Dec 17, 2007 11:25 AM

Before the industry moves into the new year, we take a moment to reflect on the past year in which the worries about the economy, a big bankruptcy and growth in franchised clubs took center stage.

The past always seems to be gaining on us, which is why the best way to sum up the lessons learned in 2007 comes from the Zen master itself, the rear-view mirror, which always reminds us that objects are closer than they appear.

The big stories in the fitness industry in 2007 will likely continue to make headlines in 2008. From the bankruptcy and re-emergence of Bally Total Fitness, to several states attempting to legislate taxes on health club memberships, to large club companies venturing into new markets, to the growth and demise of other companies, every story will have a profound effect on how this industry will develop in 2008.

The key issue across the board in 2007 was the economy, what path it would take and how that would affect various industries. Whether the economy is just going through a “softening” or is starting to slide into a recession depends on the economists you listen to and the media reports you believe.

In late November, the Federal Reserve lowered its growth target for the economy for 2008. The central bank had forecasted in June that the economy would grow 2.5 percent to 2.75 percent in 2008. Now, the Federal Reserve is predicting growth of only 1.8 percent to 2.5 percent for next year.

Ben Midgley, president of World Gym and Planet Fitness, Dover, NH, says the economy is softening, but it didn’t affect his company in 2007. In fact, he expects sales of Planet Fitness’ low-cost memberships (sometimes running as low as $10 per month) to actually improve if the economy softens even further.

“Economically, the downturn the country is experiencing is clearly going to segment the industry even further, and those on the high or the low end will prosper. For those in the middle, it will continue to be a struggle,” Midgley says.

Other club owners and consultants contacted for this story say that they are seeing more clubs closing.

“In the last nine months, we have seen an unusual number of clubs close,” says Stephen P. Roma, owner and chief executive at Workout World, Brick, NJ. “I see and hear that more clubs are struggling than ever before.”

Some club owners also say their direct mail pieces and ads pulled in fewer prospects. However, Rick Caro, president of Management Vision, an industry consulting company based out of New York, says the industry doesn’t have enough information to say whether the economy had an effect on memberships and retention this year. Club owners who had problems with membership numbers this year might have been grasping at straws when they blamed the economy or layoffs at a local business for their lack of business.

“I think most people don’t know if it’s an extra competitor or the economy to blame, but they aren’t blaming themselves and their marketing [for their business slow down],” he says. “No one is taking personal responsibility.”

Doug Ribley, director of wellness and administrative services at Akron General Health and Wellness in Akron, OH, says that his two hospital-based wellness centers and four satellite centers were not affected by the economy this year. All of his projects and the projects at other hospital-based wellness centers that he consulted with this year have met or exceeded their budgets.

“When it comes to the medical fitness market, they attract a different group,” Ribley says. “Many have not been a member of a club before, and a high percentage have an identified risk factor that they are trying to eliminate or reduce. These people have a different motivation to be at these centers. My experience is that the shift in the economy hasn’t deterred them to stop coming.”

Legislatively, several states worked on laws to tax services or memberships in various industries including the fitness business. Some of the states went after all fitness facilities while others left out the nonprofits. One of the biggest hopes for the year was that the Workforce Health Improvement Program (WHIP) Act would be attached to legislation, but that did not happen. The WHIP Act would reaffirm employers’ rights to deduct the cost of subsidizing or providing off-site health club benefits to their workers.

So what were the top news items and trends for 2007? We’ve listed our picks on the following pages. Take a look and let us know what you think we missed.

Top News Events

1. Bally Bankruptcy and Re-emergence

After several years of financial restatements, accounting changes, investigations and shareholder attempts to take over the company, the health club industry anticipated a bankruptcy filing from Chicago-based Bally for more than a year. The company officially ended that anticipation by filing for bankruptcy on July 31 and then re-emerging from Chapter 11 just two months later. However, the industry has yet to see what form the newly private company will take. Bally management has been quiet since the re-emergence. All the questions about how many clubs Bally will close and who the new CEO will be are still unanswered, leaving the industry to await news on Bally’s plans for the future.

