Marianna Papadakis Reporter

Marianna writes for The Australian Financial Review and Business Review Weekly from the Sydney newsroom. She has an interest in legal affairs, technology and business.

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Lean, fast franchises muscle in on fitness industry

Published 28 February 2013 00:28, Updated 09 July 2013 00:13

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Lean, fast franchises muscle in on fitness industry

Jetts managing director Adrian McFedries embraces the high levels of competition in the sector in the convenience gym sector Photo: Eddie Safarik

When gym chain Fitness First announced the loss of 120 jobs, the sale of 19 clubs and the closure of a handful more in 2012, it wasn’t a signal that the broader gym market was under pressure.

Indeed, the fact four gym franchises have grabbed a place on the BRW Fast Franchise list shows how vibrant the sector is, and how franchising can help turbocharge business growth.

The explosive growth of relatively new players such as Jetts, Anytime Fitness, EFM Health Clubs and Plus Fitness is transforming the sector – and putting formerly dominant market players like Fitness First, Contours and Curves under pressure.

The gym industry is worth $2.9 billion a year and is estimated by IBISWorld to grow over the next five years at an annualised rate of 3.6 per cent to reach $3.4 billion by 2016-17. Older customers will be a key driver for growth and operators are revamping services and making targeted offerings to gain an edge.

Jetts and Anytime Fitness are the pioneers of the low cost, 24/7 operating model that is cheaper for both franchisees and customers.

While the larger operators have bigger facilities of up to 2500 square metres with pools, group classes and personal trainers that bump up costs for members, the likes of Jetts and Anytime Fitness concentrate on smaller gyms in suburban and regional areas.

Franchises like Jetts, EFM Health Clubs and Plus Fitness do not lock members into long-term contracts, but operate on a monthly fee basis.

Anytime Fitness, however, maintains a contract approach.

The convenience model has been extremely successful.

Industry insiders say a staggering 80 per cent of the gym market’s growth has been in this convenience segment, with fierce competition among franchise groups.

Jetts has about 200 clubs while Anytime Fitness has 245, Plus Fitness has 48 gyms, and EFM Health Clubs has 65 clubs based at schools and hospitals. Others such as Snap Fitness also now have about 100 gyms.

With more than 600 convenience-model clubs nationally, franchising in this segment of the market appears to be approaching saturation.

But that isn’t stopping these fast-growing franchises from targeting further growth.

But most are averaging one new premise a month and all are planning more growth in the next 12 months.

Anytime Fitness, which takes its model from its US parent group, is expanding aggressively in Australia after opening here four years ago.

It is planning to have at least 350 clubs by next January, opening five a month in regional areas where the bigger-box-type gyms cannot go.

The average size gym is around 450 sq m with private ensuite size bathrooms but no locker rooms.

Chief executive officer Justin McDonell, who owns three franchises with his sister Jacinta McDonell-Jimenez, plans to have gyms in every big town from Broken Hill to Sydney.

Other operators are sceptical of the future success of Anytime Fitness’s contract approach to membership, but McDonell says this ensures a regular and reliable income while motivating members to take their program seriously.

“If people are committed to a 12 to 18 month program they will be prepared to get their results,” he says.

With about 1000 members per club, revenue is heading for $12 million a year and increasing each month.

McDonell sees Anytime Fitness picking up a lot of the ground that the bigger-box gym operators are being forced to abandon.

At $55 a month, the chain’s fees are slightly higher than the industry average, but McDonell says this will help Anytime meet a trend he is seeing out of the US, where gyms are elevating standards and adding more services such as health and personal training. The discounting of his competitors could “only last for so long”, he says.

“We want to be good quality and convenient at an affordable price. Not just the cheapest,” McDonell says.

Franchisees need an average of about $350,000 to establish a club although they also pay a fixed fee of $991 a month as opposed to most franchises, which charge a percentage (up to 9 per cent) of monthly turnover.

“Our franchise consultants provide coaching to franchisees and there is a lot of online support, including an extensive intranet with marketing and operational plans they need.”

It has a higher free weight component than its competitors and is venturing into larger facilities and offering more additional paid services such as virtual fitness classes which members select on a touch screen.

It has diet tracking and nutrition planning via online portals and functions to build programs and virtual personal training.

If there are questions staff respond within 24 hours and there is a community forum for members to network.

“We will have sectioned off areas with different flooring, fit balls, deluxe monkey bars with rope, core stability and functional training equipment,” McDonell says.

Its biggest selling point was convenience with members being able to travel domestically or overseas using the same personal access key to get into any club.

Franchisees are selected based on their ability to raise capital and past experience in the industry. Some knowledge or a background in marketing and sales also helps.

One of the attractions of the low-cost gym franchises is that franchisees don’t need to be heavily involved and around 20 per cent of Anytime’s franchisees have full-time jobs elsewhere.

“They can log in and see sales or cameras at the premises. They don’t need to be tied to the business,” McDonell says.

“[But] self-running gyms, we don’t believe in or promote that. We want people to be driven.”

Anytime Fitness’s main competitor is Jetts, whose managing director Adrian McFedries embraces the high levels of competition in the sector.

