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Tuesday
Mar072017

Reinventing a Heritage: The Sun Never Sets on Fitness First 

At one point in time, it was accurately noted that “The sun never sets on the British Empire.”

At another, much more recent point in time—2010, to be exact—the same also could be said for Fitness First, the health club chain that had been born as a single squash club in Bournemouth, Dorset, England, in 1993. Just 17 years later, it was a true global entity, with 78 facilities and more than 171,000 members in the U.K. alone, and a total of 360 clubs in 16 countries that served nearly one million members.

It was, arguably, the most recognizable club brand in the world.

But its domain had already begun to strain at the edges, and, bit by bit, shrink. Four years earlier, there had been 500 Fitness First facilities.

Like the British Empire, it had been subjected to all of the forces and unforeseeable developments of, in this case, mercantile history, including the strains involved in expansion, strategic missteps, increased competition, changing consumer tastes, financial crises, conflicts between corporate and members’ needs, and the gap between goals and results achieved.

Causes and Effects

“Perhaps one of the most significant strategic misjudgments was when Fitness First decided to remove salaried staff from the gym floor and replace them with self-employed personal trainers,” say Ray Algar, the managing director of Oxygen Consulting, a club consultancy based in Brighton, England. “The move was designed to reduce costs, but had the effect of signaling to members, and to the wider market, that shareholders’ interests were being put first.”

That perception, Algar suggests, made the brand vulnerable, since, by 2006, the U.K. was seeing the emergence of a new breed of “affordable fitness” options, inspired, in part, by the dramatic success of McFit in Germany. “Unknowingly,” says Algar, “management had been steadily turning Fitness First into an expensive, self-service experience that made the brand vulnerable to low-cost rivals.”

In 2010, in response to the growing pressure, the company embarked on a global sell-off. That year, Fitness First sold 57 clubs in Belgium, Luxembourg, and the Netherlands. And, in 2011, it divested an additional 45 clubs in France, Spain, and Italy. “That left its 80 German clubs as the only evidence of its once grand move to bring affordable fitness to European consumers,” notes Algar.

The same year, the company, grappling with a heavy debt load, suffered a damaging blow when it made an ill-fated attempt at an initial public offering (IPO).

“The proposed expansion didn’t materialize into fresh countries and continents as planned, and there was little investment in the existing property,” observes David Minton, the director of LeisureDB, a club market intelligence firm based in London. “With no growth story, the markets and the finance companies—which included more than 20 banks at the time—only saw a debt-for-equity swap option.”

Fitness First found itself forced to restructure via a company voluntary administration (CVA).

While the chain appeared to be floundering, it found a potential path out of the woods. In 2012, it was acquired
by two hedge funds, Marathon and Oaktree Capital Management, through a £550 million (approximately $800 million in 2012 dollars) debt-for-equity swap. The transaction absolved it of external debt, providing it with a chance to rebuild from a more advantageous position.

“Fitness First had encountered financial difficulties caused by an unmanageable debt burden, rather than a decline in its business performance,” says Martin Seibold, now the managing director of Fitness First UK, which is based in Poole, Dorset, England. “As a result, the business transitioned to new owners and was restructured. The CVA, which might have appeared to be a negative at first, resulted in Fitness First being debt- free and well financed. This enabled us to transform its business and brand into what they are today.”

Seibold, who began his industry career as an IHRSA intern, joined Fitness First in 2004 as the managing director of its German operations, and subsequently served in a number of executive positions, becoming chief operating officer of its U.K. holdings in 2011.

Though it wasn’t obvious at the time, Fitness First UK was setting out on a journey that, last August, would result in its becoming an independent business.

From Slide to Success

With Marathon and Oaktree as its new owners, Fitness First went through an “optimization,” taking a deep dive into reinventing what it was all about. The goal for its U.K estate, Seibold explains, was to demonstrate “the real value of a supported, variety-packed gym membership” both to shareholders and members—not an easy task given still-intensifying competition, particularly from the high- volume/low-price (HVLP) sector.

But the U.K. division did transition.

“We’ve reengineered the entire business to ensure that our members are at the heart of everything we do,” Seibold told CBI last year. “We’ve upgraded our facilities, reinvented our training options, and harnessed technology.”

The changes included removing turnstiles, improving seating areas, and introducing key touchpoints for the modern gym-goer, such as cool-down showers, instructional iPoint touchscreens, and, of course, free WiFi. It also revamped its programming, working with the TEAM GB Olympic team to develop several advanced exercise programs, such as its BEAT heart-rate-based training and its MOVE immersive studio.

“In addition,” Seibold pointed out, “we developed CustomFit, a Fitness First app that allows members to take full control of their training with anytime/anywhere support.”

Perhaps the core of the optimization was a strenuous rationalization.

Between 2012 and 2016, Fitness First streamlined its U.K. presence from more than 150 to approximately 50 facilities. The goal, says Seibold, was to retain and strengthen successful locations that meshed with its upper middle-market position. “London and the South East are the wealthiest parts of the U.K., with all of the demo- graphic and wealth metrics trending positive,” he reports. “The business and residential property markets remain solid, creating a naturally high barrier to entry, and making it difficult, in particular, for HV/LP operators.”

After five years of decline, Fitness First has seen two straight years of revenue growth, as well as three years of bottom-line growth.

“The proportion of ex-members rejoining each month is at its highest level ever, and our net promoter score (NPS) has shifted by 36 points. ... This is clearly a sign that our primary objectives—of enhancing our position both in the marketplace and in the eyes of the consumer have been met,” Seibold suggests.

