Planet fitness big muscle commercial

Michael A. Roberto, Trustee Professor of Management at Bryant University, prepared this case. This case was developed from published sources.

M I C H A E L A . R O B E R T O

Planet Fitness: No Judgements, No Lunks

“Planet Fitness Is Not a Gym: And it’s stupid to keep pretending it is.”1 Several years ago, this headline appeared in Men’s Health – a popular health, fitness, and nutrition magazine. Executives at most fitness center chains might be quite alarmed at such a news story. However, the headline didn’t faze McCall Gosselin, head of public relations for Planet Fitness. She told the magazine, ““We say we’re not a gym, we’re Planet Fitness.” Gosselin explained, “The gym industry was built on bodybuilders, people who work out multiple times a week. Planet Fitness was founded as a place for the other 85 percent.”2

Planet Fitness proudly proclaimed itself a “judgement-free zone” where people could exercise without feeling intimated by serious athletes and muscular bodybuilders. Each gym possessed a “lunk alarm” – a siren that would sound if someone grunted too loudly while working out, or dropped their weights. Its television commercials poked fun at bodybuilders and hard core “gym rats” on a regular basis and made it clear that they were not welcome at the firm’s fitness centers. In one scene, a Planet Fitness employee asked a new customer what type of exercise he enjoys. The man with bulging muscles and very short, very tight pants kept repeating, “I lift things up and put them down.” The employee tricked the man into leaving the gym and locked the door. The commercial ended with the message: “Not his planet… yours.”3 The gym even offered free pizza on the first Monday of each month, free bagels on the second Tuesday, and Tootsie Roll candies in the lobby on a regular basis. These policies stirred the ire of fitness enthusiasts, as evidenced by the rants against the company on many online forums. One blogger wrote, “Planet Fitness is a big, purple-colored adult daycare marketed to people afraid to go to an actual gym.”4

Despite the negative reaction from some observers, Planet Fitness had grown rapidly over the past decade in a highly competitive industry. While Bally Total Fitness experienced bankruptcy twice and Curves closed thousands of locations, Planet Fitness continued to thrive. In its 2017 Annual Report, the firm reported 44 consecutive quarters of same-store sales growth. The company had doubled its number of locations over the past four years and boasted 10.6 million members across 1,518 gyms.5 By August 2018, the company’s stock price had risen by over 150% since its initial public offering in 2015, outpacing the S&P 500 index by a wide margin (See Exhibit 1 for stock price performance).6

Planet Fitness had aggressive growth plans for the future. Management believed that it could grow to 4,000 locations in the United States alone. In fact, franchisees had signed contracts to open 1,000 additional locations in the next five years.7 Could the firm sustain its competitive advantage while trying to grow at such a rapid pace? Could it succeed over the long haul in an industry where many chains had grown rapidly in the past, only to falter or fizzle out eventually? Some analysts harbored doubts. Stock analyst Vince Martin wrote, “Planet’s valuation looks awfully stretched at the moment. A leveraged balance sheet has helped the stock on the way up, but could pressure the stock if the narrative here turns at all. Competition remains intense — and the history of the fitness industry is littered with fallen stars.”8

The Health Club Industry

The health club industry generated $30 billion of revenue in the United States in 2017. The industry remained highly fragmented despite the growth of larger chains such as LA Fitness, Gold’s Gym, and Anytime Fitness. Slightly over 60 million people belonged to 38,477 fitness clubs in 2017. Membership in fitness clubs varied substantially across the country. While more than 23% of residents belonged to clubs in states such as Connecticut, Massachusetts, and California, fewer than 15% of people were members in states such as Michigan, Tennessee, Alabama, and Indiana.9

Many entrepreneurs owned and operated a single location. Opening a small health club required a limited amount of capital, potentially less than $50,000 for those who leased the space and equipment. 10Fitness center chains with large, multi-purpose facilities spent considerably more to open a new location. Planet Fitness estimated that its franchisees spent $1.5-$3.2 million to establish a new location, including leasehold improvements and equipment purchases.11 Wages, rent, and utilities represented the most significant operating expenses for a gym (See Exhibit 2 for a breakdown of a typical health club’s cost structure).12

