Government Promotion of Exercise Benefits Boosts Industry Prospects
By Catherine Larner
Governments throughout Europe are realizing the health implications of increasingly obese and sedentary populations and are, at last, beginning to take action. The timing couldn't be better for the health and fitness club industry, giving an injection to a market which has fallen victim to the combination of too rapid growth and an unsupportive financial climate.
Institutional reports, strategies and proposals are now being published or acted upon after many months of procrastination, and the key message coming through is for the individual to take responsibility for their own health. Governments are moving away from finding more efficient ways to deliver healthcare, and are focusing on how best to encourage individuals to lead a healthy lifestyle.
Early in 2004, the U.K. industry was holding its breath for the much-awaited publication of the Chief Medical Officer's (CMO) report. 'This is an absolute landmark for our industry,' said Nigel Wallace, executive director of the FIA. 'In it we have the highest medical authority in the U.K. demonstrating the therapeutic quality of an active life and illustrating how 20 of the major causes of ill health or death can be related to physical inactivity.'
The CMO report deals with scientific evidence and is to be followed by another document looking into the outcomes of various interventions. It was preceded in February 2004 by the publication of the Wanless report, Securing Good Health for the Whole Population. Plus, there is a British Medical Association report on adolescent health; Sport England's aim to promote physical activity through the government's Game Plan; and Prime Minister Tony Blair's personal statements about the benefits of exercise. Such activity all looks promising for the industry.
Public facilities are well placed to benefit from this sea change and are already capitalizing on new funding sources in the U.K., enabling authorities and contract management companies to construct new facilities, or renovate old leisure buildings into fine complexes. They have also been continuing to refine their offer in line with the standards being provided in private clubs.
'The achievements of the government's Game Plan strategy, urging people to be more active, is mainly going to fall on local authorities,' says Steve Philpott, CEO of leisure management company DC Leisure. 'Whereas the agenda previously was all about community activity and sports participation levels, now the health of the nation is a prime concern. And, as leisure contractors, we will be at the forefront of that.'
Meanwhile the big name operators, primarily based in the U.K., who were bullish about dominating the European market, have continued to struggle despite stepping out of the stock market and finding backing from private equity companies.
'The public market did not suit me at all,' said Harm Tegelaars of Cannons. 'This is the third time I have had private equity partners, and I relish being round a table with four or five people talking about taking the company forward.
'Trading conditions haven't been ideal in the U.K. recently,' he said. 'That has made us look at the quality of our delivery. Attrition rates are the single most pernicious issue for the industry. If we keep to current levels we will be high-powered sales organizations and nothing else.'
When times are hard, pricing becomes the issue, despite all operators warning against going down this route. Deals on joining fees are now commonplace, but monthly dues are also being slashed as competition is rife, consumers are increasingly calling the shots and operators need to keep up the numbers.
A handful of companies are bucking the trend. LA Fitness continues as a dedicated public company-now the only one remaining in the U.K. Virgin Active, with its 14 sites in the U.K., and nearly 90 in South Africa, has moved into the Italian market. Fitness First has slowed but continues its growth - 40 more sites planned to open worldwide for 2004. Focusing mainly in the north of the U.K. Bannatyne Fitness enjoys continued success. And David Lloyd Leisure, which was notable for not making a move into Europe when all the other U.K. operators flocked over the Channel, is now making a surge with numerous facilities coming on stream in the Benelux region. The company surprised the industry by purchasing the Dutch arm of Cannons earlier this year, and is now working on its long awaited Brussels new build.
Companies focus on strengthening brands
As a whole, companies are refocusing, selling or closing clubs that don't match their core goals, and they are concentrating on their domestic market rather than pursuing their ambitious international expansion plans. And in France, too: Club Med Gym, for example, is working hard at its brand identity and service standards so is selling 12 of the sites that don't fit with its model. In the long term, this is a necessary and beneficial step to tightening businesses.
There are varying fortunes for the smaller chains too. There has been an influx of women-only and weight loss facilities, highlighting the potential of niche marketing for clubs and the huge slimming market that has not yet been fully addressed by the U.K. health and fitness business. Fitness First has entered this arena with an 85 percent share of Fresh Start Fitness. Franchise operators are bullish about the number of clubs they foresee opening throughout European cities. U.S.-based Curves is growing apace, while in the U.K., Ladies Workout Express, a chain of dedicated weight loss centers in the north-originating from the Lady of America franchise-is enjoying steady growth. But other small chains and single sites are also opening at quite a rate within this market.
