Capital Ideas

Peter Brockway
Managing Partner
Brockway Moran & Partners
Boca Raton, Fla.
Invested in Gold's Gym

As the majority stockholder in Gold's Gym, Brockway Moran & Partners owns an important part of fitness history. From its humble beginnings in the '60s, Gold's grew into a licensor with a global reach. And even today, some fitness buffs still think of Venice Beach, Calif.-home of the original Gold's Gym-as the Mecca of exercise.

Nowadays, however, it isn't the location of the company's headquarters.

Gold's main management team now resides on the East Coast, the result of an investment made by Brockway Moran & Partners. In August, the private equity firm sponsored the acquisition of Venice, Calif.-based Gold's Gym Enterprises and the G Group, a successful licensee with eight Gold's Gyms in the Washington, D.C., area. Thus, Gold's Gym Investments was born. Kirk Galiani, John Galiani and Jeff Skeen-the executives behind the G Group-became the new organization's CEO, COO and CIO, respectively.

In Gold's Gym, Brockway believes that his firm has a great name with a great history in an industry poised for expansion. He points out that the industry's growth is already in the double-digit range, with plenty of market penetration still available. "You have good inherent growth," he says. "You have demographics working in your favor."

Indeed, certain populations still have low representation in clubs-seniors, for example. Brockway believes that will change, noting that medical and scientific research will drive older adults to clubs. "As people get older, there is more awareness that exercise is a major benefit to their longevity," he says.

And Brockway would like to see seniors get that benefit at Gold's Gym. In fact, Gold's is looking for ways to capture the reported 90 percent of the population who don't belong to health clubs. "We are focusing on penetration and the number of people coming to health clubs," he says.

Not only is Gold's looking to expand its membership base, it hopes to increase the number of licensed facilities and expand corporate-owned facilities, the latter strategy being a tactic that Gold's former owners never took. Gold's will also continue to cash in on its household name by licensing apparel lines and similar products.

To take advantage of all of these profit opportunities, Gold's must plan carefully and execute well, according to Brockway. Gold's biggest challenge? "Seizing the opportunities we have," Brockway replies. -J.J.

David King
Managing Partner
McCown DeLeeuw
New York

Invested in 24 Hour Fitness/part of Fitness Holdings Worldwide McCown DeLeeuw could see the consolidation coming. As the firm prepared to invest in the fitness industry, the fragmentation was impossible to ignore. At the time, approximately 12,000 clubs-mostly small, single operations-were in business across United States. And Bally Total Fitness, with its hundred of locations, loomed larger than them all.

McCown DeLeeuw believed that the industry needed more multi-club ownership, backed by the power of a brand that people recognize and respect. According to David King, managing partner with McCown DeLeeuw, clubs with brand names can outgrow industry standards. "They can outperform single clubs," he says. And they enjoy economies of scale that single clubs can't achieve.

Not only did fragmentation and economics favor multi-club ownership, an evolution in consumer perspectives indicated an increasing demand for fitness services, according to King. Aging baby boomers were looking at their health, and they were going to demand high value from health clubs. Only the clubs that could meet this demand could expect business from boomers.

With all of this in mind, McCown DeLeeuw went shopping. "We looked at the industry and did a lot of tire kicking," King says. The firm found what it wanted in the closing days of 1994: 24 Hour Fitness, a club chain that possessed the meaningful brand that McCown DeLeeuw desired.

Describing 24 Hour Fitness as one of the industry's "dominant players," King notes that the chain's management team knew how to build on its strengths and deal with its weaknesses. That latter skill especially left an impression. For example, to improve upon lost membership-arguably the industry's biggest challenge-24 Hour Fitness hired a Berkeley engineer who developed a system that helped measure retention. "They had focused on the problem and put processes into effect to deal with the issue," King says.

Although 24 Hour Fitness's management team gained McCown DeLeeuw's confidence, the firm still had worries about the industry. During the early days, McCown DeLeeuw wondered if the mounting interest in health and fitness was a long-term trend or a short-lived fad. Also, the industry's own reputation gave McCown DeLeeuw pause. "This is an industry beset by its aggressive selling practices," King notes.

Many of the risks that once raised questions with McCown DeLeeuw no longer apply today. Aggressive selling has cooled, King claims. And interest in exercise, particularly among the boomers, has not waned. Still, challenges do exist. King points out that it's difficult for a growing chain to create information (i.e., computer) systems that tie locations together. That's because clubs which are acquired never anticipated that they would become part of a larger entity, so they don't have the appropriate hardware in place. Therefore, in a fragmented industry, the system capacity isn't immediately available to run a large chain.

King describes management building as another challenge-that is, turning fitness enthusiasts into sophisticated managers who understand everything from service needs to balance sheets. He also notes that financing remains a problem, as the meaningful bank loans necessary to grow aren't readily available.

Despite this, McCown DeLeeuw has grown its investment considerably. Today, 24 Hour Fitness is part of Fitness Holdings Worldwide, a worldwide chain with approximately 350 clubs. This global company includes Sats, a large chain in Northern Europe, and California Fitness, an Asian chain.

And the company hasn't stopped yet. King expects his firm to make even more investments in the industry; in fact, he expects other investors to target this market as well. "We've seen a number come in the last couple of years," he says, "and I suspect we'll see more and more.