I read an interesting article[i] recently in the Daily Telegraph by the film critic Robbie Collin which helped to explain a trend that I had already been thinking about.
A few weeks before I read this I had re-watched on DVD one of my all-time favourite movies: David Lean’s 1962 epic classic Lawrence of Arabia, starring Peter O’Toole. Now I have seen this movie many times before; but something struck me this time that I had not been aware of. Namely, the fact that O’Toole, then considered the most beautiful man in the world, had the physique of a coat hanger with a few broomsticks attached for limbs.
Of course, O’Toole, a legendary boozer and smoker in those days, probably thought that a barbell was what pub landlords used to announce closing time. Like most men of his times, he had never been to a gym in his life. And I think of my grandfather, a sinewy member of the South London starch-collared respectable working class (now defunct), who probably never had a workout once in all the 90 years he spent on Earth.
Robbie Collin’s point was that, if a young male actor wants to make it in Hollywood these days, he has to be buffed, as the Americans say. He cites the careers of Channing Tatum (Magic Mike XXL) and Jake Gyllenhaal (Southpaw). Both have spent man-years in the gym with personal trainers to achieve a look that now guarantees box office success. Our expectations about how people (especially men) should look have changed.
This started of course, on Muscle Beach in California sometime in the 1950s and has been spreading Eastward ever since. We are now just as body aware as the Americans (though bodybuilding is still not as big here as it is there). And I note that gym culture is big in the developing world too. On a trip to Mumbai last January, I was struck by how many gyms there were – and how busy they seemed.
I know that there is a debate underway about the negative implications of heightened “body awareness”, especially amongst the young. Supposedly, teens are being induced into steroid-taking, which is obviously undesirable high risk behaviour, though I doubt that this is that common. Most of the debate is driven by feminists and proto-feminists, who having for years excoriated the objectification of women’s’ bodies are now lamenting the objectification of men’s bodies (even though they always aspired to gender equality!).
But, for my part, I take the American view that anything that gets people off the sofa eating Pringles and out of the pubs and bars to do exercise (universally recognised as good for one’s health) must be a good thing. Vanity is not such a bad motive if the outcomes are positive. Moreover, it’s good to see young people – and not-so-young people, like me – looking fit. The Romans talked about about mens sana in corpore sano[ii] – a healthy mind in a healthy body, and there is now abundant medical evidence that physical and mental health are closely correlated.
Attitudes change, thank God. It is doubtful that a Sir Cyril Smith, the morbidly obese Liberal MP for Rochdale from 1972 to 1992 (who is now said to have been a perpetrator), could be elected to Parliament these days. In fact it’s difficult to imagine how anyone so freakish could have been regarded as a popular icon; just as it is very difficult to understand in retrospect how the repulsive Jimmy Saville (another Sir) could ever have been considered cool.
Another angle on this is that Sport (capital ‘S’) has been elevated from something that working class men watched on Saturday afternoons 40 years ago, to the all-encompassing passion of our age. International sporting events today are surrogates for war (just as they were in ancient Greece). In the same way, it is the new breed of athlete mega-stars, not rock stars who are now bigger than Jesus (as John Lennon described the Beatles). Look at the international standing of Usain Bolt, Mo Farrer, Tiger Woods or Lewis Hamilton.
But if we consume hours of sport on TV and in the press every day, this is also the age of inter-action. It is not enough to watch sport on TV; people want to participate, and millions do. And by the way, you can’t be a professional footballer or cricketer these days, still less a rugby player, without spending time at the gym.
Gym and sports club memberships have been growing steadily in the UK over the last 25 years. The step change seems to have been in the early 1990s when most clubs moved over to a monthly direct debit membership model. Hitherto, clients had to pay a hefty annual fee up-front. The growth in sports club subscriptions has followed the economy – there was a big dip in the recession of 2008-13, as this is considered discretionary spend – but there is now sustained expansion.
Now the health and fitness business, such as it is, is quite fragmented, and investment opportunities are limited.
In the old days, there were sweaty gyms in basements or at the back of boxing clubs, male-only, and never really commercial. Now, most small towns across the UK have reasonably salubrious gyms, though still targeted mostly at men. But the word “gym” no longer has the rough working class, gangster-laden connotations it once had. Small independent gyms are now mainstream and, apparently, increasingly financially viable (though not investible). Many of the local operators offer a “no contract” model, meaning you can cancel your direct debit without penalty.
Local councils across the UK provide gym facilities too, though of very variable quality and value for money. The Jubilee Hall in London’s Covent Garden, with its magnificent Victorian atrium and views of the Piazza, is considered a great gym by pensioners and bodybuilders alike. It is run by Westminster Council.
