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Struggling Economy Is Top Health Club Industry Story of 2008

Struggling Economy Is Top Health Club Industry Story of 2008

<strong>Snapshots of 2008: Of all the events that took place in the industry this year, one story stood out from the rest: the economy.</strong>

On a normal weekday in mid-November, a quick search of some of the latest stories about the fitness club industry had an all-too-common theme: a struggling economy. The headlines themselves told the stories:

Fitness clubs offer discounts as economy falters.

Trying to stay in shape: Tough times weigh on fitness clubs.

Gym, spas stress value of fighting stress in hard times.

Although these stories represent a snapshot of what took place in the month of November, they paint a broader picture of the battles the industry faced in 2008. Sure, there were many other big stories in the industry this past year, such as: Mark Mastrov leaving 24 Hour Fitness, Michael Sheehan leaving 24 Hour to become the CEO of Bally Total Fitness, 24 Hour suing Bally over the hiring of Sheehan, Planet Fitness putting World Gym up for sale, David Schnabel resigning as CEO of Gold's Gym and the release of physical activity guidelines by the U.S. Department of Health and Human Services. But for the second straight year, no story affected club owners and operators more than the economy.

Due in large part to the economy, some clubs closed, and some have tried to balance the books by trimming operating costs and revamping their retention efforts. Some club companies, such as Life Time Fitness, Chanhassen, MN, even had to reduce staff. Manufacturers took a hit in the economy as well, also resulting in some layoffs as well as some plant consolidations. Soaring gas prices affected both members and manufacturers.

The economy has no doubt worried several club operators, but Rick Caro, president of Management Vision, New York, says the industry is more worried than it should be.

"Based on several hundred clubs that I've talked to in recent months, clubs are faring OK. Their net memberships are about the same as the year before," Caro says. "They're more worried about attrition escalating tremendously. It turns out that, yes, there's been a slight increase in attrition for a number of club groups, but not significantly and not something that's at an alarming proportion."

Funding also is a concern for club operators, Caro says.

"[Club owners] don't know what the debt markets are going to look like, so they don't know what they can borrow, if they can fund a new deal, if they can fund an expansion, if they are able to access capital in a significant way," Caro says. "At this point, it's just not clear that [club owners] have an understanding of how these markets will behave once [lenders] start lending again. It's not clear, for some clubs, whether there's an exit strategy in the near future."

Like Caro, Geoff Dyer, founder and vice chairman of Lifestyle Family Fitness, St. Petersburg, FL, says attrition throughout the industry has not gotten too far out of hand, but he adds that new member sales have decreased throughout the industry.

"I think it's too early to tell to what extent the economy is going to affect the health club industry," Dyer says. "We're in the beginning of this slowdown. Good companies find a way to reinvent themselves in all kinds of economies."

Not all the news involving the economy has been negative. LA Fitness, Irvine, CA, opened more than 50 clubs in 2008, Caro says. Most club companies, until the last couple of months, have done a better job of growing non-dues revenue, he adds.

"They were having great luck getting increased usage in their group exercise areas," Caro says. "Those people that have tried to do group private training have found traction. That's something that many people are now willing to take on. [Group private training] sounded like an interesting concept but didn't have much traction at the beginning of the year."

Both Caro and Dyer say that the continued growth of low-cost clubs made a huge impact on the industry this year. As members cut back on their club membership expenses, low-cost players, such as Planet Fitness, Anytime Fitness and Snap Fitness, have welcomed them with open arms.

From September to mid-November, Planet Fitness, Dover, NH, opened 25 clubs, its biggest growth span since the company began franchising in 2003. At its most recent count, Planet Fitness had 251 locations in 29 states. Chanhassen, MN-based Snap Fitness and Hastings, MN-based Anytime Fitness, both 24-hour key-card club companies, continued to increase in numbers, both domestically and internationally.

"The vast majority of feedback we receive from people who buy our franchises is 'I can get a 40-minute workout done in 42 minutes,'" says Anytime Fitness CEO Jeff Klinger. "Meaning, they park in front, they get in there, they exercise, they leave. They're tired of being harassed for all the ancillary services that the big clubs have to go after them for, like training and massage. They're dying for convenience."

