On May 29th 2015 came news that Pure Gym was buying LA fitness, subject to approval from the Competition and Markets Authority, the competition regulator. Of all the potential buyers including Fitness First, Sports Direct and Terra Firma, I was surprised on hearing this news. Fitness First was seen as the logical buyer having, what to me, looked like the best strategic fit – two established mid-market brands sharing common operating principles. Meanwhile Pure Gym’s rationale for this acquisition is to secure a stronger foothold in London and the South East of England – presently Pure Gym has 23 clubs open in London and the South East of England (at June 2015).
Over the past few days, I have been contacted by various media asking me to comment on this deal and what follows are my observations.
Summary of the proposed deal
Pure Gym launched in 2009 and currently operates 98 low-cost gyms across the UK. In May 2013 funds affiliated with CCMP Capital Advisors, LLC bought a majority stake in Pure Gym. Members pay monthly, with no contract commitment. Gyms typically comprise more than 200 pieces of cardio’ and strength training equipment and up to 80 group exercise classes each week. The modal or most frequently used price across the 14 clubs in its London region is £22.99 per month (month-to-month commitment as there are no contracts) which provides access to the local club and varying access to others in the nationwide network along with a £20 one-time joining fee (again this is the typical joining fee in its London region). Prices of course vary across other regions. For example, in the South West of England the average price is £19.24 per month. I’m focusing on London and the South of England because this is the rationale for the deal.
Pure Gym is acquiring the LA fitness business, which operates 43 mid-market and LAX premium health clubs across London and the South East of England, South West of England, Midlands, North of England and Scotland. The most frequently quoted membership fee for an LA fitness club across its Central London region (10 clubs) is presently £49 per month based on signing a 12-month contract, rising to £59.95 per month if a member prefers not to be in a contract. LA fitness has approximately 123,000 members. The price of the deal has not been disclosed, although Pure Gym is thought to have paid between £60m and £80m. If this pricing range is correct it would equate to £1.4m – £1.8m per club.
Is the takeover a surprise?
Initially, I was a little surprised by this move because the strategic fit between Pure Gym and LA fitness is not obvious to me. LA fitness is a legacy mid-market brand founded in 1996, pre-dating the low-cost gym movement which begun here in the UK in 2006. Their operating models are fundamentally different which is reflected in the types of property they occupy, the facilities they provide (42 of the 43 LA fitness clubs has a swimming pool) and their staffing structures. This deal will require major reconfiguration of all LA fitness clubs in order to convert them to the Pure Gym model where the core facility offer is powered by an extensively equipped gym. It is a deviation from the original property strategy of acquiring empty shells and then quickly fitting out to a branded budget gym template. Pure Gym has successfully acquired and converted former clubs before but not a portfolio of this size. My understanding is that it will take between 10-16 weeks to convert an LA fitness club to a Pure Gym, depending on the complexity of each property.
How will LA fitness members react?
LA fitness has 123,00 members who made the conscious decision to join LA fitness and not a low-cost gym which provides a very different self-service experience. It will be interesting to observe the member reaction when this news spreads.Humphrey Cobbold, Chief Executive Officer of Pure Gym has said: “This transaction represents a good deal for members of both Pure Gym and LA fitness as well as other consumers that are hungry for more affordable fitness options.” Clearly Pure Gym would want existing LA fitness members to stick with them following the migration to a low-cost operating model and are assuming that up to two-thirds of members will stay. My understanding is that those LA members who wish to move on will be released from any existing contract commitments and refunded any membership fees paid in advance.
What does this mean for the UK fitness industry?
As the LA fitness clubs convert over to the Pure Gym brand it means one of the industry’s founding gym brands will leave the high street, subject to CMA approval of course. It’s a little sad but also a reflection of how the gym landscape has changed and how consumers have quickly embraced new fitness trends. The longer established gym brands have recently been re-defining their core offering to ensure they remain relevant in an era of abundant gym and broader fitness offerings. I believe this is the year they need to demonstrate a real leap in value for their members otherwise they face a bleak outlook.
Has the fitness industry become increasingly stratified by cost?
I see the UK health and fitness market bifurcating or forking along two distinct pathways – ‘self-service’ and ‘supported’. Many consumers have steadily been taking control of activities once outsourced to others – self-scanning our groceries, booking hotels and flight tickets – and enjoy the empowering feeling of serving ourselves. Low-cost gyms have tapped this phenomenon very effectively, attracting members seeking a more ‘narrow’ gym-led fitness experience and content to serve themselves. However, perhaps less conspicuous is the second pathway, which I describe as ‘supported’, where customers seek and pay for a more guided experience. This is where the very best specialist studios are to found purposely engaged in helping customers reach a desired health and wellbeing aspiration. So one pathway serves up outputs (facilities) and the other outcomes, a critical difference.
I think the issue for legacy brands such as LA fitness is that the consumer has been receiving more of a self-service experience, but at monthly fees far higher than offered by low-cost gym brands.
Will competition concerns stymie the growth of operators like Pure Gym?
I was very surprised when the Competition and Markets Authority (CMA) referred last year’s proposed merger of Pure Gym and The Gym for an in-depth merger investigation. Although the two brands only had 103 combined gyms at the time, the CMA had several concerns one of which was the potential for the enlarged company to raise membership fees. This time around sees the combination of a low-cost gym operator with a mid-market operator with the results that membership fees will be falling for many pre-existing members. I cannot second-guess the CMA’s decision, but this and the very different geographic mix (Pure Gym has a strong presence in the North of England) of the company’s clubs could result in a different outcome.
Linklaters, the global law firm is advising Pure Gym and Simon Pritchard, Linklaters Competition partner says: “The deal has closed but we have already had considerable constructive engagement with the CMA, and are confident in the CMA process and in our evidence that the parties are not close competitors. For these purposes, each deal turns on its facts, and this one is very different to the earlier proposed deal with The Gym – which the CMA regarded as combining closest competitors and as raising ‘national’ issues for reasons unique to combining those two players.”
What future moves do you anticipate in the sector?
The low-cost gym brands will continue building momentum and their geographic reach in order to bring affordable and accessible fitness to all corners of the UK. However, also look out for the specialist boutique-style studios such as Psycle, Heartcore Fitness, Barry’s Bootcamp and 1Rebel that attract a fanatical following from customers seeking expert-led sessions. These people are prepared to pay £20 for a single 45-minute class, which is proof that parts of the industry are not commoditising.
What do you think could limit the growth of budget gyms? Are we anywhere near a ceiling for them?
The UK was late to pick-up on the low-cost gym trend with the first brand opening up only in 2006. This was nine years after they first began opening across Germany so I believe we will see far more growth in this segment. Consumers love what they stand for – simple to understand, 24-hour opening, no contracts, a great machine-led experience and monthly fees that were unthinkable just a few years ago – average gym prices across all London private clubs are around £61 per month (source: The Leisure Database Company 2014) whereas Pure Gym’s most frequent London charge is £22.99. If you are happy to serve yourself and give up the swimming pool, it’s an excellent deal.
Business as usual
The two businesses will be operating separately until the Competition and Markets Authority has assessed whether this deal is good for consumers This will take at least four months, and potentially longer, so expect no decision before October 2015.
Would like to hear from members
I would love to know what LA fitness members make of this news and if they believe they will continue with Pure Gym when the clubs are converted.