Stelios Haji-Ioannou, the man who founded easyJet, is rolling out a chain of gyms under the easyGym logo, with familiar orange coloured branding. There are now about 15 easyGyms. The one in Oxford Street charges a £25 joining fee and a monthly direct debit of £24.99. It is already popular and the punters think it is good value for money. Of course, we are unable to peek at the financials because they are unavailable.
A new arrival in this space from the USA is Snap Fitness, which is rolling out gyms fast in Southern England. Worldwide, Snap has over 2,000 facilities. Members receive an electronic key-card which enables them to access the gym 24/7 – even when it is unstaffed.
Then there are the chains of fitness spaces which call themselves health clubs. These are very visibly open to both men and women, they usually have a good range of “cardio” equipment (running machines etc.) as well as weights, and offer a variety of classes such as aerobics, Pilates, stretching and, increasingly, even yoga.
A good example of an operator in this segment is Fitness First. First launched in 1993 Fitness First was a trail-blazer which expanded too quickly and was eventually gobbled up in 2003 by the private equity firm Cinven. Cinven sold it on to BC Partners in 2005 and it is now owned by Oaktree Capital Management. Fitness First has 360 clubs worldwide with getting on for one million members. It operates 78 gyms across the UK with about a third of those in London.
The monthly membership fee for Fitness First comes in at around the £39 mark.
Then there are the upper-end fitness spa operators which offer large, superbly equipped gymnasia (plus the classes and cardio equipment) but with pools, saunas and wet areas. Not to mention beauty treatments (dilapidation, massage etc.) – and not just for the ladies. Competitors in this space include Virgin Active, Holmes Place, LA Fitness, Bannatyne’s, David Lloyd and many other smaller players. These guys are all contract based – you sign up for at least a year and you may have to pay a penalty if you leave.
Things are moving fast in this segment. In April this year South Africa’s Brait took an 80% stake in Virgin Active for £682 million; and in May Britain’s budget gym operator Pure Gym acquired LA Fitness’ 43 clubs. Pure Gym, which operates 98 fitness centres across the UK, reportedly paid around £80 million. Pure Gym plans to open another 16 clubs in the UK this year.
Interestingly, the Pure Gym strategy appears to be to take out the pools and therapy pods and to expand the gym and cardio areas, which suggests to me that the fitness spa model is proving less successful that the health club model. It’s obvious really: gyms have rapidly diminishing marginal costs for each additional sign-up; whereas therapy-cum-beauty treatments have relatively continuous marginal costs. The ideal is to create a big gym space and then to maximise membership, knowing of course, that while a few fitness fanatics come every day, many members will come rarely (and some not at all).
Finally, there are the luxury spas, which are normally hotels as well, not to mention sought-after wedding venues. They have gyms and pools but they concentrate on the beauty side. Ladies (mostly, but not only) spend good money in such places pampering (or is that being pampered?) for a day or longer. A good example is Hoar Cross Hall Luxury Spa in Staffordshire, with 96 rooms, owned by the Joynes family.
Now the interesting thing is that all the operators mentioned above are private (family or private equity groups). If this is such a good business sector, how come no listed companies have launched in this space?
Well, actually, there is one – though it didn’t start out as a gym operator. Rather it is better known as a sports clothing and equipment retailer. But in May 2014, LA Fitness sold 33 of its 80 clubs to Sports Direct (LON:SPD). The news came after its UK rival JD Sports Fashion (LON: JD) made its first tentative step into the fitness market last year by opening a gym in Hull.
Sports Direct, still run by its flamboyant founder Mike Ashley, is still predominantly a retailer selling sports and leisure clothing, footwear and equipment through retail and wholesale stores, with a market cap of over £4.5 billion. The company offers third-party brands including Adidas, Nike, Reebok and Puma, as well as its own in-house brands, such as Dunlop, Slazenger and Lonsdale.
On 1st September Numis Securities rated Sports Direct a BUY. They set a 950 pence price target on the stock, implying a potential upside from the current share price of over 20%[iii].
It’s short-sighted to talk about a fitness craze underway. Good investors, like artists, understand that the idea of what is “normal” changes. Like Channing and Jake, we have to stay on trend. Get exposure to this mainstream sector now.
And just between ourselves, Swen is looking pretty buffed these days. We’re meeting down the gym later for a sesh.
[i] And the Oscar for best Torso goes to…, by Robbie Collin, Daily Telegraph 24 July 2015, available at: http://www.telegraph.co.uk/film/southpaw/jake-gyllenhaal-channing-tatum-diet-exercise-bodies/
[ii] Juvenal, Satire X.
[iii] http://www.dakotafinancialnews.com/sports-direct-international-plc-receives-buy-rating-from-numis-securities-ltd-spd/400746/