Some studies and statistics released this year have the potential to cause alarm for the industry. Total health club memberships dropped from 42.7 million in 2006 to 41.5 million in 2007, according to a report from the International Health, Racquet and Sportsclub Association (IHRSA). Despite those numbers, industry revenues climbed from $17.6 billion in 2006 to $18.5 billion in 2007. As of January 2008, IHRSA reported that the United States had 29,636 health clubs, a figure which included for-profits and some nonprofits but not corporate, government/military and university facilities.

YMCAs, however, increased membership by 700,000 over the past year and by 2 million over the past five years, according to the YMCA of the USA. The 2008 membership and club numbers for nonprofits and for-profits won't be available until next year.

With the economy in its current state, more members may be switching from for-profit clubs to cheaper options at Ys, community rec centers or their local colleges and high schools. Military veterans and their family members may be taking advantage of working out for free at a nearby military fitness center, says Margaret Treland, chief of the Air Force Fitness Branch.

"That's probably driving our usage up," Treland says. "Now they've decided, 'We can't afford $100 or $200 a month for a family membership anymore, so now we can use a free military facility.' Which, in most cases, are up to par with the industry as far as equipment and programs go."

Another perceived blow to for-profit facilities came in the form of a February survey in Consumer Reports, which stated that members gave more favorable marks to private studios, nonprofits, local community centers and office fitness facilities than to most national health club chains. Life Time Fitness was the only exception, receiving the highest marks for national chains. Chicago-based Bally Total Fitness received the lowest marks for national chains and was criticized in the survey for wait times for machines, problems with contracts or fees, lack of cleanliness and subpar locker rooms.

Several women-only and express club franchisees continued to suffer in 2008, causing more damage to the industry's reputation. Many franchisees of Butterfly Life, San Ramon, CA, and 1-2-3 Fit, Denver, closed their clubs and lost hundreds of thousands of dollars. They blame their losses on poor management and direction from the corporate offices of their respective companies. Other franchisees of women-only and express club companies expressed similar sentiments regarding their losses.

"We're seeing more distressed operators out there, independents that are wanting to sell their clubs or clubs actually closing," says Bill McBride, chief operating officer for Club One, San Francisco. "There's more conversation about opportunities with regard to location [with these operators] than other operators."

Still, the story of 2008 came back to the economy. During the summer, gas prices peaked to more than $4 a gallon in some parts of the country. Joe Cirulli, owner of Gainesville (FL) Health and Fitness Centers, says soaring gas prices made members think twice about joining a fitness center.

"That was probably one of the biggest things that we had to address with our sales team," Cirulli says. "You had the typical objections that you've always had. Now all of a sudden, you have a new objection. People will try to come up with excuses as to why to not get started, even when they come into the center. The gasoline issue made it a very easy one to throw at our salespeople."

As gas prices went up, stock prices went down for the two big publicly traded companies in the industry. Life Time Fitness' stock price on the New York Stock Exchange had a 52-week high of around $55 a share. As of mid-November, it had plummeted to around $11 a share. Life Time announced it was scaling back its projections for 2009, with plans to open six clubs instead of 11 clubs next year. It also announced it was eliminating 100 jobs at its corporate headquarters.

Town Sports International (TSI), New York, also experienced a steep drop in its stock price this year, going from more than $11 a share on the NASDAQ Stock Exchange to slightly more than $2 a share as of mid-November. Upon releasing its third quarter 2008 financial results, TSI also scaled back its growth projections for 2009. Earlier in the year, the company had put in place a new chief operating officer and a new chief financial officer.

"Certainly, both stocks have been beaten up," Klinger says. "But in reality, that is more of a function of people's fear of the stock market, not necessarily their fear of that particular company. Life Time's earnings, in my opinion, are still great. TSI is still making money. I don't think that their stock trading prices are a reflection of the management of their operations."

Manufacturers experienced another tough year. Nautilus Inc. recorded a loss in third quarter 2008 and saw net sales decrease by almost 19 percent. In February, Nautilus announced it was transitioning a call center from Winnipeg, Canada, to its headquarters in Vancouver, WA. In July, Nautilus announced it was closing its facilities in Tulsa, OK, by the end of the year, affecting some 140 people, and was transferring the manufacturing of its products to its Independence, VA, facility. Nautilus's stock price on the New York Stock Exchange has gone from more than $7 a share to less than $2 a share.

Brunswick Corp.'s fitness segment, which is Life Fitness, had an 8 percent increase in sales during the third quarter 2008 despite yielding an overall net loss of $591.4 million in the same time period. Brunswick's stock price, which had been more than $20 a share, was slightly more than $3 a share in mid-November.

