The Gym Group

The Gym Group launched their first site in 2008 and have grown their portfolio to just under 100 gyms across the UK following their floatation at the start of 2016. The business runs a chain of low cost 24-hour gyms which, through the use of technology, require significantly less staff and hence lower cost base the traditional gyms. The company is experienced in finding good sites and installing a proven gym format.

Their plan is to expand at between 15 and 20 sites per year, funded via internal cash flow. Management have identified the most important factors to consumers are price and location. They have therefore built a strategy of settling up multiple gyms in each major city in the UK at a low cost. Management state their competitive edge is their gym formula (the right mix of equipment), location (proximity to shopping locations/transport hubs) and their price point (they charge an average of £14 vs the industry standard of £40 – £60 per month).

Low cost gyms were first established in the US in the early 2000’s. Their popularity has only increased since as they have stolen market share from the traditionally more expensive gyms and public sector gyms. Overall, the UK gym market has grown consistently by 5% pa over the last 5 years. Within this, low cost gyms seem to have gained market share from almost zero to circa 20% of the market, in terms of memberships. One of the main structural drivers of the increase use of low cost gyms is the obesity rate. According to the NHS, two thirds of the UK’s population is overweight or obese. This ranks it as the 6th worst country for weight issues within OECD countries.

Typically a gym costs circa £1.4m to build. At opening, each gym on average has between 2,000 and 3,000 members. This is because they offer the first 200 membership for £5 and the next 3,000 memberships for £13 a month (this pricing structure varies by location). Annual operating costs have averaged £550k before depreciation & amortisation. On a monthly basis, each gym is on average EBITDA breakeven from 2 months after opening. As the gyms mature, each site tends to reach a capacity of about 5,000 members who pay on average £16.67 per month, meaning the average gym’s revenues increase from £500k in Y1 to £1m in YR3. Due to natural churn in memberships and the staggered price increases you tend to see a gym’s economics become predictably more attractive with time.

As you can see from the above, the revenue and operating profit per gym increase as a site mature. This is because the revenue per member increases with time and the refurbishment and maintenance costs decrease with time. Although intuitively you would expect refurbishment and maintenance costs to increase over time, management say the opposite is true once you take into account opening and initial build costs.

Middleton Enterprises think this is a good business with a very predictable growth story due to their great operational abilities and the strong structural driver behind it. It does have a competitive edge currently in terms of its ability to select good performing sites and it seems to have the recipe right in terms of the store layout. This is something only one other competitor appears to have cracked, based on their expansion rates. Its growing size will allow it better terms on gym equipment with increasing buying power and negotiate better terms on their leases.

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