A Second Act

While Fitness First’s global operations remained problematic, some were observing the turnaround of its U.K. arm with interest. Among them was Dave Whelan, a former U.K. soccer star who had founded Dave Whelan Sports Limited (DW Sports Fitness) in 2009. The company’s unique portfolio included 78 DW Fitness brand gyms, and 89 DW Sports retail stores, 48 of which were co-located with the clubs.

In 2012, to drive growth, DW Sports had partnered with Intersports, the world’s leading sporting goods retailer, to increase its profile and buying power, and the initiative yielded results. Over the past two years, DW Sports has opened 18 retail stores, bringing its total to 90, and making it the third-largest sports retailer in the U.K.

But the fitness side of the business had lagged. A DW Fitness club opening in Bristol late last year was its first in nearly three years.

“In the past few years ... the emphasis for growth was firmly on retail, as we felt we’d found a winning formula,” explains Scott Best, the director of DW Sports. “Having focused in recent years on retail, the fitness side had fallen behind.”

Turning its attention to fitness, DW Sports recognized a promising opportunity in Fitness First U.K. “We saw the value in what Fitness First had built over the past few years,” says Best.

Last August, DW Sports acquired the Fitness First UK clubs for £70 million (approximately $85 million).

The remainder of Fitness First’s operations—in Germany, Australia, and Asia—have been, or are being, sold off separately by Marathon and Oaktree.

“The Fitness First acquisition has switched our focus back to fitness,” notes Best. “The addition of the Fitness First clubs to the DW Fitness footprint in the Midlands and in the North of the U.K, couldn’t be a better fit. It means stronger operations across the U.K., and a more powerful presence in London, too. Fifty-two clubs are already being refurbished or are in the process of being upgraded and modernized, and of course, we’re making use of what we’ve learned from Fitness First’s programs.”

A New Game Plan

Going forward, the plan is to run the two brands as standalone companies, with DW Sports Fitness as the parent company and Fitness First as a sub-brand. At the same time, the two will explore likely synergies with respect to everything from operations, to programming, to technology, to market share growth.

One especially promising area has to do with introducing Fitness First into DW Sport’s retail universe.

The company is reviewing embedded best practices, tapping the skillsets of both of its teams—for instance, in finance and information technology (IT)—to its advantage wherever appropriate. It intends to standardize programming, adopting Fitness First’s proprietary, 12-program Signature Training Concepts curriculum; update equipment; add pools and more training space to its existing London facilities; and increase digital options with new apps and e-commerce capabilities. A new customer relationship management (CRM) system features a powerful app that will let members use their mobile devices to book and manage classes, interact with friends, and download workout advice and live-streamed group exercise classes.

“Mid-2017 also will entail a new website approach that combines fitness with retail, helping us to harness the purchasing power of our combined 350,000-plus members,” says Best. “Recently, when we offered Fitness First members a 10% discount to shop at DW Sports online, it proved to be a real success.

“On average,” he explains, “a London-based Fitness First member spends £275 ($341) a year on sports apparel, and a Midlands/North-based DW Fitness member spends £175 ($217). This has attracted the big sports brands to our unique demographic—that of gym users with high purchasing power.”

One particular focus for growth is the London market where, Seibold points out, the company’s versatile model and club network give it a distinct advantage over the competition. “We believe we can double our inner-city London presence to 50 facilities,” he says, “but we’re in no hurry. That’s the beauty of being privately owned. In the world of private equity, the emphasis is on the short- term return on investment; in the private sector, it’s on building a sustainable, long-term business model.”

The dedication of the Whelan family, the expertise of the two firms’ team, a portfolio of well-invested clubs, and low financial liabilities, he believes, “give us the fuel for becoming the best.

“Our priority, though,” he continues, “remains positioning our teams at the forefront of our service strategy. ... They’re critical to communicating our core philosophy: DW Fitness and Fitness First no longer intend to just be gyms. They’re committed to providing a supported lifestyle offering.”

Unlimited Potential

Certainly, Fitness First has gone through a great deal of change, but, unlike other brands, it hasn’t turned into something that’s unrecognizable—its upscale heritage remains unchanged.

“For the past decade, Fitness First has been working to redefine its everyday mission,” says Algar. “When it launched in 1993, it embarked on a heroic mission to democratize fitness, allowing U.K. consumers to experience a private health club experience for the very first time. Over time and under new owners, its focus shifted from providing a remarkable member experience to international growth.” That, he observes, was a serious strategic misstep.

“The future narrative for Fitness First,” he suggests, “is about becoming a better, more remarkable brand, rather than one of the biggest chains. The company, still an iconic brand, has been reporting that former members have begun to return and that its global Net Promoter Score has been rising—those are good signs.”

Minton feels that the DW Sports hybrid model may be the perfect vehicle to drive the Fitness First brand forward, and cites a number of examples of other retail/ fitness alliances: Debbie Moore, the founder of the Pine- apple Dance Studios and an associated clothing brand; Sweaty Betty, an active wear retailer that offers in-store classes and outdoor runs; Reebook, which has created FitHubs, and developed links with CrossFit, Les Mills, and GymBox; and Nike+ Run Club and Nike+ Training Club, which forge links into the community from their shops.

“In addition to DW Fitness, two other main retail brands have moved into fitness,” notes Minton. “Sports Direct Fitness, with 30 club sites, and JD Fitness, with 10 open.

“Retailing and fitness create great synergies, and the potential is limitless.”