mean it's one of the most important stories of the year. In fact, some of the stories that affected the industry the most were not on that list. That's why the editors at Club Industry put together our own review of the top news from the fitness industry for 2017, most of which we covered during this year.

Keep in mind that what we share below exists in the context of the obesity epidemic continuing to grow. In fact, the obesity rate in the United States has reached an all-time high, according to news from the Centers for Disease Control and Prevention (CDC) released in October. More than 70 percent of Americans have a body mass index of more than 25, which classifies them as overweight or obese. Almost 40 percent of adults and 20 percent of children in the country have BMIs that would classify them as obese. The obesity rate since 199 has risen by 30 percent for adults and 33 percent for children.

The obesity rate increased despite the number of health club members increasing by 3.6 percent in 2016, according to IHRSA. (2017 numbers won't be released until spring 2018.) IHRSA notes that in 2016, 57.3 million people were members of a health club in the United States, equating to about a 19.3 percent penetration rate in Americans aged 6 or older. The IHRSA report also revealed that the country had 36,540 health clubs in 2016, although some studios may not have been counted due to the method for determining the number.  

Studio Excitement

Even though not all studios may be counted in that number, a growing number of people are attending classes at studios. The growth of the studio segment has been one of the biggest stories for the past several years, and 2017 was no exception. Studio operators reported that they had a 6 percent increase in their membership base in 2017 and an average retention rate of 76 percent, according to results of a survey released in November by the Association of Fitness Studios

The growth of studios may not end soon. Data from Piper Jaffray estimates that studio users are 10 years younger than members at traditional health clubs. 

Photo by Alli Harvey/Getty Images for Spotify

SoulCycle's heart is still cycling, but it has been expanding into non-cycling offerings to allow its riders cross training options.

One of the biggest stories for the year is one that didn't happen in the studio market in 2017: SoulCycle still has not gone public. The company announced in July 2015 that it had filed paperwork with the Securities and Exchange Commission (SEC) for an initial public offering. In December 2015, it updated its IPO registration, but it did not complete the IPO that year—or in 2016. SoulCycle is a sister company to Equinox; both companies are part of Equinox Holdings, which has been owned by The Related Companies since 2006. In March 2016, Equinox CEO Harvey Spevak said the unpredictable stock market had caused the delay. However, for much of the last few months of 2017, the stock market reached record numbers, but still no IPO for SoulCycle in 2017. That hasn't stopped SoulCycle from expanding. In November, it opened a non-cycling concept in Manhattan called SoulAnnex. SoulAnnex offers classes that incorporate high-intensity interval training, yoga and other modalities. A March 2017 article on Bloomberg.com theorized that Equinox Holdings could be a prime candidate for an IPO, which might encompass SoulCycle as well as the other fitness companies under its umbrella: Blink Fitness and Pure Yoga.  

In the meantime, Yogaworks, Culver City, California, became the first yoga chain to go public when it filed its IPO in August. After the IPO, more than one analyst shared disappointment about the brand's performance. One analyst wrote on SeekingAlpha.com that the YogaWorks IPO was "disastrous." 

The author noted: "The company has no business being a publicly traded company as it runs just 50 studios, and loses a lot of money despite strong operating conditions, as it plans to use the raised money to buy even more studios."

An October 2017 article on Bloomberg.com was entitled "YogaWorks Is a Meditation on Painfully Premature IPOs." You can guess the gist of that article.

YogaWorks' second quarter financials included a $4.4 million net loss. Total revenue for the second quarter was $12.5 million, a 6.3 percent decrease year-over-year. The company attributed the decrease to its re-classification of the quarter's sales from net revenue to deferred revenue. Deferred revenue grew due to a "sales mix shift from monthly memberships toward class packages," which company leaders said, over time, will broaden YogaWorks' customer base. Its third quarter financial report showed revenue for the quarter at $13.5 million, flat year over year, and the company shared that it expects net revenue for fiscal 2017 to be lower than in fiscal 2016. Fourth quarter and full 2017 results will be released next year.

Despite the issues that YogaWorks experienced, the boutique studio market continued to grow and attract investors in 2017. In August, Hyatt Hotel Corp. purchased exhale for an undisclosed amount. Exhale, founded in 2002, is one of the first boutique studio brands. 

