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Global Reach

Global Reach

<B><I>U.S. health club chains penetrate Asian markets. </i></b>

Two world maps blanket the wall of Robert Morschorak's office at the Bally Total Fitness corporate headquarters in Chicago. As the managing director of franchise operations and development, he plans to cover these maps with hundreds of colorful pins denoting Bally's international locations. The Chicago-based fitness operator already has a start in the Asian market, which offers a world of opportunity for American health club chains due to limited competition and increasing obesity rates.

“We think there's a tremendous amount of opportunity in Asia and a good level of interest in the franchising concept,” said Morschorak, who has 20 years of experience with franchising. “The potential for China is much greater than other parts of Asia. Korea has a lot of the money and purchasing power, and we are getting some interest from Japan and India.”

Bally, which opened two fitness franchises in Seoul, South Korea, this year, is joined by other chains who are also franchising overseas. Gold's Gym, which has more than 400 clubs in 43 states and 25 countries, runs a club in Seoul, South Korea, and 10 clubs in Japan. California Wow Xperience, which is affiliated with 24 Hour Fitness, operates clubs in Hong Kong, Malaysia, Singapore, Korea, Thailand and Taiwan. American circuit training facilities like Curves and children's franchises like The Little Gym are also expanding their presence in Asian markets.

While the U.S. health club market is far from being tapped out, American companies are seeking opportunities overseas due to the sheer size of the Asian market. The world has a population of about 6.5 billion, and India and China together account for 2.3 billion alone. The penetration rate for health clubs in Asia is only 2 percent, which leaves the door wide open for American health clubs to set up fitness facilities throughout that market.

“Asia is a huge consumer market, and you're in a situation where the tide is getting bigger every year,” said Luis Campalons, managing director of international franchising for Gold's Gym. “The growth of one brand is at the expense of another, but there's enough business to go around, and it will be like this for the next 10 years. I expect the penetration rate to double in the foreseeable future.”

Americans aren't the only ones trying to grab a piece of the pie. Asian entrepreneurs are opening up their own fitness facilities and are doing a good job of developing their own brands, said Stephen Roma, chief executive officer of WOW! Work Out World, which has 11 locations in Japan and a satellite club in China. By using a well-established American brand for a new club, however, an Asian entrepreneur can gain access to the company's knowledge and experience, he said.

Partnering Locally

American health clubs face many barriers when expanding into an overseas market — a new language, cultural differences and a lack of knowledge about the local market. This is where master franchise agreements come into play. Gold's Gym, Bally and WOW! Work Out World signed master franchise agreements with individuals and companies in Asia.

These agreements allow an American company to have a single point of contact in the market, which makes it easier to operate the clubs rather than running the clubs remotely.

“If we were doing them one at a time on our own, we would have been putting ourselves in a position to fail,” Roma said. “We now have one point of contact in Japan and China, and they are the most familiar with the world, geography and people, and the day-to-day and nuts and bolts of it there.”

Trust in a master franchise partner is also essential when licensing a brand overseas, Roma said.

“Over the pond is a very long distance,” he said. “It would be ill fated of us if either one of us weren't able to live up to agreements or have them pay a license fee and then walk away from it. The ability to trust each party is a significant step.”

Campalons agreed that strong local partners were a necessity. Gold's partnered with an Indonesia multinational corporation, which is expanding into preventative health care and has sales of more than $400 million. Gold's works closely with its master franchisers in Japan, the Philippines, Indonesia and India to identify strengths and weaknesses of the brand and decide how to export the company's brand, marketing and franchising knowledge. These master franchisers have the option to build out new Gold's Gyms themselves or sub-franchise to a third party.

Expanding into Asia is Bally's top priority in terms of international franchising, Morschorak said. To propel growth in China, where Bally currently has 18 clubs, the chain set up a joint venture in September 2001 and is working with a Chinese native who earned his MBA from an American university, is fluent in Mandarin and Chinese, was trained by Bally and resides in Bejiing. Bally is also working with master franchise partners, who then sub-franchise the fitness facilities to local entrepreneurs looking to open Bally clubs in Asia.

“The huge benefit of franchising is that we can provide the framework and the tools, and then someone on the ground location can use them to make it work,” Morschorak said. “We're specific about how a club should be laid out, and [following that plan is] important for our success going forward.”

The Little Gym is also selective when it comes to choosing overseas franchise partners, said Bob Bingham, president and CEO of The Little Gym. The company, which was founded 30 years ago, began franchising in 1992 and now has 246 locations worldwide. The Little Gym plans to open 60 to 85 franchises in Asia over the next five to 10 years, he said.

“We need people who understand our concept and that we are doing great things for kids,” said Bingham, who regularly travels to Asia to visit the franchises.

WOW! also partnered with local businessmen to open its international locations. The chain opened a club in China during the third quarter of 2005 and partnered with a Japanese equipment vendor salesman six years ago to set up clubs in Japan. WOW!'s master franchiser plans to open 12 new locations by September 2006, which will make WOW! in Japan (called WOW'D) the number one club in terms of new locations. Each of the clubs averages 2,500 members who spend $70 to $110 for a monthly membership. WOW!'s Japanese partner visits three or four clubs in the United States every few years to get a flavor for what is going on in America. He takes back-to-back classes and sleeps in the car driving from club to club, Roma said.

Rather than using a franchising model like Gold's, WOW! instead licenses its brand names to the Asian clubs, which pay an annual $6,500 licensing fee. WOW!'s U.S. license agreements run from year to year, but the company's master license agreements last five years.

