Ray Algar looks at the emergence of the first true budget clubs in the UK, and considers what consequences they will have on the shape of the market

A swarm of low-costsI can vividly recall the discussion with the then-chief executive of Holmes Place. “I’ve put together an exciting deal for a purpose-designed club to form part of a new development in Newbury. The numbers are good; what do you think?”After reflecting, he replied: “We can’t open in Newbury; the town already has a private health club.” A few years ago, that was the unwritten market rule; the first to enter, won. Why waste resources competing? Let’s just find our own town. How quickly the rules of the game change. Now clubs stand side-by-side and compete hard, and not just small clubs. Some towns now have two £13m+ health and racquet clubs within a mile of each other. ‘If the town is good enough for them, it’s good enough for us’, became the new mantra, as chains rushed to build a national estate.

As competition intensified, one rule seemed to remain constant. Prosperous consumers joined the premium clubs, while those of moderate financial means frequented the ‘affordable’ private mid-mar-ket club or leisure centre. However, everyone is now well aware that the principle of neatly-defined homogeneous consumer segments is now in tur-moil, causing marketers sleepless nights. Promiscuous buying behaviour is everywhere, where shopping at Lidl now suggests, more ‘smart’ and ‘savvy’, than skint.

‘Geiz ist geil’ is how Hans Muench, european director for IHRSA (International Health, Racquet and Sportsclub Association) characterises German consumers attitude to low-cost purchasing. ‘Stingi-ness is cool’, is how it translates.

Insight Budget gyms

The first UK budget clubFitness First created an early generation ‘budget’ or low-cost club back in the early 90’s with a £29 per month membership positioned as ‘affordable fit-ness’. Core facility areas such as swimming pools, café bars and indoor tennis courts were stripped out to reduce capital and operating expenses and pass on lower prices. However, it was still clearly related to its more affluent and larger club cousin. Smaller, doing less, but still related.

Rainer Schaller, the entrepreneur and founder of McFit in Germany fundamentally changed the rules in the mid 1990’s, when he opened his first ‘no frills’ health club. At just 645 sq ft, equivalent to one squash court, it was now just a distant relative to what most people would recognise as a typical club. This first generation McFit club was a simple room above his family’s grocery business (he understood the Lidl/Aldi business models), with a modest col-lection of fitness equipment. The price to friends was Dm10 per month, about £4. This modest pilot has now grown into Germany’s largest club chain (by membership size) with 97 outlets, over 630,000 members and revenues of m100m (£79m). The present generation McFit club has grown a little and now occupies around 27,000 sq ft, filled to the brim with cardio-vascular and strength machines. The flat-rate membership now stands at m16.90 (£13.40) a month to access this super-sized gym.

What is a budget club?Presently, there is no official definition for a UK budget or low-cost health club, so here is mine:

l A price point at least 50% below the UK average. This means no more than £21 per month. Deloitte in Germany define low-cost at below £16.l Gym-only proposition. l Extended opening hours with a 24/7 aspiration.l Extensive use of technology and online joining.l Ability for a staff of one to operate entire club.

A new consumer propositionThe low-cost club utilises four simultaneous stra-tegic pathways to create a compelling new consumer proposition:l Reduce competitive factors that the industry normally competes on.l Eliminate entirely some aspects of the proposi-tion that are normally taken as given.l Create new and original features that consumers have not previously enjoyed.l Raise some aspects of the consumer proposition well above the industry norm.

The first two pathways are driving costs down, while the latter two are creating new consumer value. So, the low-cost club undertakes a quest to eliminate all non-core elements such as swimming pools, crèche, café bar, health/beauty, retail and studios. Only the ‘engine room’, the gym remains. Aligned to this is a philosophy of reduction, a zeal-ous approach to scaling back to synchronise efficiency and brand consistency. ‘Bring your own’ should be printed on the reverse of a low-cost mem-bership card. McFit takes cost reduction to its extreme. Eight members of its senior management team, including Schaller, live in a shared house.

8 Leisure Report l www.leisurereport.co.uk August 2008

August 2008 www.leisurereport.co.uk l Leisure Report 9

So, less becomes more. No need for reception desks, because reception staff have been eliminated, along with instructors, sales staff and layers of man-agement, replaced by one or two multi-skilled individuals ready to turn their hand to an array of operational scenarios. Once stripped back, the emphasis turns to adding new competitive factors that disrupt the industry norm and create new value. Self-service is applied everywhere, from join-ing/booking online to touch-screen terminals. The reward is dramatically low fees. FitSpace sells annual memberships for £12.50 per month, which is 70% lower than the national average price.