In May, TPG Growth bought a stake in Club Pilates, which Club Pilates CEO Anthony Geisler said would be used to expand the Pilates studio chain by 200 studios in 2017.

Photo courtesy Earth Treks.

In March, Earth Treks announced that a new partnership with private equity firm Tengram Capital Partners would allow the company to open additional climbing gyms in new and existing markets.

 

In March 2017, Earth Treks Climbing and Fitness, Columbia, Maryland, gained a new equity partner in Tengram Capital Partners. It didn't take long for the cash infusion to pay off in expansion. In May, Earth Treks announced that in 2018 it would open a 52,000-square-foot climbing gym in Englewood, Colorado, claiming the facility would be the largest climbing gym in the country. In November, the Tengram Capital Partners deal led to an Earth Treks merger with Planet Granite with plans for expansion into new markets in 2018. 

Circling back to cycling boutiques, Flywheel Sports, New York, made news in February 2017 with the hiring of former Equinox President Sarah Robb O'Hagan as CEO. In March, the company hired another former Equinox executive, Geralyn Coopersmith, as its COO. In May, O'Hagan shared that Flywheel would be rolling out new bikes at its studios to appeal to the athletic bike consumer. She also announced that by the end of the year, the company would release bikes for the home market along with a streaming content platform for at-home users of those bikes.

The at-home bike and streaming content platform may sound a bit reminiscent of Peloton, which sells at-home bikes and offers streaming classes for at-home users. However, Peloton made moves of its own in 2017, including adding streaming yoga content and opening a second studio to stream classes. Peloton CEO John Foley indicated that that studio might be open for in-person classes. Peloton announced in May that it had raised $325 million from investors, in part to possibly go public, Foley said in a Fortune article. 

Changes at Large Companies

The studio market was not the only market with changes related to being public. In July, ClubCorp, Dallas, was acquired for $1.1 billion by private equity firm Apollo Global. With that purchase, the company was taken private, just four years after going public. Since fall 2016, ClubCorp executives had been pressured by active investor group FrontFour Capital Group LLC to consider a strategic sale. The sale announcement came three months after ClubCorp CEO Eric Affeldt announced he would be retiring

In July, Equinox secured an investment of an undisclosed amount from private equity firm L Catterton, which also has investments in Peloton, Pure Barre and CorePower Yoga. That news came a few months after Spevak was promoted from CEO to managing partner and executive chairman of Equinox Holdings. Niki Leondakis was named as the new CEO of Equinox Fitness Clubs. The L Catterton investment and Leondakis' background in hotels should come in handy as Equinox builds its first hotel concept, which is to open in 2019, despite the company facing a trademark lawsuit from Equinox Hotel Management Inc. 

Photo by Phillip Faraone/Getty Images for EQUINOX.

Equinox CEO Harvey Spevak said that the investment by L Catterton will allow Equinox to continue its expansion, such as the opening of this Equinox club in Hollywood, California, in October 2016.

In 2017, management at Town Sports International was planning for a better year. In 2016, the company, which operates clubs under the brand names New York Sports Clubs, Boston Sports Clubs, Philadelphia Sports Clubs and Washington Sports Clubs, reported its fifth straight year of revenue decline. Town Sports Chairman and CEO Patrick Walsh said the declines were a result of the company "still recovering from its prior strategy of converting to a low-cost budget gym. This strategy resulted in extreme revenue pressure over the past two years with revenue declining from $454 million in 2014 to $397 million in 2016."

Walsh called 2016 an "inflection point" for the company and promised expansion in 2017 through acquisitions. He delivered. In July, Town Sports acquired the Lucille Roberts Health Clubs, which totaled 16 clubs in the New York City area. The company said it would continue to operate the women-only clubs under the Lucille Roberts brand. 

The purchase of the clubs helped Town Sports mark its first revenue increase in many quarters when it reported its third quarter revenue of $98.6 million. That number was a 0.1 percent increase year-over-year. However, TSI reported a $13.2 million net loss in the quarter compared to a $5.5 million net loss during the same period last year. The company's operating loss also grew from $2.6 million during the third quarter of 2016 to a loss of $6.2 million this period.