Price Point

When expanding their brand into Asia, American health clubs face a harsh reality — the high cost of real estate. The cost of operating a health club in Asia depends heavily on local conditions, and as a result, there is a large disparity in pricing and cost structure across the region. For example, the real estate in Tokyo demands some of the highest prices worldwide. Health clubs can expect to spend $45,000 a month for rent on a 15,000-square-foot building in Tokyo while the rent for the same-size building in India will typically cost $12,000 to $15,000 a month.

Because of the high cost of real estate, Asian health clubs charge about twice as much as American health clubs for monthly dues. Yas Kawasaki, general manager of international business development and business strategy for Konami, which owns 209 clubs in Japan, said regular members pay from $80 to $100 a month to belong to its middle-end clubs and $150 per month for a single membership to a high-end club.

The quality of the fitness operations in Asia also vary dramatically from country to country, Campalons said. In the large metropolitan areas, the clubs tend to be more high-end, while in the outer provinces, they are not as elaborate.

“China is about as advanced of a society as you can imagine in terms of the wealthy,” he said. “There are those who have everything and those who have nothing. The club offerings will be skewed in one direction or the other.”

Many of the American-branded health clubs in Asia are smaller than their counterparts in the United States, mostly due to the high price of real estate. For example, in the United States, health clubs average 46,000 square feet, according to the International Health, Racquet and Sportsclub Association. In the Asian market, many of the American-branded health clubs measure about 5,000 to 10,000 square feet.

“Everything is smaller [in Asia], much more crowded and compressed in terms of the equipment and space that is available,” Roma said.

A New York-based health club entrepreneur, John Yo, is launching a new franchise in the densely populated country of Korea, which is smaller than the state of Florida but has about 45 million to 50 million people. Yo, a South Korean martial arts athlete and body builder, will open 400-square-foot to 1,200-square-foot boutique gyms. These space-efficient fitness facilities will feature modern training methods like functional training machines and kettlebells, a 300-year-old training system that originated in Russia. By swinging the kettlebell in different directions, a person uses a variety of muscle groups and gets both a strength and cardiovascular workout in a short time.

“The combination [of functional training] with the kettlebell makes it a perfect model and is very space efficient,” he said. “I think my model best suits the Korean market because it has a low investment and a high rate of return per square footage.”

One Size Doesn't Fit All

Many health club chains make a major mistake by opening carbon copies of their American clubs in the Asian market, Yo said. Asians typically have a smaller body frame than Americans and can't use the same-sized equipment. The U.S. companies may also open mammoth clubs and not turn a large profit because the property value and overhead is higher than in the United States.

In China, which has the fastest population growth rate of any country in Asia, many U.S. and international health club companies are looking to expand, but few are doing so just yet, said John Holsinger, director of Asia Pacific for IHRSA.

“Everyone sees the investment potential, and they are trying to position themselves to be there when something happens,” he said. “The huge question is if anyone is really making any money. That's what's stopping the foreign companies from going into China.”

American health clubs that expand into the Asian market need to be flexible to adapt to the local market, Holsinger said. For example, when California Fitness opened its first club in Hong Kong in 1996, they broke their design mold by installing three floors of windows around the gym. The new design concept was so popular that the company expanded the formula to Taiwan and Korea.

“Prior to that, no one in Hong Kong thought a Chinese person would want to be seen exercising,” Holsinger said. “The ground floor was the busiest part of Hong Kong. People were lining up to exercise in the windows.”

Other American health club chains are going against the grain by not offering spas and pools in their Asian fitness facilities. For example, Gold's Gym, which celebrated its 10th anniversary in Japan, designs its clubs for those who are serious about fitness and not looking for a spa experience. The Gold Gym's franchises in Asia have the same look and feel as the the United States clubs and offer 70 to 80 group exercise classes a week and nutritional counseling. The clubs have a Jacuzzi and a wet and a dry sauna, but they draw the line when it comes to operating a pool.

“The economics of pools are fairly poor,” Campalons said. “You're devoting hundreds of square feet to service two or three people at a time. They're expensive to maintain, and they will affect your staffing levels because local requirements may require you to staff the pool on a full-time basis.”

Despite the challenges of expanding internationally, doing business in Asia is just like doing business anywhere in the world, Holsinger said.

“If you operate professionally, have a good business plan, have respect for both the culture and the people, [then] business can be very successful,” Holsinger said.

To gain a solid understanding of the Asian market, many health club executives are packing their bags and embarking on 15-hour flights to Japan, China and Korea. Morschorak is no exception. He visited Bally's clubs in April, and if his company continues to open new clubs in Asia and overseas, his dream of covering his world map with pins may someday come true.

Exploring the Asian Fitness Market
Country Total Industry Revenue (USD) Total Number of Clubs Total Number of Members Members as Percent of Population
China* $303 million 800 1.01 million 2.7 percent
Japan $2.44 billion 2,000 3.4 million 2.7 percent
Korea $900 million 1,200 1.5 million 3 percent
Hong Kong $173 million 180 0.24 million 4.7 percent
Taiwan $134 million 148 0.28 million 1.8 percent
Source: 2006 IHRSA Asia-Pacific Report

* Note: The numbers for China account for only the top 10 cities in the country.

Obesity Rising Internationally

Obesity is no longer just an American problem. According to the World Health Organization, more than half of the populations in Spain, Australia, Brazil, Mexico, Denmark, Italy and Russia are overweight. Obesity is also showing up in Guatemala, China, Egypt, South Africa and South Korea, where 36 percent of the population is considered overweight. Experts blame two factors for the rising obesity rates — improved technology and American fast-food restaurants.

“It all has to do with the rising domestic product,” said Luis Campalons of Gold's Gym. “Obesity is an affliction of the wealthy. I've been traveling four million miles for the past four years, and I've seen amazing changes. As the societies are getting richer, the [obesity] statistics are getting worse.”

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