Working Out the New Normal for the Gym Industry
A 2019 survey counted 39,570 health and fitness clubs in the United States. Those clubs served 71.5 million consumers, which translates to about one in five Americans belonging to at least one U.S. health club or studio. In 2020, this booming industry was brought to a near total halt by COVID-19. While some gyms have eked out some profits by transitioning to virtual solutions, others have faltered. GLG talked to Frank Napolitano, former President at 24 Hour Fitness, to understand the challenges and opportunities facing the gym industry today. This interview was shortened and edited for clarity.
Could you talk through the short- and long-term impact you see for the gym industry from COVID-19?
The short-term impact is obvious. Gyms were among the first to be closed by local and state governments, and they are among the last to reopen. Consequently, virtually every gym player in the world, and certainly all of them in the United States, have had to close for three to four months.
Gyms are a recurring revenue business, which means they likely don’t carry extensive cash on the balance sheet to get them through six or eight months of zero revenue. Cash has been in short supply with a lot of businesses in the industry, and in many cases, it has forced the weaker players to seek protection from the bankruptcy courts.
Long term, the question is: What will the gym industry look like now? Can operators adapt to this new environment? Upon reopening, gyms are subject to a significant number of regulations that will make their operations quite different than they were before closing. The regulations that have been promulgated are primarily focused on the density of customers – limiting the number of people in the exercise space at any given time.
Right now, that density varies a great deal from country to country and state to state. But I’d say, on average, most regulating bodies are asking or requiring that there be no more than one exerciser per 100 square feet of space at any time in the gym. That’s a fundamental change of significant proportions, especially for gyms with smaller footprints.
What are some of the biggest investment themes coming up in fitness, and how have they shifted as a result of COVID-19?
I think the smart money says that COVID-19 didn’t really cause anything new to happen. Rather, it accelerated things that were already happening. Before the pandemic, investment themes in the fitness industry surrounded how to merge the brick-and-mortar experience with the digital experience so you can surround a customer with your brand 24/7. So, when COVID-19 really shut down the brick-and-mortar element, anyone who was already working on those programs launched them – sometimes before they were ready. These technology-based products allow their members to exercise even if they aren’t in the gym. That investment theme will continue. You’ll see further integration of the digital and physical experience that was already very much in evidence before COVID-19.
How do you think the pandemic has affected consumer habits and patterns?
Years of industry research have made it clear that consumers of fitness are by nature “snackers.” In normal times, people like their gym memberships, but they also like to do different kinds of exercise. The pandemic forced people into the modalities available to them: exercise outdoors or virtually in their homes.
For people with large homes, virtual in the home was fairly simple. You could pipe digital programming to your large-screen TV. This is more of a challenge for people in apartments of small homes, so they tend to go outside. In the short term, the pandemic drove people toward these options, but I don’t see it as a driver for long-term change. Alternative solutions have always been there. The outdoors have always been there; Jane Fonda put out her first exercise program for the home decades ago. These have always co-existed because people are social creatures and want to exercise in a social environment. They want what we call multimodality exercise, which is most easily done either in a gym or a boutique.
How should we be thinking about consumer habits amid an economic downturn or recession?
This is my 36th year in the fitness industry. We’ve seen epidemics and pandemics. We’ve seen recessions. This is the first time they’ve coincided. So it’s hard to predict what people’s habits will be. However, historically, when you think about economic downturns, the gym industry could be one of the more resilient businesses. It’s one of the cheapest diversions you can have. If you’re unemployed and you can muster the $25 or $30 it takes for a membership, you can occupy yourself every day doing something that’s good for you.
That said, one of the most common things that happens is people trade down. So people who were spending maybe more than $200 a month on their exercise habits will modulate down to a single membership in a higher-end gym at maybe $60 or $80 a month. And the $60- or $80-a-month people will move down to the $40s, and so on.
Sometimes, when customers trade down, they realize their new solution meets their needs and they don’t upscale again. More commonly, they trade down in times of economic struggle and then go back to what made them economically and emotionally happy when they can afford to do that.
How is a potential second-wave return of the virus in the fall affecting how consumers are thinking about these decisions?
Right now, we’re seeing variations in terms of geography. In the center of the country, which was not hit hard at the beginning of COVID-19 but now is experiencing many cases, people continue to say, “Hey, this is no big deal.” If you don’t know somebody who’s gotten really sick, you tend not to believe it’s a big problem. On the coasts, where people probably do know someone who got really sick, I think people are acting differently.
For larger companies though – or even larger franchise operators – where you’re aggregating this up to a national level, the slow reopening has caused a lot of membership freezes. I don’t think a reprise of COVID-19 would mean that governments will shut down like they did the first time; the consequences are too catastrophic. But a second wave will likely impact a person’s willingness to go to the gym, which means more freezes.
Can you describe the supply-and-demand labor dynamics you’re seeing right now?
Front-line gym employees don’t make a lot of money. Everybody assumed you could furlough them, and they’d all come back because “Where were they going to go?” But the additional unemployment compensation that was made available, which is well-intentioned and probably saved a lot of people’s lives, has also resulted in employees asking themselves a logical question: “Why would I go back and put myself in harm’s way to make less than I’m making while I’m on unemployment compensation?” As a result, it’s been challenging for a lot of operators to staff up to the levels that they need to run their gyms.
We’ve also seen that trainers and exercise instructors, when faced with making no money, have tried to find other ways to do that. There’s been a proliferation of mobile applications and an aggressive use of media, like Zoom. People are getting paid for providing a service digitally that they used to provide face-to-face. Many people have been very successful at this – they’re never coming back.
Though unemployment is high, there will be significant challenge here, at least until the end of July, when the supplemental unemployment compensation disappears. Then you’ll likely see people clocking back in. But in the meantime, it’s going to raise wage rates across the board. And, of course, that’s yet another cost pressure gyms will face.
About Frank Napolitano
Frank Napolitano recently retired after almost six years as the President of 24 Hour Fitness USA, Inc. Frank is the Co-Founder and Chairman of several companies in the fitness and related verticals, including Black Dog Partners, LLC; Wexer Virtual; HealthFit, Inc.; and Club Realty Group, Inc. He had been actively involved in the fitness industry since 1984 and served as Chairman of its international association, IHRSA. From 2000 through 2006, he led the strategy and technology groups at Town Sports International. During that period, it grew from ~40 clubs to 140. He then served as the CEO and Executive Chairman for GlobalFit from 2006 until 2012. In 2014, he organized the acquisition of 24 Hour Fitness as an operating partner of Fitness Capital Partners and was asked to lead as the President until his retirement.
This article is adapted from the June 26, 2020, GLG teleconference “Growth Potential for Gyms amid Challenges.” If you would like access to this teleconference or would like to speak with Frank Napolitano, or any of our more than 700,000 experts, contact us.
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