The global fitness industry is projected to reach $99.9 billion in revenues in 2019, up from an estimated $94 billion the prior year. Industry participants are confident this growth will accelerate and will continue to invest in the space and grow their brands. To do that, fitness companies won’t have any hesitations about further leasing more real estate to expand their footprints, despite the threat of a looming recession. The sector is that strong, but certain segments of the market should stay vigilant.

Luxury brands, such as Equinox, are setting the bar and will lead a shift to more brick-and-mortar investments that’ll attract more consumers. But much of the disruption will come from the high-value, low-price (HVLP) space, which has until now been made up of 15,000-square-foot clubs that offer weights and cardio for $9 to $19 a month.

HVLP 2.0 will see expanded clubs, of 20,000 to 25,000 square feet, with more amenities – including personal training – that are similar to legacy fitness brands but at a third or half the price. The tiers and fitness offering in HVLP 2.0 are evolving because of the demand for classes and fitness programming. These clubs have flexibility because of their previously sparse offerings, so it’s possible for them to add a kids’ club, more women-focused studios, a salt room, or a recovery room. These add-ons could justify a membership price increase.

Who’s Running for the Lead?

Of course, this expansion will require more space, so HVLPs will look to significantly grab real estate where value is evident. And thanks to Amazon’s effect on retail, we have seen the real estate market for the past 18 months become more forgiving, with more space available and landlords more flexible with tenant improvement allowances and terms. Free rent on the front end – makes it easier and more affordable for club franchisees, who are driving growth in the space.

HVLPs have maintained a large volume of the fitness space. Planet Fitness is clearly the category killer there and remains in terrific shape to dominate that space, with Crunch following behind. Crunch has great recognition and the potential to grow. There’s rising competition, however, with at least 15 private-equity-backed operators, as of 2018, competing for a share of the HVLP market, according to Piper Jaffray. It’s easier to break into the 2.0 space, whether through buying a brand and trying to expand it or starting one, than to go up against a pure HVLP like Planet Fitness, where new competitors don’t have the same exposure from a marketing standpoint.

The luxury brands, meanwhile, continue to perform. Whether it’s market leader LA Fitness, runners-up Life Time, Equinox, or The Bay Club, they know where they can go. They know the demographics they need to appeal to. They know where they can steal market share. They’re not concerned about other brands.

Fighting for the Middle

The mid-market is seeing flat or slightly negative growth, depending on the brand. The mid-market clubs will continue to be challenged and redefine themselves. It’s starting to happen already with Town Sports International making moves and 24 Hour Fitness changing its operating model. These companies are trying to figure out how to capture more market share from their existing membership base without necessarily growing externally.

Emerging competitors include clubs that focus on high-intensity interval training, such as Orangetheory and F45, or boxing, including 30 Minute Hit. They each have different growth strategies, but all work, with price points that are insulated from urban pricing of $300 to $450 a month. Some smaller players, including EōS, The Edge, and Chuze Fitness, will expand but at a slower pace when compared to Planet Fitness, which wants to double its current footprint of 2,000 clubs. This white space will slowly, from a real estate standpoint, fill in.

There are also opportunities for brands in the space between luxury and the mid-market, which have to price themselves at neither $30 to $45 a month nor at over $125. One example is Canada-based Movati Athletic, which has around 15 locations. Its positioning is performing extremely well for the company.

Rough Terrain Ahead?

The big question for 2020 is what happens if there’s an economic downturn. While luxury brands will see their core members stay, they will see a significant downward shift in add-on amenities, whether it’s personal training or spa services. While these might only make up a portion of margins, dues and membership are closer to 90%, so it’s not as much as a concern. These brands have done a great job of making themselves lifestyle brands, so their members won’t give them up, even in a downturn.

But some urban boutique studios may be under duress when the economy takes a bit of a slide. We’re already seeing boutique studios struggling to figure out how to have their EBITDA (earnings before interest, tax, depreciation, and amortization) in a positive state and how to make sure their margins and occupancy are in balance with their revenues. The middle market will get destroyed in terms of services, because while members might hold on to a $40 fee, they won’t continue to pay up to $200 a month for services or training.

To protect their dues during a downturn, clubs will likely make attractive offers to consumers, such as first and last month free, three months free, or no enrollment fees. They may even have to offer zero-commitment memberships because competitors will put out more favorable offers as well. That will be painful. If they were selling 200 memberships a month, now they’ll be selling 180 but at lower margins.

But high member fees aren’t a concern for HVLPs, insulating them from economic downturns. With their staying power and growth potential, HVLPs are ready to go the extra mile in 2020.

---

About the Author
David Fowler is an Independent Consultant for Integrity Square and has 30 years of executive leadership in hospitality and fitness. He is currently Operating Executive for Integrity Square where we he assists several clients with boutique studios, luxury brands, sporting club, and high volume low-cost models.

---

This article is adapted from the GLG Teleconference, Fitness Industry Outlook for 2020. If you would like access to this teleconference or would like to speak with David, or any of our more than 700,000 experts, contact us.