The total number of members in the industry had grown at a compound annual growth of 2.9% in the past decade. The net increase in clubs surpassed 8,800 since 2007 (See Exhibit 3 for industry statistics).13 A wave of retail bankruptcies in recent years had made it much easier for entrepreneurs and existing chains to find attractive space for new locations. Chris Rondeau, CEO of Planet Fitness, explained: “Seven or eight years ago, it was much harder to get good sites. We were fighting with Best Buy and Barnes & Noble. Now landlords are looking for new business to drive traffic, and we’re getting much better locations at cheaper costs.”14

The Competitive Landscape Traditional multi-purpose gyms, such as LA Fitness, Gold’s Gym and Life Time Fitness, offered a wide range of services. They provided cardio and strength equipment as well as a large selection of free weights. Many of these gyms offered additional services and amenities including personal trainers, group exercise classes, swimming pools, racquetball and/or squash courts, massage therapy, saunas and steam rooms, childcare centers, and juice/smoothie bars. Memberships at these clubs tended to cost $25-$60 per month with additional charges for some services. Many of these gyms tended to have a footprint of 35,000-45,000 square feet. Life Time Fitness tended to operate much larger facilities.

Over the past decade, these traditional gyms faced increasing competitive pressure from boutique/luxury health clubs as well as budget chains. Boutique clubs included companies such as SoulCycle, YogaWorks, and Orangetheory Fitness. These clubs often focused on group exercise classes with a specialized fitness/exercise approach. Orangetheory, for instance, offered a one-hour interval workout class. According to the company, “Orangetheory’s heart rate monitored training is designed to maintain a target zone that stimulates metabolism and increases energy. We call it the afterburn.”15 The prices at these boutique health clubs tended to be significantly higher than the traditional gyms. For instance, Orangetheory ranged from $59 per month (4 classes) to $159 per month (unlimited classes). Luxury fitness centers, such as Equinox, had also grown during the past decade. Described as the “swankiest gym chain in America,” Equinox offered a wide range of equipment and premium services, and it charged from $159 to $240 per month. The brand did not employ franchise arrangements; all gyms were corporate-owned.16

Budget chains, on the other hand, tended to offer basic fitness equipment and very limited services in a simple environment. This segment of the market grew considerably in recent years, with franchising as the dominant organizational model. These chains included Planet Fitness, Crunch Fitness, Snap Fitness, and Fitness 19. These chains typically offered base memberships at roughly $10-$20 per month without the need to sign an annual contract. Fitch, the credit rating agency, described the pressures facing traditional gyms as follows:

“Traditional gym operators are disadvantaged relative to some boutiques due to their high fixed investments in real estate and equipment. Traditional facilities also face pressure from budget-oriented, lower-amenity gyms, which are gaining popularity and market share. To tackle this challenge, some traditional operators are transitioning to tiered membership-pricing strategies that limit access to certain amenities (pools, courts, etc.).”17

Budget clubs seemed to be thriving because many customers were highly price sensitive and hesitant to make a long-term commitment. Gyms responded to these price conscious shoppers by cutting monthly fees, eliminating annual contracts, and waiving sign-up charges. Television, print, and internet advertising often focused on a gym’s low prices in an attempt to attract new members. Customers valued convenience a great deal as well. According to Dstillery, a market research firm, the typical member traveled only four miles, on average, to visit his or her gym. 18 Finding a nearby club did not prove to be a problem for many consumers. Almost 600 health clubs were located in the greater Boston area alone, for instance.19

The Consumers Given the plethora of competitors, health clubs faced a great deal of customer churn. According to some estimates, the average club lost more than 40% of its members each year. Customers left for various reasons, with price being one of the most significant factors. Many people dropped their membership after failing to adhere to a New Year’s resolution. A study by Professors Kylie Wilson and Darren Brookfield showed that one half of people who committed to a new fitness regimen at the start of the year had stopped actively pursuing that goal six months later.20

