There are two types of gyms in the UK: private and public.
Public gyms are gov't sponsored and provide YMCA-type services.
Private gyms are commercial enterprises and bifurcate into two sub-categories: traditional & low cost.
What's the diff?
2/ The Traditional Gym Package
Traditional gyms offer a paid membership, fixed contracts, and tiered pricing based on several services offered.
These gyms provide everything you could imagine from tennis courts, swimming pools, saunas, and coffee/smoothie bars.
GBP 30-80/mth
3/ The Low-Cost Gym Package
Low-cost gyms provide everything a gym-goer needs and nothing more.
Members can enjoy free-weights, cardio equipment, and other resistance machines without any bells and whistles like saunas, pools, or fresh juice bars.
You get what you pay for.
4/ Cost Structures & Margin Profiles
Mid-to-premium tier gyms sport significantly higher cost structures than their counterparts. They must charge more for more services offered.
By offering essentials, low-cost gyms can charge lower monthly rates & hold a better margin prof.
5/ Gyms Are Commoditized Goods
Weights weigh the same regardless of your monthly fee. Plus, it doesn’t matter where you squat as long as you have a bar and a rack.
There are two ways gym biz can differentiate in a commodity market:
- Price
- Amenities
6/ Competing on Amenities An Inferior Game
Competing on amenities is a dangerous game for gym businesses and creates an uphill battle on costs.
More services = higher membership fees. Higher membership fees = fewer members + higher churn rates.
It's a rat race of lavishness.
7/ $GYM Plays The Easier Game
GYM wants to play the low-cost game. They *want* to keep the gym operating a commodity business as long as possible.
Why? Because in a commodity market, the lowest-cost wins every time.
Solid unit economics @ lowest prices = competitive edge
So what do they do? They go back to the amenities game.
Mid/upper-tier gyms add more services to justify their price.
9/ The Low-Cost Market is Growing Fast
As of 2019, nearly 16% of all UK residents are members of a health/fitness club. That’s up from 12% in 2007. Yet only 3% of residents belong to a low-cost gym
A 2019 PwC report estimated that low-cost gyms would account for 5-7% of gyms.
10/ Why $GYM Can Continue Its Expansion Strategy
There are four reasons GYM is best-suited to capture this growth:
- High per-site ROICs
- Low leverage vs. peers
- Economies of scale drive lower build-out prices & favorable lease terms
More sites @ lower costs = higher ROICs
11/ Back-of-Envelope 2026 Estimate
Let's assume GYM grows sites ~5%p.a till 2026. That gives us 247 locations. We'll also assume each store averages 970K in revenue, 320K in EBITDA and 240K in EBIT.
We end 2026 w/ 240M in revenue, 77M in EBITDA and 55M in FCF (13% yield).
12/ Concluding Thoughts
The competition will surely emerge, trying to eat away GYM’s mouth-watering ROIC and margin profile. But so far, they haven’t.
Each new gym the company opens further entrenches its competitive advantage in the market.
The low-cost model wins in gyms.
13/ Credit For Idea: Tollymore Investor Letter
Big thanks to Mark Walker (@walkertollymore) for his write-up. It kickstarted my research and provided excellent commentary.
The last decade hasn't been the same as Graham points out in his book.
It hasn't been better to "buy a group of large companies that are relatively unpopular."
In fact, it's been better to buy "glamorous and dangers fields of anticipated growth"
2/ Using Microsoft as An Example
When you stop and think about $MSFT, it'll blow your mind. Anderson notes:
"In its last year as a private company, $MSFT made $24 million net profit. In 2018 it earned $30.27 billion. That’s at a 24& CAGR over 33 years w/ 30% EBIT margins."