Adversity Builds Character

I for one will be happy to see the end of 2005. It's been an up and down year for me personally, and I saw that reflected in the industry, too. Hurricanes, rising gas prices, investigations by the Securities and Exchange Commission and U.S. Attorney General into Bally Total Fitness, accounting issues at Sports Club Co., and the controversy about accreditation of personal training certifications and the National Board of Fitness Examiners — all caused concern in the industry.

The year also had its positives. The sale of 24 Hour Fitness for $1.6 billion created a big buzz about our industry in the investor community. Town Sport International has received much attention as it waivers between going public and seeking a new owner. Life Time Fitness continues to show growth and promise as a public company. All of this coupled with extensive media coverage of the growing obesity problem has served to increase Wall Street's interest in the industry.

Then we have the issues that fall somewhere in between. While 2005 numbers aren't available for membership and club growth, the International Health, Racquet and Sportsclub Association (IHRSA) recently released 2004 numbers, and there is little reason to believe the growth seen in 2004 changed significantly in 2005. Health club membership grew in 2004 to 41.3 million, an increase of 4.8 percent, according to IHRSA. However, the number of clubs has increased even faster, rising 14 percent in one year to 26,830 clubs as of January 2005. These numbers would seem to imply that memberships per club decreased; therefore, revenue per club also decreased. However, IHRSA reported that revenues per IHRSA-member club were up in 2004 (total revenues of $2.17 million per club, a 4.5 percent increase over 2003). Earnings for these clubs increased by 8.6 percentage points from 8 percent of total revenues in 2003 to 16.6 percent of total revenues in 2004. However, several consultants I've spoken with have stated that revenues per club were down in 2005, and calls from desperate club owners were up. We'll have to wait another year for IHRSA to release its 2005 numbers.

A growing number of low-priced, no-frills clubs have opened, often reaching the previously uninitiated exerciser who stayed away from gym membership because of cost. Unfortunately, these clubs also are pulling some members from the mid-priced clubs, and the operating model for many of these clubs is to get as many people to sign up on EFT for as little as possible and hope that not all of them show up. Goodbye member follow-up and added revenue potential per member.

The increase of single-gender circuit training facilities has also contributed to the phenomenal growth in club numbers. These facilities can be a good way to reach some of the deconditioned market, but where do these members go when they plateau? And are too many of them expanding too fast, leaving their franchisees out in the cold?

Every year our industry faces its challenges and triumphs. Often, they are the same year after year. No person can ever look back upon a year full of only sweet moments just as no business can close a year without a crisis of some degree. However, just as anyone who has gone through a difficult period often emerges stronger and wiser, this industry will do the same to face the challenges and triumphs that lie ahead for next year.

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