Sweating your assets


Pure Gym’s results last week highlight the extent to which low-cost gym operators have disrupted the market over the past five years. It reported revenue growth of 28% (to £159.9m) for the year and delivered EBITDA growth of 41% (to £39.5m), having added 38 new gyms in 2016. This follows similarly impressive gains by The Gym Group last month.

Premium operators have also seen success in recent years, with Virgin Active, David Lloyd, Nuffield Health and Bannatyne’s all growing their estates since 2011. However, the mid-market has suffered a remarkable decline over this period. Fitness First has shed over half its gyms, repositioning itself as a premium operator and increasing average membership fees by around 60%. At the same time, the LA Fitness brand has disappeared completely, following its acquisition by Pure Gym.

The polarisation of UK retail and service sectors is of course nothing new, but the share gain of value gyms has been particularly aggressive, which raises questions as to the sustainability of their continued growth.

Looking to other developed markets, such as the US and Germany, where 40-50% of all memberships are with low-cost operators (compared to 32% in the UK) would suggest there’s further potential. Furthermore, gym membership penetration in the UK reached an all-time high of 14.3% last year, yet still fell short of markets such as the Netherlands (16%), Sweden (16%) and the US (20%).

A reduction in consumer spending following Brexit is a cause for concern, as value operators’ success has been in part thanks to their ability to attract new members into the market. Around 35% of Pure Gym members have not previously held a gym subscription and more casual members would likely be the first to sacrifice memberships as disposable income gets squeezed. However, our research shows that the low-cost gym model fulfils most threshold choice criteria for consumers, doing away with ‘nice-to-have’s’ like instructors and classes. This presents an attractive option for members of mid-market or premium gyms looking to downsize.

From a profitability perspective, increasing rents could see bottom lines suffer in the future. Low-cost gyms currently pay £2.48 per square foot less than mid-market operators on average – a gap that is likely to be corrected through rent reviews over the next few years. As Andrew Jones, chief operating officer of Nuffield Gyms notes, “as you need more sites, you get further away from the ‘bullseye’ sites you began with.” Recent changes to business rates and the national minimum wage could also see overheads swell, although low-cost operators are less exposed to fluctuations in staff costs than full-service chains thanks to their lean staffing model.

Whilst the economic model of new gyms may become challenged by increases in overheads and operating costs in the future, there are strong indications that consumer appetite for this model will continue to grow for the foreseeable future.

Jacob Gascoine-Becker