2. Growth of Large Public and Private Multipurpose Clubs

The five largest multipurpose health club companies in the industry continued to expand in 2007, most of them in old and new markets. LA Fitness, Irvine, CA, which is notoriously quiet about its business, moved into several new states including Minnesota and Wisconsin in 2007.

24 Hour Fitness, San Ramon, CA, celebrated its 24th anniversary this year by opening 40 new clubs and making plans to move into New York, Baltimore and Washington, DC, next year. Equinox, New York, also added several clubs this year, moving into new markets such as Florida and Illinois.

Two of the publicly traded companies in the industry, Life Time Fitness, Eden Prairie, MN, and Town Sports International (TSI), New York, continued to expand into new markets in 2007. Most of the year, their stock also climbed, but as of press time, the price correction in the general stock market had taken its toll on the two companies, dropping Life Time Fitness’ stock price to $49.72 at close on Nov. 27 (from a high for the year of $65.09) and dropping TSI’s to $10.10 at close on Nov. 27 (from a high for the year of $24).

3. Three Private Equity Firms Invest in Club Companies

The October sale of the 17 Alaska Clubs to Lincolnshire Management Inc., a New York-based private equity firm, was one of three instances where private equity money entered the industry in 2007. The other two instances involved the October investment by Collins Neyer Capital in The Rush Fitness Complex, Knoxville, TN, and the investment this summer by Bunker Hill Capital, Boston, in California Family Fitness Centers, Sacramento, CA.

“We see a lot of private equity firms looking at the industry but few are going into it yet,” says Caro.

4. Planet Fitness and World Gym Changes

Although Planet Fitness purchased World Gym in October 2006, this year was a year of tough transition for the two groups. After changing the World Gym logo and some of the World Gym franchisee operating procedures, Planet Fitness CEO Mike Grondahl and COO Christopher Rondeau faced some disgruntled World Gym franchisees at a meeting this summer. However, after the open forum, the company offered franchisees the option to go month to month with a flat fee, rather than renewing their agreements on a longer term basis.

In October, some World Gym franchisees caught wind of the company’s planned key-card club model, so management rushed a letter to franchisees explaining the model, which could situate the 24/7 clubs, called World Gym 1440 All Axcess, in the territories of some current World Gym franchisees. 

5. Gold’s Gym Changes

Gold’s Gym International said goodbye to its largest franchisee, Royce Pulliam, and his Global Fitness Holdings Co., in an announcement made in November. However, Titan Fitness Holdings, led by Jeff Skeen, already had announced that it would be joining Gold’s Gym as possibly its newest and largest franchisee. Speculation was that Skeen could take over all or part of Pulliam’s old territory in addition to other territories.

But these changes weren’t the full story for Gold’s Gym in 2007. The company began growing the number of its company-owned stores, reaching more than 50 this year. These stores now make up the majority of revenue for the Gold’s Gym company.

In addition, David Schnabel, appointed as CEO in late 2006, and the rest of Gold’s Gym management worked to retain as many existing franchisees as possible despite grumblings from franchisees about the company’s royalty-based fee system, a departure from the company’s old flat-fee system. The Gold’s Gym Franchisee Association met with the Gold’s Gym’s National Franchise Council, which was formed in late 2006, to resolve the matter, eventually implementing a royalty-based fee system that costs less for existing franchisees but more for new franchisees.

6. Arthur Jones’ Death

Jones’ passing in August may not have gotten all the publicity it deserved. As Caro points out, Jones basically invented the weight resistance category in 1970 when he introduced Nautilus to the world. Prior to that, people had used free weights. The introduction of this equipment coincided with the growth in the 1970s of the health club industry, partially due to the equipment he introduced. Jones sold Nautilus in 1986, but his mark is still felt on the industry today. 