Others chose not to renew their memberships and switched gyms because their personal trainers had moved to different fitness centers. Health club owners often complained about personal trainers “stealing” clients when they departed to start their own businesses or work for another gym. Fitness instructor and trainer Krista Popowych explained:

“When personal trainers leave your organization, clients may also leave. Owing to the relationships fostered during one- on-one training, it is not uncommon for clients to feel compelled to continue training with the same personal trainers, regardless of where the trainers work. Unfortunately, all client departures hurt organizations financially. Lost clients mean lost revenues. From my experience, when a trainer leaves, your organization may lose as few as 10% of the trainer’s clients (an ideal scenario) or as many as 80%.”21

Consumers had a wide variety of options when it came to fitness. They did not have to become members of a gym. Many people chose to work out in their home, using equipment such as treadmills, exercise bikes, and dumbbells. Roughly 25 million Americans engaged in home gym exercise each year.22 Many individuals chose to run or walk outdoors to stay fit and/or lose weight. Some runners trained extensively for marathons and half-marathons, with approximately 2.4 million people completing such races in 2016.23

Others took advantage of gyms available at their school, university, or workplace. Companies increasingly offered on-site fitness facilities as a means of promoting a healthy employee population, keeping healthcare costs down, and attracting the most talented people. Googleplex, the search giant’s campus in Mountain View, California, featured seven on-site fitness centers.24 Deloitte’s corporate university in Texas contained a 12,000 square foot state-of-the-art fitness facility.25 Some firms offered discounts to employees to subsidize memberships at health clubs, rather than operating their own fitness centers. Universities, meanwhile, continued to build bigger and better gyms for their students. Tuition payments typically covered the price of admission to these facilities.

Many families – 9 million children and 13 million adults – participated in health and wellness activities at their local YMCA, one of the largest nonprofit organizations devoted to promoting healthy living with 2,700 locations around the country.26 Each YMCA tried to insure access to all local residents by providing financial assistance to needy families and individuals. Many locations provided free summer memberships for local teenagers; over 7,000 kids benefited from this program at the Greater Boston YMCA alone.27

An International Health, Racquet and Sportsclub Association (IHRSA) survey showed that a majority of consumers joined fitness centers to lose weight.28 In its latest report, the National Center for Health Statistics reported that 39.8% of American adults and 18.5% of youths were obese.29 However, some people pursued other weight loss options included a variety of diet plans, and in some cases, gastric bypass surgery. 4.6 million people were members of Weight Watchers in 2018, and many others belonged to competitor organizations such as Nutrisystem and Jenny Craig.30 The IHRSA survey demonstrated that people also joined health clubs for other reasons beyond weight loss. These factors included a desire to remain in good physical shape, improve their health, and enjoy a fun social experience.

Fitness Equipment Manufacturers The fitness equipment business had experienced consolidation in recent years. Five major players accounted for 72% of the global commercial fitness equipment market in 2015.31 Then Brunswick, the industry leader, acquired the the fifth largest firm, Cybex, in 2016 to bring its total market share to 30%. Brunswick’s major brands included Life Fitness, Cybex, Hammer Strength, and Indoor Cycling. Brunswick had grown its fitness business by acquisition. However, in March 2018, the Illinois-based conglomerate announced that it would be spinning off its fitness equipment division into a new publicly traded company. Brunswick indicated that it would focus on its boat manufacturing and marine engine business moving forward.32

Italian manufacturer Technogym had the second highest market share at 17%, followed closely by Amer Sports of Finland. Founded by Nerio Alessandri in his garage, Technogym began in 1982 with a focus on innovative strength training equipment and later began manufacturing cardiovascular training machines. It served as the official fitness equipment supplier for many Olympic Games, beginning with the 2000 summer games in Sydney, Australia.33 Amer Sports owned the Precor brand, and it sold 90% of its products to commercial customers. Founded in 1980, Precor had introduced the first ergonomically sound rowing machine. Precor now produced a variety of cardio and strength training machines.34 Founded in 1975, Taiwan-based Johnson Health Tech sold to commercial customers under the Matrix and Vision brands. It also served the home market with brands such as Horizon and Tempo.35

