Gyms tone up to take on their new low-cost rivals

For an industry in which personal trainers are forever exhorting members to shape up, the gym and fitness sector is itself in pretty poor form. Overall revenue contracted by 3.8% in 2009-10, according to research by IBISWorld published in May this year. As such, the industry is seeing a shakeup, with a number of new budget entrants shifting the market dynamic by offering cut-price subscriptions.

Established brands in the sector are having to think carefully about their positioning. This comes after a long period with little disruption to the status quo. LA Fitness chief executive Martin Long admits: “There has not been a lot of innovation in the industry recently.”

This is changing with the arrival of brands such as Fitness4Less and Stelios Haji-Ioannou’s easyGym launching its first two facilities in Slough next week and Wood Green, north London, next month. With monthly rates of £15 to £20, membership at a budget brand costs about a third of that at a mid-market brand.

They are able to charge lower prices as a result of lower overhead costs for staffing and maintenance. For example, at the eight Fitness4Less gyms, users sign up online without an induction and manage their membership accounts themselves. There are no swimming pools, the personal trainers are self-employed and most of the gyms do not even have phones.

Fitness4Less marketing director Emma Edwards argues that personal contact with staff is superfluous. “You do miss out on the service, but essentially the price point seems to be more attractive and a bigger pull for people. They are willing to forgo the service. We have research which indicates that, when it comes to health and fitness, they like it being a private thing.”

According to Edwards, budget brands have seen an opening left by local authority leisure centres, which previously would have provided lower-cost access to gyms but have now priced themselves out of those consumers’ reach by attempting to move upmarket.

She also compares the budget gym business model to that of a low-cost airline an analogy that is clearly pertinent for her rivals at easyGym, coming from Haji-Ioannou’s easy stable of brands. Everything is cut out except the core offering of fitness classes and gym equipment.

Also missing is the marketing spend, says Edwards. “Most traditionally run health clubs operate a sales and marketing team, and they spend perhaps 10-15% of their turnover on that. We have customers sign themselves up on the internet and take care of all of those sales and marketing functions. We do have sales and marketing activity, but it is centrally based, it is mass-market and it is low-cost,” she says.

If budget gyms represent a competitive threat to established operators, one strategy is for their higher-end rivals to emphasise the services they do provide. At the premium end of the market, fitness brands tend to use more specialist offerings such as racquet sports and wider health services to warrant the higher prices.

David Lloyd head of digital and marketing communications David Brosse says that he sees his brand in a very different category from the low-cost entrants. He says: “We describe ourselves as a racquet, health and fitness group. We are much more than a gym. We would point to our very extensive facilities and our expertise as key differentiators.”

Nuffield Health, meanwhile, positions itself as a health and wellbeing provider, with further core services including hospitals, diagnostic units and treatment centres. Gyms and fitness classes are unlikely to be the only reason for signing up to a membership.

Marketing director David Grint says: “By nature the customer segment we attract is looking to improve their health and change their lives for the better. Our services are personal and tailored to each individual and we provide a range of facilities including health assessments and GP services, in addition to the traditional fitness facilities.”

Despite this level of differentiation, premium brands as well as those in the mid-market need to make an effort to encourage loyalty among their customers. David Lloyd’s Brosse says: “Frequency of visits is a key determinant of how long you stay. We are keen that people do stay with the brand and achieve their goals.

“We have been investing in the past year or so quite heavily in our customer relationship management programme and in terms of improving our communications and our booking system. We have been investing quite a lot in video and media to demonstrate what it is like to take part in some of the classes.”

By contrast, budget gyms appear to be making a virtue of their flexibility, turning the lack of interaction with customers into a benefit. While most gyms have minimum contract terms of12 months, Fitness4Less does not require customers to sign up for more than a month at a time. According to Edwards, 64% of customers return on a regular basis anyway.

Brosse argues that most of David Lloyd’s customers are in the ABC1 demographic, so his target market is unlikely to be looking for a budget option. Edwards is not so sure. She believes that even high earners are interestedin budget gym brands, noting: “We have people who are unemployed; we have people who are solicitors.”

Yet it is unlikely that customers who consider it worth paying for tennis courts, premium facilities or healthcare services are the same as those who would be lured away by the basic offerings of budget gyms. The greater threat appears to be to the mid-market sector.

These brands are taking steps to protect themselves from the low-cost invasion. Virgin Active, a mid-market business, acquired premium chain Esporta in April, nearly doubling its size from 71 to 126 facilities. Now Sir Richard Branson’s company is believed to be in talks to sell a stake to private equity firm CVC to fund its expansion.

Another mid-market brand aiming to see off low-cost competitors with the promise of better service and facilities is LA Fitness, which has spent the past two years reappraising and rebuilding its brand, recognising a need for consistency after it lost its way, as even LA Fitness’s Long admits (see Case Study, below). The result is a more coherent approach to the look and feel of its facilities, and a company that differentiates itself on its service. The process drew upon Long’s background in retail, as chief executive of video gaming retailer Game Group.

“In my old business I used to say that if someone picks up a product, goes to the counter, exchanges the money and walks out, and you did not talk to them about that product or help educate them, then you have failed,” he explains. “Any of our competitors could have simply put it through a checkout. What did you do today to make it different?”

According to Long of LA Fitness, the penetration of gym membership in the UK is only 12%, meaning that there is growth potential for all areas of the market in a population that is living longer but is increasingly struggling to maintain a healthy lifestyle. It seems likely that much of the business that budget gyms will attract could be from the 88% of people not already signed up to a membership.

However, there are likely to be many gym-goers who see the appeal of lower prices. As the number of budget facilities grows, so will the level of competition. Fitness4Less, for example, is seeking to expand by acquisition of both failing independent gyms and facilities too small to fit the business model of the brands running them.

In order to keep their own base of customers and to attract new ones, mid-market brands such as LA Fitness will need to maintain as strict a regime as their members. To keep the bottom line healthy, they must ensure gym-goers consider their standard of service and facilities to be indispensable.