Trimming the fat in the gym/health club market

Thanks to my newly expanded remit on Resources, I have decided to take a look at the health sector this week which has seen some fascinating reinventions over recent years.

Change has come quickly to the gym/health club sector.  Over the last 6 years we have seen massive growth in the budget gym sector with occupiers such as Pure Gym, Xercise4less and Fit for Free capitalising on customers who want a cost-effective easy in/easy out membership with no long term ties.

This has largely been at the expense of mid-market operators such as Fitness First and LA Fitness which have both gone through a CVA (Company Voluntary Arrangement) process over recent years reducing the size of their club network.  This is mainly as a result of budget operators expanding into the market but the mid-market sector has also been challenged by the fact that many clubs are held on long leases, often with RPi indexed rent reviews.

During the recession whilst rental values fell, the rent reserved on a large number of leases continued to increase, leading to red balance sheets with membership numbers and fees coming under pressure.  The result has been the trend in the mid sector towards CVA as a means of longer term brand survival.

So far in 2015 we are seeing further consolidation in the health club/gym sector as costs continue to rise – primarily in terms of business rates and staffing.  And whilst membership numbers grew nationally in 2014, this was down to the rapid rise of the budget sector which is forecasted to exceed 20% of total membership this year.

I expect to see more consolidation or contraction in the mid-market sector, with the notable exception of Nuffield Health which has a model to integrate its clubs within their general health care offering across the business.

At the top end, David Lloyd continues to attract high brand awareness and with the recent buyout in 2013 they are seen as a mainly organic growth prospect in the immediate future. Beyond David Lloyd are a small number of high level boutique operators such as Equinox selling life style choice to exclusive residential catchments largely in the South East, where growth is likely to be moderate. These operators are niche players which are unlikely to develop towards a national offer.

As ever there remains a north/south divide in terms of membership trends and rental values, which in some ways explains the reliance on the south by the principle mid and high end operators.