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Singing in the Rain

Singing in the Rain

<B><I>Break out the umbrellas in 2006 as the industry welcomes a steady rain of investors, new members and new competition.</b></I>

A little rain can't get a fitness industry optimist down, especially when an umbrella is close at hand. While the clouds of increased competition, Bally troubles and rising utility and interest rates may hover nearby, the fitness industry has reason to do a little singing (and maybe even some dancing) in the rain.

Despite the challenges of 2005, last year also was a year of triumphs from the continued bright performance of Minnesota-based Lifetime Fitness, to the $1.6 billion sale of 24 Hour Fitness, to the growth by national club companies (24 Hour Fitness, LA Fitness, Lifetime Fitness) and regional club chains (Lifestyle Family Fitness, Spectrum and Xsport).

Their growth in an adequate economy was spurred by readily available financing, something that also helped industry newcomers, says Rick Caro, president of New York City-based consulting company Management Vision. Real estate landlords also lent a helping hand as they were more willing to spend money to create club space, which made it easy and attractive for first time club operators to get started in the business.

2006 promises to be a year in which more private equity will be infused into the industry, Caro says. Private equity firms, which have been hovering around the industry for several years, are investing more as they see other private equity firms sell their fitness facility investments for a profit.

Increased investor interest in the industry will make it easier for new people to enter the club business, Caro says.

“I think there will be clubs of all different sizes and shapes and prices coming into the markets,” Caro says. “The clubs that may not succeed will be those who are squeezed in the middle — those that are not well capitalized and are not well differentiated.”

Competition will continue, particularly in the low-priced clubs, Caro says.

“There's an ease of entry at the low end where it is easy to open a pure gym without any real furnishings and cost to develop the physical plant,” Caro says. However, that doesn't mean mid-priced or high-end clubs are a thing of the past. Mid-priced clubs just need to differentiate themselves, and certain people will always pay more for extra service and amenities at high-end clubs.

A growing population in the Northwest has led to a growing number of health clubs and increased competition in this region, says Aaron Culver, vice president of operations at Thrive Community Fitness in Anacortes, WA. The Thrive owners have three other clubs in Duvall, Redmond and Monroe, WA.

“Our focus is to develop the fitness industry in smaller outlying communities that are too small for the bigger chains,” says Culver. He sees great prospects in the small town market as people there realize the importance of good health and the impact of exercise on the quality of life as they age.

Caro doesn't foresee much consolidation this year as companies stick to their own businesses.

“We're continuing to have lots of club companies stay the course,” says Caro. A number of consistently performing regional club companies have stuck to their own backyards and remained in the industry for 15-20 years, maintaining the same leadership or successfully handing off leadership, he says.

Member Pull

Investor interest in the fitness business is being spurred by the obesity epidemic and growing club member numbers. Seventy percent of respondents to a Club Industry's Fitness Business Pro survey of fitness facility management expect membership at their facilities to increase in 2006 while 27 percent expect it to remain the same (although facility owners were a bit more optimistic last year when 77 percent expected an increase in membership in 2005 and only 17 percent expected it to remain the same).

The International Health, Racquet and Sportsclub Association (IHRSA) estimates that 10 million Americans will join a for-profit health club in 2006. They will join an estimated 41.3 million current health club members (as of January 2005). That number doesn't include nonprofit memberships, which are difficult to calculate since those who join a YMCA, YWCA or Jewish Community Center may join for the programs and not for the fitness facility.

Caro predicts that accounting for attrition, total membership will grow 2 to 4 percent as an industry.

These new members will most likely be seniors and children. People over 55 years old represent 25 percent of new members while those under 18 years old represent 11 percent of new members.

“Statistics show that every minute, 5.5 people will turn 60 this year, so we are seeing an older population in our clubs,” says Mark Miller, vice president of operations at Merritt Athletic Clubs in Baltimore. “With this comes different programs and service needs.”

Not only will clubs need a new view on how to service older clients, but trainers also will need to deal with a wider array of medical issues, he says.

These two markets could affect the type of equipment that is popular this year. The over-55 market will help increase the popularity of low-impact equipment and exercise options (elliptical trainers and aquatic exercise), while the under 18 market could increase the use of high-tech, interactive fitness equipment (those featuring video game characteristics or virtual reality-style engines and GPS mapping systems that simulate outdoor activity).

Quick and Easy

As they did last year, express clubs will again have a significant influence on membership growth this year. The clubs — both women-only and men-only clubs — welcomed in a whole new set of users last year — those who had never before belonged to a club, says Caro. The trend became so popular that as existing clubs saw their success and the need for express options for their time-starved members, they, too, created express areas within their facilities.

And express clubs have helped alleviate the intimidation factor that people new to exercise often feel about fitness facilities, Caro says. At express clubs, members can wear what they want, and the express clubs within larger clubs are often set aside so people don't feel on display. The pricing is direct, easy and affordable, so it doesn't require a lot of thought about getting started. In addition, exercisers face each other while working out, which increases the social aspect of club membership — something that research shows is especially important to women and seniors.

