IHRSA - Jan 2004 CBI

2004: The Year That You've Been Waiting For

Better Times are Finally Coming, According to These 10 Industry Insiders

by Stephen Wallenfels

It no longer seems necessary to recount the various difficulties that have beset business for the past few years. There have been too many of them. And some of them have been unmitigated disasters. We all know that, and, last year, when CBI asked a group of industry leaders to speculate about the year ahead, they were certain of the challenges and skeptical of the opportunities. This year, it is different: the balance has changed. The 10 industry insiders that we contacted -- all individuals who toil in the trenches -- admit that trials still lie on the path, but are, without exception, reassured by how well the industry has performed, and convinced that 2004 will prove the start of a period of renewed expansion and greater growth.

Last year, our contributors were cautiously optimistic; this year, they are clearly optimistic.

Last year, the industry's mood was serious. This year, it seems eager.

Capital Comeback

Ed McCall

Ed McCall is a general partner in Brentwood Associates, a private equity firm based in Los Angeles that currently manages more than $2 billion in assets; among its holdings is Spectrum Clubs, a 20-facility chain with sites in California and Texas. McCall is also a director of IHRSA and of the USA Cycling Development Foundation.

Capital has been scarce for the past several years in virtually all business sectors. A faltering economy, high-profile corporate failures, and crumbling consumer confidence have driven equity markets lower, very nearly eliminated debt capital, and compressed valuation multiples in every industry, including our own. But 2004, I think, holds great promise for clubs.

Investment professionals, having been seduced and burned by get-rich-quick opportunities in fields such as technology and the Internet, are now returning to their traditional position, focusing on strong, stable, core businesses. The gatekeepers of capital are discovering what club operators have long known: Fitness is a fundamental component of many consumers' lives. The industry grows even during periods of general economic weakness. Yes, growth rates do slow, but, in fitness, we're still using the term growth; many industries have contracted by 10%, 20%, 30%, or more. Fitness also boasts good unit economics, high margins, strong free cash flow, and expanding revenue sources.

Given this recognition, I expect our industry will see an improved flow of debt and equity capital during the coming year. Equity investors will be increasingly interested in investment opportunities; strategic players will have more and cheaper capital to pursue acquisitions; and entrepreneurs will be able to revive expansion plans that have been put on hold. And, with more capital seeking a home in fitness, valuation multiples will have nowhere to go but up.

New Chapter in the U.K.

Rod Hill

Industry consultant Rod Hill is one of the foremost observers of the European health and fitness market, having spent nine years with market leader Fitness First, most recently as the company's head of European sales.

The imminent release of a report by the country's Chief Medical Officer about the dangers of an inactive lifestyle could very well mark the start of a new chapter of exercise awareness and education in the U.K. As in the U.S., the U.K. is currently confronting an obesity epidemic, and that situation, along with London's aggressive bid to be designated an Olympic site, could put the club industry in a strong position, during 2004, to secure its reputation as a serious health provider.

The time has clearly come for the U.K. to aggressively communicate the vital role that exercise plays in successful weight management. Weight loss centers, possibly attached to existing clubs, may become more common; it seems likely given the fact that some 3 million people in the U.K. have already purchased a copy of The Atkins Diet (it's preceded on the best-seller list only by Harry Potter's latest adventure). Personal training is also expected to increase in popularity, as more entrepreneurs recognise the advantages of setting up shop inside our clubs.

On the financial front, however, there's some concern about the recent delisting of a number of club chains, and about the possibility that the U.K. market may be nearing saturation. During the past two years, a number of public companies, including Cannons, Holmes Place, and Fitness First have gone private, leaving LA Fitness alone on the London Stock Exchange; as a result, financial analysts now have less information on which to base an informed opinion'either of individual firms or the sector as a whole. The situation is now comparable to that in the U.S., where there are just two major publicly held chains.

The WOW! Factor

Stephen Roma

Stephen S. Roma is president and chief operating WOW!zer (yes, you read that right) of WOW! Work Out World, a family owned, seven-facility chain based in Brick, New Jersey. The company also licenses its name and logo to clubs throughout the world.

At WOW!, we're looking forward to 2004: we plan to open two new facilities of our own and to license 10 others during the coming year. As we expand, we will have to develop systems to handle our ongoing growth, but we also want to remain flexible so that, if economic conditions improve quickly, we'd be able to accommodate a rapid growth spurt. Among the systems that we're working on are ones for new member induction, member retention, and licensing. In order for us to remain successful, every incarnation of WOW! has to be moving in the same direction, and consistent with our corporate goals, culture, and atmosphere.

What do we think will happen in terms of trends? Well, we continue to see 30-minute-circuit clubs for ladies popping up, and regard them as feeders for our business. These facilities provide new exercisers with a comfortable environment, a simple, straightforward solution, and, after a while, a yearning for something nicer and more sophisticated. These clubs are tapping into a new market; their model and systems have merit, and we can learn from them.

We're also continuing to witness the growing impact that functional training is having on the world of personal training; the result is a greater number of passionate, highly qualified trainers with a superior service to offer. And recently, we've begun to observe a greater interest in, and emphasis on, the fitness assessment, which provides us with a better, more accurate way to design workout programs.

Right-Stuff Equipment

RADU

Radu Teodorescu is a personal trainer and fitness guru based in Manhattan whose stellar client list includes such entertainers as Jennifer Lopez, Cindy Crawford, Vanessa Williams, Regis Philbin, and Matthew Broderick. Radu is now exploring the possibility of launching a line of clubs.

I'm very encouraged by the improvements that have been made by fitness equipment manufacturers, and by the new ones that, no doubt, they'll soon be unveiling. Compact and attractive, the new generation of machines is safer, more exciting, more user friendly, easier to adjust, and appropriate for club members representing a wider range of fitness levels than any in history.

I expect to see even more improvements during the coming year with respect to aesthetics, safety, ease of use, and adjustability.

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