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Everyone's talking about...: Attracting investors
The health and fitness industry has weathered a run of recessions. Now the economic climate is looking brighter, what should operators be doing to catch the attention of investors?
Two years ago, when we ran a feature about investor relations, the overall picture wasn’t very uplifting (see HCM June 12, p30). The UK was in the midst of a recession, the fitness sector was receiving negative press about contracts, Fitness First had run into financial difficulties and local authorities were implementing budget cuts.
But as the recession bit, there wasn’t in fact the mass cancellation of memberships that had been predicted, which earned the sector some credibility.
In addition, as predicted in 2012, the low-cost chains emerged strongly. While mid-market clubs ran into well-reported problems, the budget chains worked hard to create a niche for themselves, based not least on listening to consumers’ desire for value and distaste for contracts.
And now, after a long and miserable recession, the outlook is more positive. The economy is doing better, with house prices rising again, along with consumer confidence. There’s a buzz in the fitness sector too: Fitness First has come through its restructuring, new clubs are being built, and while the low-cost sector has driven the growth of the industry, premium microgyms are also popping up all over London.
Added to this, we’re seeing some old faces – such as Allan Fisher, David Turner and Mike Balfour, who all founded chains in the past – back in the industry.
Against this backdrop, a number of operators have attracted new investors, among them David Lloyd Leisure, The Gym Group and Xercise4Less. Meanwhile payasugym has also received an initial £250,000 funding from Albion Ventures.
So what does this mean? Are the bad times behind us? Is the current buzz sustainable? And are investors starting to take another look at the health and fitness sector?
In fact Nicholas Batram, travel and leisure analyst at Peel Hunt, says the sector is not particularly on the City’s radar at the moment, because there aren’t any listed companies. So how do we gain the attention of potential investors? We ask the experts....
How can club operators attract potential investors? Email us: [email protected]
Nigel Bland,
Partner,
Deloitte Corporate Finance
“Growth is cyclical, so now should be a good time to invest in the health and fitness sector, with the next three to four years looking promising.
Budget gyms are still flavour of the month, offering substantial market growth and attracting new members to the sector. The mid and upper markets are more difficult and operators need to convince investors they have a case for growth: not just rolling out, but looking for ways to segment, differentiate and originate new products.
Despite predictions, the sector has held up well in terms of membership during the recession. Now the economy is growing, I don’t think memberships will necessarily grow much faster, but I do think people will be prepared to pay more if the service is good enough, so this should be a focus.
The balance sheet for the sector is generally looking healthier now. Some businesses ran into difficulties, but after restructuring most are now out the other side – but they will need to prove strong management to attract backing.
The general direction of travel should be easier now, with people better off. The demand for health and fitness will not go away, especially with the obesity issue, so the industry could do well if it can offer a solution to this problem.”
Christoph Ruedig,
Investment director ,
Albion Ventures
“When we assess whether or not a company is investable, we look at three areas: the management, the product and the market. We only back first rate management; the product has to be clearly differentiated, offering clear benefits to customers and stakeholders, and the market has to be stable, with a growing customer base and predictable revenues.
In the fitness sector, the old model of just opening a gym and hoping people will join is no longer working. The market is saturated and there has been a lot of erosion by budget gyms.
Companies that want to grow have to innovate – for example, with new fitness concepts and class franchising with well-known brands. However, innovation also brings about creative destruction, by threatening established players and creating more pressure to keep changing.
The UK fitness sector doesn’t offer a lot of growth, which will be driven mainly by new product offerings and business models: lots of chains are looking outside the UK for growth.
Albion Ventures invested in payasugym as it’s an innovative company. Its online gym directory and pay-as-you-go business model target less frequent gym users and ensure they receive good value for money.”
Nicholas Batram,
Travel and leisure analyst ,
Peel Hunt
“The main concern in the City regarding the health and fitness sector was that membership might drop off during the recession, if people saw membership as a luxury or discretionary. But as in the US, this didn’t happen. What actually happened was that usage increased. The industry has done well in a difficult time when consumers haven’t had much money.
The test will come when someone wants to come to market. There’s some negative history – it didn’t end well in the City for Holmes Place. However, with the right company and the right valuation, the market could be open. There’s been press speculation surrounding Virgin Active: the company has performed impressively over a long period of time. Equally, growth opportunities in the budget sector look exciting.
Technology – devices like Jawbones and Fitbugs – are also an interesting trend, and it’s good the fitness sector has embraced this rather than seeing it as a threat in the way the retail industry did. I think the industry needs to find ways to use technology in an innovative way to mobilise those who are inactive. While the government wants a healthier society, there’s opportunity at both ends of the market to find ways to engage the inactive population. I think technology could play a key role here.”
Neil Harmsworth,
Co-founder,
payasugym
“To attract investment, the industry needs to demonstrate that it’s a growth sector. The rise of budget gyms has created growth by widening the target audience, but this sector will quickly mature in UK, as it has done in other regions.
Now the industry has to focus on delivering the next growth opportunity, by looking for innovative solutions to engage new audiences and showing there’s a real possibility of moving from 12 or 13 per cent population engagement to 25 per cent.
Market conditions are good, the investment market is moving into a strong period and customer disposable cash is increasing. If the sector can find a new way of engaging customers, there’s an opportunity to capture a proportion of disposable cash and ensure it’s dedicated to fitness.
Outside the budget sector, I expect little to happen in terms of investment. The first stage is for the leaders in the fitness industry to trial and test new models to demonstrate growth. Learning from other industries will be critical: a stagnant car rental market grew through the innovation of Streetcar/Zipcar, and the hotel market through AirBnB. Once business plans can be created, demonstrating a clear path to growth, then investment will follow.”