The trade-off, you may be thinking, is that low-cost clubs are situated on contaminated brownfield sites with panoramic views of the gas works, but they are not. FitSpace shares a prominent site in Bournemouth with Costa, and offers free parking. New UK entrants are targeting shopping centres and retail parks.

‘Do less, but do it well’ is another low-cost char-acteristic. Some new members turn up perhaps expecting home-grade exercise equipment thrown into a dirty room. Imagine their delight when they see wall-to-wall quality commercial grade equip-ment from Precor. Consequently, these clubs are attracting both the experienced, and first-timers.

They are attracted by the price and simplicity of the proposition. They like the low joining barriers (small joining fee, low price and short contract cancellation period). The result is that first-timers represent up to 50% of some low-cost clubs.

FitSpace has held the honour of being the UK’s only genuine budget club since the end of 2006. However, in June 2008 they were joined by the The Gym Limited, which opened a 24-hour budget club in the Blenheim Centre in Hounslow, Middlesex, a £220m mixed-use development. The 160-exercise station gym is £14.99 per month, with no contract. Funding is via Bridges Ventures, a venture capitalist with a social agenda, which has initially invested a first tranche of £1m into the project. Businesses that Bridges invests in must be located in the most deprived 25% of the UK and provide genuine social benefits to local residents. Bridges is enthusiastic

about the investment because it feels this new brand can bring less prosperous customers into the indus-try. The company says 40% of members at the Hounslow gym are first-time club members. How-ever, with a £14.99 commitment and no contract, the key challenge will be retaining them. Easy to join, easy to leave, does mean that low-cost clubs can suffer attrition rates higher than mid and pre-mium market clubs.

In September 2008 JJB Fitness Clubs enters the segment with their new MiFit budget brand with a £9.95 monthly membership (fixed until 2010), with a once-off £30 activation fee. Cardiff opens first, followed by a second in Reading. The company is collaborating with Technogym and using the Wellness ‘smart key’ System. The smart key allows club access, controls lockers and stores a member’s training and exercise history. Members can also track their progress online. MiFit clubs will be embedded inside JJB retail stores allowing operat-ing expenses to be kept super-lean and create a credit-crunching price point that was unthinkable 12-months ago. It is also 25% lower than McFit.

These low-cost chains have the ‘mid-market’ clubs in their sights. The competitive play used to be mid-market versus premium, with the former claiming they could offer ‘more for less’. The problem is these ‘affordable’ mid-market clubs with fees of £35-50 per month now look flabby.

Chris Ayres, managing director, Greens Health & Fitness, says: “Over time they [low-cost clubs] will gain share and there will be an impact on the mid market. Differentiation, and crucially differentia-tion valued by the customer, is the only defence’.

For several years, the mid-market clubs have been living off well-designed clubs that impress during the sales tour, but soon lose their charm as members settle into an exercise menu that rarely changes. What starts as waiter service quickly reverts to ‘help yourself ’. As these clubs have quietly moved from ‘advice included’ to a paid-for personal training model, they have left the door gaping for low-cost operators to move in. ‘Why pay for something you never get’ is the low-cost operator’s war-cry. So, they remove the things that aren’t used, and offer low, low prices.

So, will low-cost club operators sweep across the UK as they are doing in Europe and the US? Pres-ently, the UK has nine trading low-cost clubs that fit my definition. This should reach 20 by the end of 2008. Once the pilot centres have proven them-selves, then it is feasible for the low-cost players to quickly ramp-up sites by acquiring distressed sin-gle-site clubs. Independents still comprise 55% of the UK market. This is the clear strategy of one operator I spoke with. So, how many low-cost clubs could the UK have in five years? Deloitte research shows that 23% of German members belong to a low-cost club. If the UK follows a similar trajectory, then we could see at least 200 low-cost clubs by 2013, based on conservative annual rises in total membership to private clubs. Those remaining should set themselves a challenge. Create a clear and compelling business purpose and a passion to deliver a club experience that members will rave about. Ultimately, I believe it is all about a race to the highest purpose, and not to the lowest price.

Ray Algar, MBA, is managing director of Oxygen Consulting (oxygen-consulting.co.uk).

He can be contacted on +44 (0)1273 885 998 or ray@oxygen-consulting.co.uk.