Industry analysts expected further mergers and acquisitions. For now, though, the market beyond the four big players remained relatively fragmented. Some new firms continued to emerge. Most notably, Peloton launched in 2012 and sold premium indoor bicycles to home consumers for $2,000 each plus a $39

per month subscription plan that offered individuals thousands of workout regimens as well as on-demand and livestreamed classes. Technology on each bike enabled individuals to communicate with fellow riders. By the summer of 2018, Peloton had developed a cult-like following. The firm had sold more than 100,000 bikes, and it had begun to produce a $3,000 bike aimed at the commercial market. The company also announced that it would be manufacturing a $4,000 high-tech treadmill. By August 2018, Peloton had raised roughly $1 billion in outside capital, and the most recent investment valued the firm at $4 billion – more than the estimated value of Brunswick’s fitness business.36 CEO and founder John Foley remarked, “We're not a hardware company. We don't compete with those companies. Those companies are yesteryear… We're not committed to trying to sell you a treadmill. We want to get you fantastic content and great classes and instructors and community — whenever you want it, however you want it, so it works for you.”37

History of Planet Fitness

In the early 1990s, Marc and Michael Grondahl purchased a defunct Gold’s Gym in Leominster, Massachusetts. Marc Grondahl described the failure of this initial foray into the health club business, “It wasn’t the right decision. We ended up getting evicted. We didn’t have enough experience, the location was bad and it didn’t have enough parking. There were lots of problems.”38 They tried again with a new location in 1993, and they adopted the name Planet Fitness in the following year. The brothers experimented with the business model until finally settling on the $10 per month pricing plan and the “judgement-free zone” brand philosophy in 1997. Michael Grondahl explained how the company learned from its early missteps:

“It's very, very difficult to make money in the fitness industry. In order to thrive, you really have to have a niche and sell it. You've either got to be at the high end or at the low end; otherwise, you're not in at all. We're at the very low end: Members have access to a great club for 10 bucks a month, and I don't see that changing. We keep it as simple as possible, so that there are as few areas to disappoint as possible. When we started out, we included perks that everyone else had, such as day care and yoga classes, but none of that made sense for us. We got rid of unnecessary perks and went hard with cardio equipment.”39

The company opened its first “bare-bones” gym in 1998 in Portsmouth, New Hampshire. They ditched many of the features and amenities that they had put in place in their original gyms. Chris Rondeau, one of the earliest employees, explained the “aha” moment that he experienced when this gym opened:

“We realized my pager was going off for the first three stores which had all these moving parts and pieces with things that were going wrong. In the day care, you would have one kid bit another kid, or they had run out of protein drinks and the blender is broken, or the aerobics instructor has not shown up and people are going mad. In that fourth store, our members were happier because we couldn’t disappoint them. We were open 24 hours a day, seven days a week and the product runs no matter what.”40

The Concord, New Hampshire gym experienced a water problem for several days in 1999, frustrating its customers who could not take hot showers. Managers apologized for the inconvenience and provided

members with free pizza. The “Pizza Monday” tradition each month began with that small, much- appreciated gesture.41 Growth accelerated in 2003, when the company began opening franchise locations. By 2006, the company operated more than 100 gyms around the country.

As the company grew, Michael Grondahl served as the CEO, while his brother worked as the chief financial officer. Rondeau became an owner ten years later and became the chief operating officer. The three men sold a large stake in the company to TSG Consumer Partners, a private equity firm, in November 2012. Soon thereafter, the Grondahls stepped away from management, and Rondeau became the CEO.42 Planet Fitness conducted an initial public offering in August 2015.43

Rondeau continued to serve as CEO for the New Hampshire-based firm in 2018. He had come a long way from the 19 year old who began working at the front desk of a Planet Fitness gym in 1993. Rondeau reflected back on his decision to drop out of college to work at Planet Fitness full time: