From PE darling to hard-hit sector: gyms face uncertain post-covid future

In 2019, prior to this Covid-19 crisis, consumers in the UK alone spent £5bn on 10 million gym memberships, according to a Sports Think Tank report. Buyout and growth capital investment volume in the sector grew during the last decade, reaching a high of seven deals in 2018 across Europe, against just one acquisition in 2010. Household names such as Virgin Active, Gym Box and Pure Gym have all seen investment from private equity backers.

After being forced to close, gyms have been engaging in negotiations with landlords for rent holidays and furloughing a significant proportion of their workforces to keep afloat. Meanwhile, those with PE backing have benefited from equity injections where necessary, with investors assisting them in gaining access to government loan schemes.

Unlike pubs and restaurants, which can still offer take-away, fitness clubs have few other potential revenue streams.

As an alternative to gyms, interest in home fitness has exploded across Europe. Tom Raymond, a director at commercial due diligence firm Armstrong, says: "Middle-class bellwether John Lewis experienced a 496% increase in sales of home gym equipment, while yoga and pilates equipment sales were up by 315%, and sports shoes orders increased by 72%." He also cites performance monitoring and gamification specialists such as Fiit as a thriving group of assets.

Fitness apps, webinars and even Instagram gym class streaming have proliferated, and some gyms have tried to tap into this market; but such measures can only go so far to relieve pressure. "When gyms release online classes, that's more about customer engagement, rather than revenue generation," says Harry Kalmanowicz, a managing director at Lincoln International. "Many gym CEOs haven't thought it worthwhile to commit investment to online classes or creating own digital content and instead are focusing their efforts on reopening and adjusting their operations to comply with social distancing guidelines."

European gym assets in portfolios

Source: Unquote Data

Back on the treadmill
The potential date for some countries to reopen their gyms now draws closer, with some countries, such as Switzerland, already having done so. But with new influences at play in the sector, the better question now is not when, but if customers will start to go back to their gyms either in the short or even the long term.

Aude Doyen, another managing director with Lincoln International, is positive about the future: "We've seen examples from other countries where gyms have reopened and membership has not dropped significantly. In the US, Planet Fitness has also reported usage is continuing to climb consistently across gyms the longer they have reopened. This is encouraging."

To comply with new guidelines, gym equipment will have to be spaced out or marked out of bounds, barriers may need to be put up between machines, companies will have to invest significantly in cleaning staff and supplies, while the fate of changing rooms and exercise classes is as yet undecided.

A spokesperson for one private equity investor in the sector says: "It's hard to know how this will influence customer behaviour. The fundamentals are still good in principle, as people obviously still need to exercise. We're going to have to wait and see how consumers react."

But different gyms will battle different issues when it comes to reopening, the spokesperson says, suggesting that larger gyms would be able to implement social distancing measures more easily than small gyms due to their increased ability to space out equipment.

Raymond thinks one area that will be more resistant to drops in revenue will be the premium sector. Luxury and high-end gyms have been a focus for backers, notably with the acquisition of France-based L'Usine by 123 Investment Managers and Sigma Gestion, and UK chain Third Space by Encore Capital.

Says Raymond: "Premium gym customers want to get back to the gym because it is an important part of their lives to which they have made a significant commitment, financially and emotionally. Secondly, consumer perception of premium leisure brands is that they have the quality of facilities and upkeep to maintain very high standards of cleanliness – fear of infection will be lower than for users of mid-tier and budget gyms."

Premium gyms, however, suffer their own set of obstacles, such as more expensive real estate costs, as well as more diverse and costly staffing – hiring physiotherapists, professional trainers and masseuses, for example.

Kalmanowicz says: "With low cost gyms, the business is about volume, so it would be damaging to have a serious decline in membership, but there's a lower fixed cost base to counteract that. With higher-end gyms, the cost base is of course much greater, but there are higher margins to play with. Depending on the operator model, there will be different strategies needed to survive at a lower membership level."

All gyms across Europe, both big and small, premium and low-cost, will have to adapt significantly to keep members coming to their gyms. Says Doyen: "A number of European operators are thinking about outdoor classes, with or without an extra fee. It's about offering something to reassure those who do not feel safe indoors at first."

However, the bifurcation occurring throughout the economy – which will likely see suffering assets fall into administration, while stronger assets remain in business – is likely to occur in this sector also.

Kalmanowicz says: "Some gyms certainly will fall by the wayside, often smaller gyms or boutiques, but where there's a positive outlook we see sponsors or banks willing to put additional cash in. The better assets will hold on through the crisis."

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