Planet fitness protein 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