7. Problems with Circuit-Franchise Companies

Contours Express franchisees filed a class action suit against their franchisor, alleging fraud and breach of contract. ShapeXpress franchisees also publicly stated issues with their franchisor. Cuts Fitness bought out all the contracts for its franchisees after admitting that the model wasn’t as successful as the company had hoped it would be. Franchisees at other express clubs have voiced discontent with their franchisors on several franchising Web sites, and rumors are rampant about additional class action lawsuits coming for some of these franchisors.

8. Settlement of 24 Hour Dues-Related Class Action Suit

In July, 24 Hour Fitness settled a class action suit in San Francisco that began in 2005. The suit concerned dues charged to members after they asked to cancel their contracts. The plaintiffs alleged that 24 Hour Fitness’ cancellation notice provision and collection of nonrefundable last month’s dues under the terms of contracts signed before 2006 violated California law. Under the settlement, class members were entitled to choose settlement benefits, depending on their situation, including partial refunds, free personal training or membership upgrades, contract modifications, and transferable 30- and 45-day club access passes.

24 Hour Fitness asserted that it treated its members fairly and that its membership agreements are favorable to members and entirely lawful.

9. Texas Attorney General’s Suit Against Life Time Fitness

After announcing in late July his lawsuit against Life Time Fitness, the Texas attorney general, Greg Abbott, has been quiet about the suit, but if it goes forward, it would involve charges that the club

company exposed its members to identity theft. The attorney general stated that his office found member information intact

in easily accessible trash dumpsters out-

side Life Time clubs in the Dallas area. The information allegedly included

Social Security numbers, driver’s license numbers, and credit and debit card information.

At the time of the announcement, Life Time Fitness would not comment on the suit except to say that it was “disappointed and surprised” to learn of the allegations and would work with the attorney general’s office on the matter.

10. Exercise Is Medicine Initiative

The American College of Sports Medicine teamed with the American Medical Association (AMA) on the Exercise Is Medicine initiative, which urges doctors to make physical activity a part of every patient visit. The AMA will provide a physician kit to doctors that includes prescription forms, referral forms, basic exercise information with regard to specific health conditions, and information about how to choose a gym and a trainer to help patients get started.  

“I believe this is bringing physical activity and fitness closer to being reimbursed by insurance companies,” says Carol Kennedy-Armbruster, a lecturer in the Department of Kinesiology at Indiana University. 

11. Update of Physical Activity Guidelines

Ten years after the American College of Sports Medicine (ACSM) and the American Heart Association (AHA) released their physical activity guidelines, they updated those guidelines this summer. The core recommendations remained the same, but the groups recommended more exercise and added a recommendation of strength and balance training. The guidelines emphasize that physical activity above the recommended minimum amount provides even greater health benefits. The guidelines also clarify what short bouts of exercise are and that doing them is OK.

12. Emphasis of Payment Card Industry (PCI) Data Security Standard (DSS)

The PCI DSS, originally introduced in January 2005, was updated at the beginning of this year. Developed by the PCI Security Standards Council, which was formed by the major credit card companies, the standard is a set of 12 requirements for enhancing payment account data security. Merchants and service providers, including clubs, that do not comply with the payment brand security requirements are subject to penalties or fines.

13. The Fitness Co.’s Bankruptcy

At one time, the Fitness Co. was a well-recognized company on the East Coast. The company owned and managed clubs as well as managed small fitness centers in residential properties. The Fitness Co. club in the World Trade Center was destroyed during the Sept. 11 attack in 2001. Although the bankruptcy filing occurred in July, as of press time, the company had not emerged from bankruptcy.

14. Augie’s Quest Fundraising Efforts 

In March 2007, the industry came together for the second time to raise money for Augie’s Quest to find a cure for amyotrophic lateral sclerosis (ALS). Augie Nieto, founder of Life Fitness, was diagnosed with ALS in 2005. The second annual Augie’s Bash for the Cure, held at the 2007 International Health, Racquet and Sportsclub Association conference in San Francisco, raised $2.1 million. Several big names in the industry banded together to organize the event and donate money. As of Dec. 2, the campaign had raised almost $12 million of its $18 million goal.

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