IHRSA financial panel ‘11: Fitness, health club industry stagnant; Internet key in future

You might not like this rerun.

Analysts on the financial panel at the IHRSA trade show in San Francisco see a repeat year ahead for the fitness and health club industry in 2011.

Things will get a little better, but not by much. The industry is still dealing with the effects of the recession, including continued consumer unemployment and low home values.

The first sign of a true recovery will be industry mergers and consolidations – something that has yet to occur in force, despite past predictions, analysts on the 15th annual panel said. Plus, the Internet is going to play a huge role in fitness as the industry progresses.

“There have been very few deals,” said Rick Caro, president of Management Vision Inc. and moderator of the event. “Sellers want (higher) 2007 values, buyers want (lower) 2009 values.”

Credit also remains tight, as a factor to few deals, but analysts do see that starting to change.

Industry default rates dropped in 2010, and a lot of companies were able to refinance debt and push out those impending maturity dates, said Steven Wayne, managing director of Oak Hill Advisors.

Consolidations could further loosen that capital, Wayne said. Banks have shown greater interest in working with larger players.

“When you look at health clubs, with only four large players, this is an industry that needs consolidation,” he said.

Still, some hesitancy on the part of investors remains, particularly those who got burned from Bally Total Fitness’ Chapter 11 bankruptcies in 2007 and 2008, he said. (Click here to see a January 2009 SNEWS story, just a few months before Bally announced it would be exiting its second bankruptcy in less than two years.)

“It takes time for people to forget,” Wayne said. “The industry needs to take the time to do more PR with Wall Street and educate them.”

With so many smaller players in the industry, Pete Moore, managing partner of Integrity Square, said businesses need to do a better job in defining themselves.

“Don’t try and be all things to all people,” he said. “Are you high-end and low traffic, or low-cost and high traffic?”

The middle market struggles the most with the question and must determine how it can sell its value without lowering price, Moore said. Some health clubs are seeing success with introducing annual maintenance fees, for example, where customers can see the value of updated equipment.

Josh Comer, a vice president with JP Morgan in the retail and investment banking division, said consumers are still hindered by high unemployment rates and low home values. But things are stabilizing.

And as consumers slowly work their way back into the fitness and health club industry, the Internet will play a large role, Comer said.

“At first glance, you might not think it would – people aren’t going to be doing their workouts (physically) online – but it will be where you have your advertising and commerce relationship. They can order that workout online,” Comer said. “The consumer’s ability to demand is raised because they will have all the information… they know all the prices… they will match, they will compare.”

In the March release of the IHRSA index of health clubs, clubs surveyed said they improved their membership and financial performance in the last two months of 2010 from a year ago. Read those details by clicking here.

–David Clucas