What were your first impressions of the fitness sector when you joined the Gym Group in April 2014?
In fact I first became involved in the sector before I joined the Gym Group. This was the middle of 2013, as a partner at Phoenix, who invested to acquire a majority stake in The Gym Group.
I was surprised by how ‘small’ the sector felt, as well as by the lack of diversity of experience, particularly among middle and senior management across the major players. However, I was drawn to the enthusiasm and willingness to think differently of the younger generation, particularly the guys at the coal-face.
What are your impressions of the sector now, on leaving it?
New investors have brought investment, not only in new infrastructure but also by drawing in new people from outside the sector. These people are bringing skills and thinking from other, more advanced customer product and service industries.
But there’s still a long way to go: there still seems to be a lot of ‘not invented here’ syndrome, ‘tried that’ and ‘it’ll never work’ and it’s getting in the way of progress.
What have been the big changes in the fitness sector in the last few years?
The establishment of a scaled-up low-cost segment, as well as the after-shock of the 2008 recession, has forced people to think differently. Burning platforms and in-flows of new money always brings about change. Adapt or die, I guess.
The major change has been the annihilation of the mid-market. It’s all but complete now, and that has to be a good thing since many of the assets were poor, the product tired and lacking relevance to the mass market it once owned.
We’re also seeing material new investment in technology to deliver a digital component to the physical experience. In the long-run this is a good thing for the consumer, but the digital ecosystem is ostensibly chaotic and in the short-term there’s questionable value to the customer from a lot of the early offerings. There are some interesting new niche products in play, but I’m not sure many will scale effectively.
Finally, the low-cost sector is growing up; it was the upstart and now enjoys incumbent status. That’s both an opportunity and a threat for these operators.
What do you think the sector currently does well, and what does it need to do better?
I think the sector generally does a reasonable job at defining its offering, and at marketing that product simply to the mass market.
But there are two fronts where the sector can and must improve massively, and this is where the winners and losers will begin to be defined. The first is the quality of customer service, in its widest possible sense, which at a sector level is typically poor and far too inconsistent. The second is in truly understanding individual customer needs and wants and then exploiting that insight to tailor the experience differently.
What are the opportunities for the sector if it manages to do these things better?
Assuming that access to fitness facilities becomes ubiquitous (it’s not yet, but the roll-out of the larger players will make that broadly true within a few years), then the upsides to the sector will be twofold. Firstly, there should be a material increase in market penetration – a rising tide that should float all boats. Second, the players that succeed in delivering more tailored, relevant and individual experiences will see increases in capacity utilisation, in tenure and in yield.
And what are the biggest challenges standing in the way of achieving this?
Delivering good and consistent customer service in this industry is hard, requiring serious investment in training and strong operational leadership. But any operators that fail to understand and focus on this are at risk of being left behind, as consumers’ expectations are only rising.
The major barriers to developing the (digital) product experience are that we still need to get the right technology platforms in place, we need to generate high quality customer data, and we must develop an ability to derive actionable insight from it in near real-time.
You have an investor background – what’s your take on the fitness sector in this context?
A lot of new capital has flowed into the sector over the last few years, much of it remaining unspent. Like many industries, this new capital has essentially funded an industry-level transformation: replacement of tired assets and investment in technology enablement.
Clearly this process is incomplete, but the wiser investors who back the winners will have secured – and will continue to secure – excellent returns on their investments.
Unfortunately, not all the capital has been deployed with equal care and wisdom, so for sure there will be losers too. Consolidation is inevitable, but the market will likely remain quite fragmented.
The Gym Group and BasicFit’s apparently high price/earnings ratios have driven quite unrealistic price expectations in the minds of many shareholders of much smaller operations who are now looking to monetise. Many will be very disappointed.
What, for you, is the most exciting thing about the fitness sector at the moment?
I’m excited by the prospect of technology facilitating data-driven, personalised digital content to fundamentally improve the customer experience. The smarter players are investing in this, and I think goal-based and outcome-orientated propositions are close at hand. These will leverage the bricks-and-mortar assets through a variety of digital channels.
But to be successful, these investments need to be underpinned by real insight and not led by the technology or technologists. Focusing on human behavioural science and exercise physiology is at least as important as focusing on the technology platforms, and some of the early forays that I’ve seen in this domain are going to fail because they haven’t really grasped this simple truth.
And is there anything that frustrates you about the sector?
I continue to be surprised by the lack of human interaction and business skills exhibited by quite a lot of personal trainers. Clearly this holds them back, but it ultimately holds back the sector and militates against the development of a true customer-centric philosophy. Enlightened self-interest often seems hard to find.
I’m also frustrated by the willingness of some operators to fuel the development of some of the more pernicious internet intermediary and aggregator business models by paying them as sales channels for short-term gain. While some of these businesses do genuinely add value to the end consumer – and so can, perhaps optimistically, be viewed as symbiotic – I’m afraid a number of them are essentially parasitic.
I guarantee that in years to come the strategy, marketing and commercial directors of operators will wish their predecessors had not breathed life into these businesses as they look at increasing CPAs and value being leached away.
What do you see happening across the fitness and physical activity sector going forward?
In the short to medium term, we’ll see maturation of the low-cost sector which will follow a very similar trajectory (although possibly evolving more quickly) as did the low-cost airline and hotel markets. The winners will be those that remain focused on costs and on bringing enough sophistication to their product and pricing model without creating unnecessary complexity.
Consolidation is inevitable in the UK and probably across Europe. There will be a shake-out of the smaller and less disciplined players and ill-advised property deals will cause some players to disappear rapidly.
In the longer term, I sincerely hope and believe that government will finally understand and believe in the public health benefits of exercise adherence, to the extent that policy formulation will move much more to prevention rather than cure. In that world, the sector stands to benefit not just from the removal of the ludicrous VAT levy, but also from the direction of commissioning funds to state-funded exercise for the vulnerable.
Who will be the winners and who will be the losers?
It’s hard not to answer this without stating the blindingly obvious. The winners will be those that stay closest to their customers; that build scale; that stick to their knitting; and that invest in technology that boosts the probability of a customer firstly setting a realistic goal, and then establishing a repeatable pattern of exercise adherence.
The losers will be those that are one or more of the following: ill-disciplined in deploying their expansionary capital; prone to confusing their customers by addressing multiple segments simultaneously or putting unnecessary complexity in their way; and irrational in the pricing of their product.
