The transaction was described as “one of the biggest tender offers ever placed by a Japanese firm,” and also represented the largest acquisition, ever, in the history of the health and fitness club industry.

This year, in February, Konami did it again. The Konami Sports Corp. (KSC), the club division which superseded People, announced that it had acquired 82% of the shares of Japan’s fifth-biggest chain, Daiei Olympic Sports Club, Inc., for $26.3 million.

Ritsu Sasakura, a spokeswoman for KSC, indicated then that KSC not only intended to purchase the remaining shares of Daiei Olympic later in the year, but that it was also considering purchasing other clubs when they became available.

Clearly, the game-maker has become an enthusiastic fan of the fitness industry.

The Promise of People When Konami purchased People from the Mycal Corp. (a struggling supermarket chain), it did so for several reasons: its sense of the future opportunities inherent in fitness; its belief that its own games expertise could be applied to exercise to create new products; the strength of People, which had deftly surmounted the impediments posed by Japan’s economy for a decade; and the chain’s preeminent market position. At the time, People had 114 owned, 21 franchised, and 106 licensed facilities, more than 410,000 members, and a 26% market share.

For Konami, its first year as a member of the “club” was anything but easy. Japan’s economy remained in the doldrums, while developments elsewhere made circumstances even more demanding. The U.S. suffered the collapse of its high-tech sector, a recession, and terrorist attacks, and the European economy began to slow. As People had done for so long, KSC navigated the difficulties well, and, by the end of 2001, had much to show for its labors.

During the six months following acquisition, KSC produced net sales of $251 million and operating income of $28.5 million, and grew its core holdings to 119 owned and 30 franchised clubs. By January, its portfolio stood at 122 owned and 32 franchised facilities. The following month, its purchase of a controlling interest of Daiei Olympic from Daiei, Inc. (a debt-ridden retail giant), gave it an additional 63 units, pushing it well ahead of Central Sports Company, Ltd., the country’s second-largest chain. Its progress, against strong headwinds, can be credited to a number of factors, including: a steady hand at the wheel; a determination to maintain course; a strong instinct about consumer desires; handsome, beautifully appointed facilities; a commitment to both tradition and innovation; a firm grip on the youth market and growing appreciation of the seniors opportunity; and an invigorating interplay of new ideas between Konami and KSC.

Strong Growth in a Weak Economy Though it lost money in four years between 1989 and 1999, People managed, during the same period, to grow net sales from $174.7 million to $399.9 million (a 129% increase); ordinary income from $8.7 million to $39.1 million (plus 349%); net income from $4 million to $18 million (plus 350%); and owned facilities from 79 to 109 units (plus 38%) and franchised from 4 to 26 (plus 550%) Not bad given a national economy that seemed to have slipped, permanently, into neutral.

Former CEO Satoru Ishihara (now chairman of KSC) and his executive team were astute in recognizing the impact that a hard-driving, fast-paced lifestyle could have on business.

“We’ve imported a lot of successful programs,” Ishihara acknowledges. “We not only acquired the STEP from the U.S., and BodyPump and BodyAttack from Les Mills, in New Zealand, but we also distribute those programs. If there are good ideas out there -- we’ll certainly make use of them.”

“People was the first Japanese chain to introduce flexible operating hours to accommodate hectic schedules,” explains securities analyst Mike Morizumi. “Many Japanese employees have long commutes, and work long hours, and don’t get home until very late. People responded by extending its hours of operation from a 9 p.m. closing time until midnight, and, as a result, saw bottom-line benefits from incremental sales to late-night users.”

High Tech Management A new, streamlined corporate management system was introduced afer People was acquired by Konami, which reduced the number of directors from 13 to eight, and eliminated their responsibility for daily decision-making, conferring it on 15 appointed officers. Konami’s technological edge has made itself felt in a variety of ways. Club managers now communicate with KSC’s head office using state-of-the-art, information technology (IT) systems. Every weekday morning, members of the Konami group confer with one another via a digital-TV meeting. An electronic KSC bulletin board provides employees with information on a wide range of topics, from corporate policies to industry developments. And the company’s Website (www.
konamisports.com) has been upgraded dramatically.

Konami’s game expertise has also been put to good use. Its popular software, DDR (Dance Dance Revolution) has been adapted for use on treadmills and stairclimbers outfitted with video monitors, and a new exercise game has been introduced that combines aerobics, martial arts, and music, and allows players to battle a virtual opponent.

Lessons from 2001 Sales at its existing clubs fell short of projections in 2001, but KSC seems to have a firm understanding of the causes, and a game plan for doing better in 2002. According to Konami CEO Mamoru Ota, last year’s shortfall can be attributed to three factors:
1. A decline in swimming school memberships (the figure for children increased, but that for adults fell).
2. A drop in revenues at the Freizeit facilities (the clubs enjoyed an increase in revenues from membership andvisitors fees, but it didn’t offset a decrease in food and beverage sales).
3. The membership growth rate declined, particularly among younger people.

Game Plan for Growth KSC intends to improve on its performance this year by getting members to spend more on additional goods and services, and by increasing the ratio of members to visitors, who currently generate more than half of all club revenues. The company also plans to accelerate club openings and introduce new programs aggressively; to push services (e.g., the use of diving equipment) that generate nondues revenues; and to begin promoting the “health benefits” of exercise and other club activities, in much the same way that fitness facilities in the U.S. are already doing. An aging population is particularly sensitive to that message, and so, too, it appears, are a growing number of Japanese youth. “Young people are becoming more proactive about maintaining their health and appearance,” notes Morizumi. “For many of them, working out at the local health club has become an integral part of their lifestyle.”

Future Prospects
Twenty-five percent of the 3.1 million Japanese who belong to clubs today are over 50 years old, and, by 2010, that figure is expected to double. This demographic trend and the relatively untapped nature of the Japanese market, which has a penetration rate of just 2.3% versus 13.2% for the U.S, bodes well for the future of the Japanese health club industry.

Given People’s history and track record, Konami’s size, resources, expertise, and demonstrated acquisitiveness -- it seems clear that, for the foreseeable future, KSC will remain Japan’s largest, and one of its most dynamic, health and fitness companies. It also seems likely that, beyond that, it may well become a global powerhouse.

John R. Halbrooks is a contributing editor to CBI and can be reached at jrhalbrooks@juno.com.