Franchises, historically, have not been popular in the U.K., although they work well on the continent. But in recent months two new U.K.-based companies have been confident of overcoming this preconception. Energie and Abbey Court are believed to be ones to watch.
Of the smaller chains, Vida in the north is working well, but Springhealth and Peak Fitness both failed and were bought back by their founders this year. Some Topnotch sites are now under private ownership after they were bought back by Matthew Harris.
Growth generally has slowed and it is predicted that consolidation will gather speed during the coming year. It is possible that we will see some big names change ownership.
Research undertaken by Plimsoll found that over a third of health and fitness companies expected the coming year to be a difficult one. A further 39 precent believed their prospects in 2004 would be similar to those in 2003. While 22 percent predict 2004 to be a good year.
A report by Market and Business Development (MBD) also shows room for optimism. The health and fitness market is forecast to achieve sustained year-on-year growth over the next four years. While sales are expected to slow over the next few years, they are anticipated to reach £3.8 billion in 2008, a growth of 6 percent in real terms compared to 2004. Participation revenues will experience more moderate growth over the period, as the private health club sector becomes more price competitive with estimates at £1.689 billion, a growth of 3 percent from 2004. The U.K. health and fitness market is believed to have increased by as much as 36 percent in terms of revenues-to almost £3.5 billion-from 1999 to 2003.
Membership penetration rates grow
The number of health club members in the U.K. grew by 4.5 percent to six million in 2003, according to the FIA's publication, the State of the Industry Report 2004, compiled by the Leisure Database Company. While the growth rate was slower than in previous years, membership penetration rates grew from 9.9 percent in 2002 to 10.3 percent of the U.K. population.
The U.K. fitness sector now comprises 1,982 private health clubs (all with over 500 members or part of a group) and 2,403 public fitness facilities.
The data confirms what many private operators have been experiencing individually-a significant slowdown but not what the economists would term a downturn. The report reveals a re-shaping of the industry with the public sector performing well and the private sector facing its toughest challenges yet.
The private sector has been hit hard with only 88 new private health clubs opened in 2003, compared to 146 in 2002. This trend has been falling since the peak of openings in 2001 and represents the lowest number of openings since 1996. (In 2004, 69 new private clubs are scheduled to open.) With more private club closures in 2003 than in 2002, the net number of new clubs to be added to the total U.K. provision was 13. While membership increased in 2003, it grew at a slower rate than in 2002.
In contrast the public sector has been performing well. The year 2003 saw the largest number of sports center openings since the all-time peak in 1974. A total of 124 new sports centers under public sector ownership opened throughout the U.K. in 2003, compared with 91 in 2002 and 42 in 2001. A further 40 sports centers were opened in 2003 with restricted access.
Growth in public sector facilities brings the total number of sports centers open in the U.K. to some 3,738. Of the U.K.'s public sports centers, 57 percent are standalone facilities and 43 are based at educational sites. The educational sector is also the fastest growing; 73 percent of all public sector sports center openings in 2003 were at educational sites.
The estimated fitness membership for the U.K.'s 3,738 public sports centers rose 2.9 percent in 2003 to just over 2.5 million people, representing 4.3 percent of the U.K.'s population.
Growth in public sector provision is expected to continue for the next two to three years. At least 574 additional public sports centers are either under development or in planning. There are 379 private sector planning applications granted for full planning permission for 2004. A further 700 plus sites have planning applications in the pipeline across both sectors.
Market still booming in the Republic of Ireland
Changes are likely to be seen in the Irish market in coming years. The 1990s saw an increase in disposable income among the population, a boom in quality facilities opening up, and the government promoting the benefits of sport and exercise. Now, however, the market is maturing and with the population aging and competition becoming heavy, health clubs will have to offer more services and products to secure new and loyal customers.
But the Republic of Ireland and Northern Ireland have had very different experiences over the past five years, according to market research company, Mintel International.
The Republic of Ireland has seen a massive 135 percent increase in its market value since 1997, and in 2003 is believed to have been worth just over E300 million. It has twice as many health clubs than in Northern Ireland. Private clubs and hotels make up 62 percent of the market, while in Northern Ireland this is just 40 percent. In the Republic of Ireland the private sector is dominated by U.K.-based facilities such as David Lloyd, Fitness First, LA Fitness and Esporta.