Another large chain faced changes in 2017, but its changes were in the C-suite. In March, 24 Hour Fitness, San Ramon, California, said goodbye to Mark Smith as its CEO. Smith started his career at Town Sports in the 1980s, working his way into the CEO role before leaving there in 2006. He joined 24 Hour in 2014 when Forstmann Little and Co. sold the company to AEA Investors LP, Ontario Teacher’s Pension Fund and Fitness Capital Partners LLC.  Frank Napolitano, who served had worked with Smith at Town Sports, also joined him at 24 Hour in 2014 as president. Napolitano became acting CEO until May when the board appointed Chris Roussos as the new CEO. Roussos was recently CEO of Epic Health Services, Dallas, and received the 2016 EY Healthcare Entrepreneur Of The Year Award, according to his LinkedIn account. Epic Health Services provides pediatric and adult skilled nursing, therapy, developmental services, and home medical solutions, according to its website

A few notable changes also occurred on the vendor side in 2017. In January, Chris Clawson was replaced as president of Brunswick Corp.'s Life Fitness Division by Jaime Irick. Clawson had served in the role for six years. Irick previously had been with GE for 14 years, most recently as chief commercial officer for Current, Powered by GE. Brunswick management noted in the announcement that Irick had a strong track record of delivering financially at GE and transforming traditional business models to compete in new and evolving markets.

In November, Thoma Bravo announced it would acquire ABC Financial Services, Sherwood, Arkansas, for an undisclosed sum. Thoma Bravo's portfolio represents more than $17 billion in capital investments, primarily in technology-enabled services sectors. The acquisition was expected to be finalized in the fourth quarter.

Lawsuits and Legalities

The fitness industry saw its share of issues during 2017, one of which involved a deadly shooting while the others involved an arrest warrant or lawsuits.

In April, a fired trainer at an Equinox club in Coral Gables, Florida, shot and killed the general manager and another employee at the club before killing himself. Abeku Wilson, 33, had been fired earlier that day and returned with a gun, according to a report from The Miami Herald, killing Janice Ackerman, 35, the general manager, and Mario Hortis, 42, the fitness manager at the facility.

Photo courtesy HBO/Real Sports with Bryant Gumbel.

An arrest warrant was issued in May 2017 for Bikram Yoga founder Bikram Choudhury for failure to pay a $6.7 million judgment to his former lawyer.

In May, Los Angeles County Superior Court Judge Edward Moret issued an arrest warrant for Bikram Yoga Founder Bikram Choudhury. Choudhury faces multiple lawsuits from students of Bikram Yoga alleging sexual harassment and rape. The arrest warrant was issued for failure to pay a $6.7 million judgment to his former lawyer, Minakshi Jafa-Bodden. Jafa-Bodden had won a lawsuit against Choudhury alleging sexual harassment and retaliation by Choudhury for Jafa-Bodden refusing to cover up a rape allegation against Choudhury. As of Dec. 27, Choudhury had not been arrested. In December 2016, Jafa-Bodden's attorney, Carla Minnard, told Club Industry that Choudhury had "fled the country" to avoid paying her client. At that time, a judge diverted ownership of Bikram Yoga College, Bikram Yoga franchise agreements and the company's intellectual properties to Jafa-Bodden because Choudhury had not yet paid the $6.7 million judgment. At that time Minnard said she and her client would seek a bench warrant for Choudhury's arrest.

In June, a Michigan Appeals court ruled 3-0 in favor of corporate Planet Fitness, Newington, New Hampshire, and its franchisee in Midland, Michigan, in a case related to its locker policy for transgender people. Planet Fitness allows members and guests to use the locker room that matches their gender identity, as part of its “no-judgment" policy. However, Yvette Cormier, who was a member of the Midland gym in February 2015, claimed her privacy and well-being were endangered  after she found someone she thought was a man in the women's locker room. The person was in fact a transgender woman. The court ruled that Planet Fitness Midland justifiably terminated Cormier’s membership in March 2015 after Cormier repeatedly returned to the gym after the purported incident to warn other women of the club's policy, even after management had allegedly asked her to stop. In July, Cormier and her lawyers announced they would appeal the ruling to the Michigan Supreme Court