The industry has gone through previous recessionary struggles, particularly in the early 1990s, before surviving and thriving. That's enough reason for the industry to be optimistic, says Steven Schwartz, president and CEO of Chicago-based TCA Holdings, which runs Midtown Tennis Clubs.

"On the other hand, there are some different dynamics going on in this recession. Primarily, we have much more competition than we had in past recessions," Schwartz says. "Fitness club users were growing in real terms faster than the economy was growing, so we had real growth in our sector. The fitness club users declined in 2007 and are maybe flat in 2008, so now a decline in the economy could take a real toll on us."

If 2007 was the year of Bally Total Fitness, then 2008 was the year of 24 Hour Fitness in terms of news involving the industry's top club companies.

Other Top Stories Highlighted 2008

Although a few executives had already left 24 Hour Fitness, San Ramon, CA, in late 2007, nobody's departure was more stunning than that of 24 Hour founder Mark Mastrov. Mastrov's exit in early 2008 was a telltale sign of the changing of the guard at 24 Hour after Carl Liebert, a former executive at The Home Depot, stepped into the CEO's role at 24 Hour. Before and after Mastrov's departure, several other 24 Hour executives left for companies such as Planet Fitness, Dover, NH; Urban Active, Lexington, KY; and Gold's Gym International, Irving, TX.

Since Bally's reorganization from bankruptcy in 2007 and subsequent change from a public to a private company, Bally did not produce a lot of news in the first part of 2008, aside from a settlement with the Securities and Exchange Commission, which charged Bally with misleading investors and engaging in fraudulent accounting from 1997 to 2003. Bally did not admit any wrongdoing in the settlement.

Then in June, Bally announced the hiring of its new CEO, Michael Sheehan, who had been the chief operating officer at 24 Hour. The Sheehan hiring led 24 Hour to file a lawsuit against Bally on the grounds that Sheehan took trade secrets with him to a top competitor. 24 Hour tried unsuccessfully to sue Bally in a California court, then had a lawsuit dismissed in Illinois before filing a third suit in October in Illinois. The case is still pending as of press time.

CEOs were on the move elsewhere in the industry. In early November, David Schnabel resigned as CEO of Gold's Gym, replaced by James Weaver. Throughout the course of the year, Gold's Gym franchisees spoke of growing unrest about the direction of the company, which is owned by private equity firm TRT Holdings. Schnabel had been a vice president for TRT and had served on Gold's board prior to becoming CEO in 2006.

More big news came from more big-name brands in the industry. Planet Fitness, which acquired World Gym in 2006, put the franchise up for sale during the summer. The number of World Gym clubs dropped from 295 to around 190 under Planet Fitness' ownership. Former World Gym CEO and owner Mike Uretz emerged as a potential buyer, acknowledging this summer that he would be interested in owning World Gym again. As of press time, Planet Fitness had not announced any further developments in the sale.

Club operators once again fought through the forces of nature in 2008, first with the floods of the Midwest in June and later with Hurricane Ike, which battered most of southeast Texas in September. Some fitness facilities in Iowa served as emergency shelters for residents and aid workers while some clubs in Houston opened their doors to residents who were without power.

In October, the U.S. Department of Health and Human Services released its physical activity guidelines for Americans, which call for a minimum of 150 minutes of moderate physical activity a week for adults (30 minutes of exercise, five days a week). This was the government's first thorough review of scientific research about physical activity and health in more than a decade. The American College of Sports Medicine and the American Heart Association, which came out with similar guidelines last year, voiced their support of the government guidelines.

The release of the guidelines might send a wake-up call to Americans, who are seeing increased levels of obesity in most states. The fifth annual "F as in Fat: How Obesity Policies Are Failing in America, 2008" report was released in August. According to the report, the number of states with an adult obesity rate of more than 30 percent jumped from one to three (Mississippi, West Virginia and Alabama). No state had a decrease in obesity levels from the year before, according to the report.


Mark Mastrov leaves 24 Hour Fitness.


Michael Sheehan leaves 24 Hour to become the CEO of Bally Total Fitness.


24 Hour sues Bally over the hiring of Michael Sheehan.

Planet Fitness puts World Gym up for sale.


The U.S. Department of Health and Human Services releases physical activity guidelines.


David Schnabel resigns as CEO of Gold's Gym.

TAGS: Nonprofits
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