19 October 2016

How budget gyms are muscling out Fitness First and Virgin Active

The relentless cost-cutters that are clobbering Virgin Active and Fitness First.

At first glance, something doesn’t quite add up. More people are taking an interest in fitness than ever, the UK gym market is growing faster than anywhere in Europe and yet, the two most dominant firms, Fitness First and Virgin Active, closed more clubs than they opened in the past year and are shedding members.

It’s come as the low-cost gym sector has gone from virtually non-existent to having more than a million members in the space of just eight years. Budget gyms are scaring the living daylights out of Virgin and Fitness First, which hold an increasingly precarious-looking 13 per cent share of the market.

German success

In Germany the warning signs were there for all to see in the form of Berlin-based runaway success, McFit, Europe’s biggest gym operator by some distance. Just under 1.4 million, mostly German members have signed up since it launched in 1997, paying a £16 monthly fee.

Two British upstarts studied McFit less than a decade ago with one question: ‘Why wouldn’t it work in the UK?’ One of them, Pure Gym, devised and executed a concept so successfully that it’s already got the most clubs and members in the UK and is the seventh biggest gym operator in Europe with an annual income of £170m. A few weeks later, it announced plans for an IPO. The other, The Gym Group, which launched a year prior to Pure Gym, floated last November, being valued at £250m and giving its VC backer a sixfold return on its initial investment.

Pain and panic

As a direct consequence of these two budget operators, launched in the eye of a recession, Virgin and Fitness First have been in a state of pain and panic. Across sectors, there’s a general feeling that being positioned in the mid market in the modern era leaves even the most seemingly well-fortified companies prone to sudden and severe disruption from well-focused startups.

The success of both Pure Gym and The Gym Group came from analysing the model of Virgin and Fitness First (and, to a lesser extent, David Lloyd) and mercilessly going after the two mid market incumbents with an offer to consumers that was markedly cheaper. They attacked two points of weakness they believed left Virgin and Fitness First exposed: doing away with 12-month commitments and ripping out costs they felt most customers didn’t care about (staff, spa facilities, cafes and swimming pools – apparently only five per cent of members use a pool).

Both offered rolling contracts and day passes with a chance to cancel at any time, and monthly memberships between £10 and £20. Virgin and Fitness First meanwhile were demanding people sign up to fixed year-long agreements for fees that varied between £50 and £80 a month.

Cheap space

The Gym Group and Pure Gym went about providing a surplus of gym equipment but virtually everything else was jettisoned, relentlessly cutting costs while outsourcing everything they could. Both took advantage of the post-2008 crash climate, when cheap commercial space was up for grabs. Old banks, space on retail parks, former Woolworths stores and even bingo sites hit by the smoking ban were snapped up.

The Gym Group’s first site was in the London suburb of Hounslow where its £10 membership proved a hit, and its 24-hour policy enticed local cab drivers and shift workers.

Pure Gym meanwhile raised investment from Barclays in 2012 and was then sold to a private equity firm in 2013 when it had 60 sites. It began adding sites incessently and last year bought LA Fitness. It had 84 clubs in 2014 and 156 by 2015. Adding a frankly incredible 260,000 members in just 12 months to 2015 – a 62 per cent jump – it’s made it the fastest growing gym company in Europe.

Ceding to insurgents

Virgin and Fitness First have appeared to effectively cede the space to the insurgents in the face of this competition, investing instead in more expensive gyms under premium sub-brands. In June this year, Virgin offloaded 35 clubs – a third of its portfolio – to the not-for-profit Nuffield Health for £80m. Neither firm has abandoned 12-month contracts, believing the cashflow impact would be too devastating.

Offering stark evidence of Pure Gym and The Gym Group’s rapid ascent and market clout, they ditched their plan to merge in 2014 after the competition regulator began reviewing the deal.

Both have plans to expand in Europe – especially eastern Europe – perhaps even going up against McFit, the very company that inspired their remarkable growth.

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