As much as express facilities grew in 2005, it's no surprise that Caro predicts an exit for some in 2006, but he also predicts the opening of yet more express facility companies.

Part of the Group

While some industry consultants are predicting an exit for group exercise programming in the future, Caro supports this theory only as it pertains to clubs with limited capital costs and resources that can't afford to take risks and that have no margin for errors. For mid- and large-sized clubs, he sees 2006 as a year to get creative and original with group exercise programming. That may mean turning to pros to put together the programming.

“Les Mills and Body Training Systems have made a real difference in clubs because they created packages in how to organize classes, instructor training and choreographed classes, which has made a big difference in the standards of these classes,” Caro says.

The American Council on Exercise predicts that fusion of mind-body programs with more traditional forms of exercise will continue in 2006, stating in its Fitness Predictions for 2006 report that by incorporating elements of mental and spiritual fitness, individuals will take better care of their entire being and psychological self, not just their bodies.

What members are looking for in their offerings varies. While 56 percent of members at the surveyed clubs participate in cardio training, personal training pulls in 36 percent and group exercise pulls in 28 percent.

The definition of fitness continues to expand, says Leslie Nolen, CEO of the Radial Group, which works with a variety of wellness-related businesses. Workout routines moved beyond classic resistance training and cardio workouts years ago, most recently adding a focus on core strength, balance and flexibility, she says.

Fitness will expand even more to include cognitive fitness (brain aerobics) that preserve and even enhance brain function and to include elasticity, which is the ability of the body to respond well to sudden environmental changes, such as tripping on uneven pavement, she says. This definition of fitness is even more important as aging Baby Boomers join clubs.

“Even Baby Boomers who have consistently followed structured and intense resistance training and cardio workouts for decades often change their workout habits in their late 40s and beyond,” says Nolen. “They increasingly switch to mind/body workouts, notably yoga, and prefer less-intense cardio, often via lifestyle activity. This means that they are more likely to find ‘fitness toy’ workouts that use bands, balance trainers, video dance systems, etc., more appealing than dumbbells, barbells, total gyms and cardio machines.”

Missing It

As the fitness industry moves forward, the trends will begin to lean toward obesity and weight control, Miller predicts.

“The key areas for clubs will be in bridging that gap between a sedentary life and physical activity,” he says.

Technology, telecommuting, commuting long distances and two-income families result in less activity and less time for activity. Couple that with more fast food options and bigger portions and you get higher obesity rates, says Miller, who suggests that clubs will need to create family programs, support mechanisms and express services to get people moving.

Unfortunately, too many clubs are missing the opportunity in this area, says Caro.

“There is still a great need for weight-loss programming, and I don't see anyone doing that,” says Caro. “The diet industry is three to four times bigger than the health club industry, and we aren't serving that group at all.”

Clubs with nutritionists serve only a small number of members and that service is generally expensive and on a one-on-one basis with no group support, he says. Nolen goes even a step further in chastising the industry.

“Traditional health clubs often offer nothing more than a supplements-based program as their exclusive weight management offering,” says Nolen. “This kind of program is usually ‘one size fits all.’ The primary focus is selling supplements, not offering a comprehensive weight management program.”

Perhaps this is the year the industry will step up to the plate, especially since Nolen sees more integration between traditional fitness and medical wellness.

“At a grassroots level, fitness and wellness businesses are springing up that bring fitness professionals and healthcare professionals together to offer comprehensive programs to consumers,” she says. “Forward-looking health clubs will offer nutritional counseling and fitness and exercise education and programming combined with psychological support. To do this, they bring together registered dietitians, certified and often degreed personal trainers, licensed psychological counselors and others.”

Seeing Dollar Signs

Seventy-nine percent of facility owners surveyed expect an increase in revenue in 2006 compared to 2005. Nearly four in 10 respondents reported 2005 expected revenue of $1 million or more compared to just 33 percent who reported expecting this level last year.

Caro estimates that revenue will increase in low single digits.

“A lot of clubs are still not raising their dues enough,” Caro says, “so it will have to come from more ancillary revenue and more members.”

Eighty-three percent of those surveyed reported that personal training was a source of non-dues revenue. Class fees came in second at 45 percent, but that was a drop from 2004 when 64 percent of respondents reported that class fees were a source of non-dues revenue.

However, clubs still rely heavily on their dues for revenue, and some are raising their rates while others are lowering them, causing the number of mid-priced clubs to dwindle. The survey found that club dues were generally higher in 2005 than in 2004 as were initiation fees. Twenty-six percent of respondents charged under $30 per month (compared to 29 percent in 2004) while 27 percent charged $30-$39 (compared to 22 percent in 2004), 18 percent charged $40-$49 in 2005 (compared to 22 percent in 2004) and 14 percent charged $50-$74 in 2005 (compared to 19 percent in 2004). On the other end of the spectrum, 5 percent of clubs charged $75-$99 in 2005, which was an increase from 2004 when just 1 percent of clubs charged this amount. Ten percent of clubs charged $100 or more per month in 2005 compared to just 6 percent in 2004.