The extent of local authority and community leisure sites amounts to 60 percent of the market in Northern Ireland and 40 percent in the Republic. Yet, the Republic has still benefited from large injections of cash funding from the government.
One of the changes in Ireland is that, like other countries, the population is aging and this is already impacting the market. These users want wellness and gentler, more sociable exercises-and they are cash- and time-rich.
Mintel predicts both markets will grow by around 30 percent over the next five years.
Italy attracting major players
Italy already enjoys an above average attendance of health and fitness participation with 2.03 million members-the third highest in Europe. Market penetration stands at 3.5 percent (4.1 percent in the U.K.), and there are approximately 6,000 clubs. Most clubs are small, averaging about 340 members, and are independently owned with no pool, childcare, or beauty facilities. Clubs are opening steadily, with around 150 a year coming on stream. There are very few chains, and these are growing slowly. The only international players are Fitness First with six sites and, Virgin Active, which launched in Genoa in February 2004, with plans to have 12 sites by 2006.
Rumors say that a significant number of leisure schemes are about to surface, comprising residential, shopping and a cinema and sporting or fitness component, but planning permission is still an issue. For Virgin Active, the Bologna site, Meridiana, has taken 30 years and Genoa has taken at least 10 years to complete.
Dynamic growth predicted for German market
After sluggish business in the past two years, there is a spirit of optimism and confidence for 2004.
The health service reform has been of major interest to all Germans since the beginning of the year. A number of different practical aspects are being debated, but the declared intent to encourage individuals to take greater personal responsibility for their health and to organize their own preventative measures is likely to give added impetus to the entire healthcare sector.
Stronger links between fitness, medicine, prevention and rehabilitation have been urged by Professor Herbert Lollgen, in his capacity as expert in the Parliamentary Sports Committee for Prevention and Rehabilitation. This also applies to older people. The increasing awareness about health matters, the cuts in services funded by the health insurance schemes and the desire for relaxation after a stressful day at work are filling the preventative and rehabilitation facilities.
Gym operators and fitness equipment manufacturers are now expecting dynamic growth, according to the results of the business survey carried out by the leisure industry working group of the Institut de deutschen Wirtschaft. According to its figures, 14 of the 35 sectors within the leisure industry are expecting to see sales growth of up to 7 percent.
The Institut has registered a strong rise in sentiment throughout the fitness and wellness sector. Associations and companies across the board are predicting improvement in business prospects in 2004. There is greater willingness to invest than 12 months ago, profits are rising and the mood is more upbeat. Those surveyed also felt that the jobs
situation was better than last year.
Deloitte carried otu research and analysis of the market study 'The German Health and Fitness Market' 2003. Before the research, Deloitte in cooperation with DSSV and
Deutscher Industrieverband fur Fitness und Wellness (DIFW) formulated for the first time standard classifications to categorize all studios in Germany.
The market has 5,600 gyms, each with a minimum floor space of 200 square meters. These were divided into four basic categories: women's gyms, mixed gyms, wellness facilities and multipurpose centers. The research found that almost two thirds (63 percent) of the facilities were mixed gyms. Multipurpose and wellness centers each accounted for roughly a sixth of the market (14 percent). Nearly one gym in 10 is used exclusively by women (9 percent).
Large fitness operators were looked at separately. These were defined as those with a minimum of three facilities and 5,000 members. Over 400 operators fulfilled these criteria. Like the smaller operators, the majority of the larger facilities were defined as mixed gyms (72 percent).
The major players in the German market are Fitness Company, Kieser Training, Injoy and Elixia.
New target groups are emerging in the German market: courses for back-pain sufferers, cardiovascular training and osteoporosis programs are now becoming popular. Yet in many cases there are still too few integrated solutions that cover everything from fitness and wellbeing to corporate health.
Membership is growing through existing sites and further consolidation is expected for the future, mainly through the larger operators.
Looking ahead
Fueled by government promotion of physical activity and growing consumer awareness of the benefits of exercise, the European industry is sitting on a firm foundation for future expansion. As companies continue to focus on improving membership retention and strengthening their individual brands, the prospects for increased market penetration and continued growth of the industry are strong.