One of the biggest payouts by a fitness company in 2017 was by SoulCycle, which agreed in June to settle a gift card lawsuit for up to $9.2 million. SoulCycle was accused of coercing customers into purchasing gift cards with illegally short expiration windows, which the plaintiffs said violated the Credit Card Accountability and Disclosure Act. SoulCycle had contended that the expiring purchases in question were individual classes, not gift cards. In the settlement, SoulCycle agreed to offer two expired classes or $50 per affected customer. The company also agreed to reassess company policy to ensure customers understand the parameters of purchases involving studio credit. The proposed settlement would include 229,646 classes, valued between $6.9 million and $9.2 million, according to court documents.

In November, 24 Hour Fitness agreed to settle a lawsuit of its own. It agreed to pay $1.5 million in a class action lawsuit filed in 2016 in which members alleged that 24 Hour staff had verbally promised a fixed membership rate even though the company had implemented an annual rate increase in 2006 that was noted in the membership contract.

Life Time Fitness, Chanhassen, Minnesota, faced at least two lawsuits in 2017. In October, Life Time and a group of 186 trainers at its California clubs agreed to a two-part $940,000 settlement over allegedly unpaid wages.The trainers alleged they were not paid as exempt employees and not for additional hours they spent cleaning, completing classes and conducting client assessments. The way their commission payments were handled was also in dispute. According to Northern District of Illinois court documents, 135 trainers will split a $700,000 class action settlement, while another 51 trainers will split $100,000. Life Time will also pay $140,000 in legal fees.

Another lawsuit against Life Time Fitness also involves employees. In October, Alexander Marshall, a Life Time employee in Illinois, filed a lawsuit claiming that Life Time allegedly stored employee fingerprint data without consent and in violation of Illinois' Biometric Information Privacy Act (BIPA), according to an article in the Cook County Record. He alleges that Life Time did not tell employees why their fingerprints were being collected, did not get consent from employees to use their fingerprints to keep track of hours worked and did not tell employees how long their data would be kept.

A similar lawsuit was filed in September by a member of Crunch Fitness, New York. Jennifer Knobloch, a Crunch Fitness member at a facility in the Chicago area owned by Chicago Fit Ventures LLC, alleged that the company violated the BIPA law by requiring members to check into their personal training sessions using their fingerprints, according to another article in the Cook County Record. Knobloch alleged the company did not “obtain informed consent” before requiring members to have their fingerprints scanned and did not inform members about how long the data would be kept. The suit also alleges that the company did not inform members about what would happen to the fingerprints if the member cancelled their membership, if the club closed or if the club was purchased by a new company. 

On the vendor side, TRX won a $6.8 million patent and trademark infringement case in March. A jury in the U.S. District Court for the Northern District of California determined California-based online company WOSS Enterprises “willfully infringed” one of TRX's registered U.S. patents as well as its trademark, “Suspension Training,” through the sale of six products, according to a March 30 statement issued by Fitness Anywhere LLC, which does business as TRX.

Goodbyes in 2017

Undoubtedly, each person in the fitness industry saw the passing of someone who was their friend, colleague or family member and who served the industry well. For Club Industry, we noted the deaths of two people in 2017: Michael Scott Scudder and Lyle Schuler.

Michael Scott Scudder, who had been a part of the health club industry for 35 years, died on June 30.

Scudder had been a columnist for Club Industry on and off throughout the years, and he had been a speaker at the Club Industry Show for almost 30 years. He was an industry consultant as well as a former club operator. He died on June 30 from complications after surgery.  

Schuler died Sept. 23 after battling an undisclosed illness. He had spent more than 30 years in the health club industry, including time with consulting company SalesMakers. Most recently, he had been owner of MAC Fitness in Kingston, New York.

Was there other news in the fitness industry? We're certain there was. Did we miss a big story? If so, let us know what we missed by commenting on this article. And make sure we don't miss news in 2018. Email us at [email protected] if you hear of news that we should make the industry aware of. Best wishes to you for a wonderful 2018.

 

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