The majority of responding fitness facilities (39 percent) charged $80-$99 for initiation fees in 2005. However, 18 percent of facilities did not charge an initiation fee in 2005.

The joining fee at Thrive Community Fitness is $79 for an individual. Members then have two options for their monthly fees: group fitness, which includes classes and equipment, for $32 a month or just fitness for $22 a month. Instead of increasing membership fees this year, Thrive Community Fitness is offering the two options to members.

“We want to provide options for people to touch a bigger portion of the population,” Culver says.

Culver expects his revenue to increase in 2006, especially with a renewed emphasis on personal training. The company revamped its training program to include full-time personal trainers, which was necessary because every member now gets two personal training sessions.

Ninety-nine percent of the membership at Thrive Community Fitness is on EFT.

“We put everyone on EFT,” says Culver. “It's about as high as it can get. The 1 percent are unwilling to allow us to have access to billing information.”

EFT has taken off at many clubs. EFT-generated funds now represent an average 50 percent of gross revenue, according to the survey. This is an increase over the 35 percent average in 2004.

Getting Bigger

With membership and revenue growth projections for 2006, it's no wonder that facility owners are also planning expansions. Thirty-seven percent of the survey respondents plan to expand their facilities in 2006. Most will do this by expanding the existing building (57 percent) although nearly half (48 percent) will open a new location.

Because financing is still available, the industry will see expansion in the two-to-five and the six-to-10 club categories, Caro says. However, this will depend on the deals that are available and how realistic a club is in wanting to be sold (and telling people that it wants to be sold since few brokers exist for the club industry). It will also depend on the thirst for growth of the acquiring club company and the dollar resources available, he says.

Culver has growth plans for his clubs. He plans to go into smaller communities and purchase some clubs to expand using the same model.

Fitness professionals may face challenges in 2006, but when the clouds clear, the sun will come out, and health clubs could see increased profits and more new members.

“It is a great time for our industry, and one with a ton of opportunities; we just need to seize them,” says Miller. “We need to get the other 85 percent of the population into our clubs. That is the challenge and the opportunity.”


  1. Retention

    The poor attrition rate in the industry did not improve in 2005 and probably won't in 2006. That has Rick Caro, president of Management Vision, concerned.

    “Nothing will change for clubs until they do a better job of doing member research to see what members are really thinking, not just suggestions in the suggestion box,” Caro says. “And secondly, unless we have customer relationship management software, we don't know much about our members — what they do when they come in, how satisfied they are, what we could do to make them introduce prospects to us, how to get them to come in more consistently, how to get more money from them as far as things they are interested in.”

  2. Small Clubs

    The undercapitalized clubs, which are usually smaller, are so reactive that they have no room for error, says Caro. Because of this, few of them can deal profitably with any kind of change, especially if it's something unavoidable such as a long-ago agreed-upon lease that will increase this year, the minimum wage increasing or energy costs increasing. These clubs can do little to offset those uncontrollable factors, he says. If they cut back in other areas, then members could see it as a lesser facility and eventually the club may be forced to close, Caro says.

  3. Lack of Revenue Growth

    “Many clubs are not getting proper price increases each year,” says Caro. “They can't always count on getting more members each year; therefore, they need to grow revenue per member.” Unfortunately, most clubs do a poor job of growing revenue in the areas of personal training, children's programming, leagues and lessons, he says.

  4. Disreputable Clubs

    Aaron Culver's biggest concern about the industry is disreputable club owners and the impact they have on reputable club owners. Culver, who is vice president of operations at Thrive Community Fitness, says that a club operation in a nearby town sold $99, prepaid, year-long memberships up to the day that they closed. That club owner is embroiled in a legal battle that has caught the media's attention, which has drawn negative attention to the industry.

    “It makes it difficult for the rest of the industry to ask for billing information when things like that happen,” Culver says. “It's unfortunate because the rest of the honest club operators deal with the fall out.”

ACE's Fitness Predictions For 2006

  1. Teenagers and kids are using personal trainers for sport-specific training.

  2. Clubs and trainers are offering more flexible workout sessions, including small-group personal training.

  3. In-home training grows in popularity whether it's people working out alone in their home gym or bringing a personal trainer into their homes.

  4. Specialized fitness programming for older adults is increasing.

  5. Simple exercise habits, such as a walk a day, remain popular.

  6. Balance training (Tai chi, yoga, Pilates) continues to be a strong trend, and equipment (e.g., foam rollers, wobble boards, Bosu balls, etc.) are among the fastest growing and most popular exercise options for adults.

  7. Employers are encouraging fitness and weight loss.

  8. More restaurants are offering healthier nutrition options.

  9. Blending popular mind-body programs such as yoga and Pilates with more traditional forms of exercise is increasing.

  10. Functional fitness continues its strong presence in personal training sessions and group fitness classes.

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