“Whether they are big operators, or outdoor groups or similar to us, we want competitors who run good businesses. It’s better for the reputation of the industry and ultimately better for members,” McFedries says.

Any growth in the industry has the net effect of more people exercising, he says. Most people do a range of different activities over a 10-year period, meaning all types of gyms and fitness play a role.

But he cautions against the continued rapid expansion of his rival, saying Jetts is taking a more disciplined approach to growth, being selective about its locations and franchise business owners.

“We focus on quality. People will walk out if the smell is not great or culture isn’t good. You can’t take your focus off standards,” he says.

“You have to make sure you’re operating premises that are as good as the day you opened it.”

But having opened the doors to around 50 gyms a year in the past three years and now with 200,000 members, Jetts is also planning to continue expanding until it has between 320 and 350 gyms.

Franchises cost about $600,000 to set up, but almost half of its club owners have more than one.

The success of its franchise model is evident in its group revenue growth, from $3.834 million in 2008-09 to $74.496 million in 2011-12.

Smaller rival Plus Fitness was operating for 16 years with six large health clubs in Sydney before radically changing its business model in 2011 to face the challenge of niche operators like Jetts.

Its franchisor Nigel Miller anticipates a continued decline in the traditional big-box style of fitness clubs.

“We realised if we didn’t change our model then we would be dead in the water – if we continued to operate as a company with that type of management structure.”

“The transition from company to franchise operation was straight forward because of our systems. We would never have achieved the growth we have in past two years.“We worked to hard to build up our brand. Then launched the 24/7 model.

Plus Fitness is opening a new franchise every week over the next 12 months and has increased its annual turnover to about $28 million.

Miller says the big box model is becoming defunct, needing around 20 staff, plus contractors for classes and licence fees to teach them, large but otherwise unused spaces and massive facility maintenance costs including running free crèches and pools.

“Stick 24/7 gyms in areas around that club, they take away 25 to 30 per cent of their market,” he says. “Why does someone who doesn’t swim or use child minding want to pay $25 when you can get it for $13 where it’s conveniently close to their work and they can train at any time with no contract obligations.”

Although he sees saturation point approaching in the tighter NSW and Queensland markets, Miller says there is still plenty of room for growth elsewhere in Australia.

Like most operators, once the initial enquiries for franchising are sorted through, a more rigorous merit-based assessment is done for those serious about business.

Miller says he looks for business experience, personality and attitude in prospective franchisees.

“It’s a fixed five- to 10-year relationship. Finding [franchisees] isn’t hard but finding [those] you can work with is harder. We can teach anyone to run a gym but we can’t teach someone to have the right attitude to run one.”

Plus Fitness’s franchise model is cheaper than Jetts and other operators, with owners asked to invest about $320,000 for premises of about 300square metres. Unlike other operators, it includes all the equipment, which it imports.

This point of difference makes it up to 30 per cent more competitive in the franchise sector, Miller says and although Plus Fitness cannot control where its competitors open, it designates exclusive territories to business owners under its franchise agreements.

“You need to provide good training and support structures but it’s then up to them to provide a high level of service in selling memberships. The clubs with the best operating systems in terms of marketing and sales are the ones that survive.”

Providing franchisees good old-fashioned training and support as well as researching the viability of establishing a club was crucial to the future success of any gym.

He says convenience operators are feeling the impact of competition, high electricity costs and wage increases of 25 per cent for staff in the past three years, and argues that they need to reinvent and find new ways of distinguishing themselves from the pack. Like Anytime Fitness, Plus Fitness is introducing virtual classes to give itself an edge.

“It creates a community feel. Some clubs have pre-programmed them for specific times when they are busy, but most haven’t needed to do that.”

EFM Health Clubs chief executive Matthew Lindblom says the market is heading towards consolidation, with more competition for sites. This will take another five years to play out.

Lindblom is selective about sites and franchisees and does not want to “grow for growth’s sake”, opening around three to five gyms a year. EFM is aiming for 120 clubs by 2015.

“The danger is a potentially high degree of failure. I’m not prepared to accept that level of risk. I want a good relationship with franchisees and do everything I can to ensure they’re profitable,” he says.

While other gym franchisors have mostly business investors buying into their clubs who work a maximum of ten hours, EMF’s franshisee model is different.

EMF mainly selects experienced trainers or existing staff members who want to develop their careers in the industry.

One challenge for the sector is catering for the increasing aged population and baby boomers, who were not raised in gym environments, but exercised outdoors.

And this is a booming market with Australian Bureau of Statistics (ABS) figures showing that 25 per cent of the nation’s population will be 65 years or older by 2056.

EFM is tackling this niche by providing a higher degree of service, such as personal trainers and personalised programs, but with double the member fees – about $120 a month – to suit this 40-plus demographic.

EFM is more community based. It operates out of spaces at schools and hospitals and runs social events.

Its average member base is about 150 members a club, not some 800 to 900 like others.

“We don’t have mirrors and this helps create a friendly, non-intimidating environment,” Miller says.

There is one trainer to every 10 members at EMF, with the trainers on the floor every session to motivate customers and look after their needs .

The company runs ladies’ sessions and tailors programs to suit hospital staff or those with diabetes and will provide more services for the growing seniors’ market.

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