Asia gyms: Muscling through the mire

When Exacta Capital Partners, a PE firm affiliated with Mizuho Bank, led an acquisition of gym operator Anytime Fitness Asia last month, the transaction turned a few heads. This was in no small part because gyms in Singapore, a key market for the company with 71 locations, were still shuttered due to COVID-19.

As markets across Asia slowly reopen for business, the fitness industry is expected to rebound, but accessing this upside will be a delicate matter of properly calculating several operational variables with jurisdiction-specific nuances. Anytime Fitness Asia, which operates 250 gyms across Southeast Asia, Hong Kong, and Macau, may require more calculation than most.

Estimating the timing and exuberance of the recovery in any given market is part of the difficultly. But perhaps more important is understanding the sub-segment of the market being targeted. Anytime Fitness Asia does not own its gyms, opting instead for a franchise model. Although each gym benefits from the global brand name, they are often subject to tight budgets that make it difficult to meet COVID-19 sanitation requirements.

Nick Bloy, a managing partner at Navis Capital Partners, sees this lower end of the market as relying on small, densely organized gyms and minimal staffing, all of which puts pressure on the labor-intensive work of disinfecting equipment and monitoring customer health. Navis’ key exposure to this space is Celebrity Fitness, a higher-end chain it backed in 2007 and helped merge with Oaktree Capital-owned Fitness First in 2017. As a premium player, Bloy says the company is able to match its historic capacity levels, even with social distancing.

“The pain in the fitness space is going to be felt at the entry level,” he says. “As household incomes drop, that’s the part of the market that drops out first. There could be a trading down from the segment above within the same business. But at the end of the day, the fat part of the pyramid is down at that low level, and it’s quite a tapered pyramid, with only a small number of people who pay high gym fees at the top. The lifetime value of those members is huge, whereas the lifetime value of a low-end member is actually very low.”

Demographic tailwinds

This is not to say that Exacta’s Anytime Fitness gambit is necessarily a miscalculation. The drivers for post-lockdown fitness revivals across Asia tie in with some of the sturdiest macro themes in the private equity playbook. Asia is underpenetrated and ripe for growth in this space, with less than 10% of the population signed up to a gym membership in most markets versus roughly 20% in the US.

According to The Global Wellness Institute, Asia Pacific’s fitness market is worth $22.7 billion annually, with a $494 per year spend per participant. Australia ranks highly in terms of membership penetration at 24%, although the local market size is only $3.9 billion. China, by comparison, claims a market size of $5.5 billion despite only 1% of the population having signed up for a gym membership. Near-term growth is expected to be spurred by greater public health awareness due to COVID-19 and government-led education to that effect.

The fitness space is also strongly associated with young consumers seeking new ways to socialize. That’s important because while COVID-19 has made it clear that exercising can be done for free at home, the gym is becoming a more important meeting place for digital generations with increasingly cloistered lifestyles. Not coincidentally, modern gyms have taken on a lively atmosphere far removed from the bodybuilding sweatshops of decades past.

Frankie Fang, a managing partner at Starquest Capital, jokes that this experience is like “working out in a nightclub” and sees social ambiance as a core demand driver. Starquest entered the market last year with participation in a $53 million growth round for China’s SuperMonkey, a pay-as-you-go chain that emphasizes app-connected socializing among customers and instructors, as well as budget pricing. Classes cost about $10 a session on average.

SuperMonkey has kept a hygienic profile during the pandemic by eschewing weights, treadmills and other equipment in favor of machine-free studios for group aerobics and yoga. It sees itself as having an advantage over higher-end players due to its lower rent and equipment maintenance burdens. This has facilitated optimized location selection in residential areas and shopping malls. Founder Liu Shuting’s background in real estate is considered one of the company’s hidden strengths. 

“It’s a good time to invest in this area, but be careful about the business model,” Fang says. “In the traditional subscription model, it’s very hard to build customer loyalty and there’re often quite a lot of people, so locations become overcrowded with people touching all the equipment. The new model is based on hygiene and making exercise more fun and affordable. People think about exercise as needing to wake up early, go somewhere and do hard work. SuperMonkey breaks that by creating dedicated social groups and a new way of enjoying exercising.”

Selling fitness

One common challenge faced by both premium and budget brands hit by COVID-19 is how to maintain engagement with customers wary of going to public places, no matter how disinfected they may be. Monetization of virtual gym services is difficult given the plethora of free instruction online, but the connectivity that comes with digitization can be a powerful intangible. During the peak of China’s lockdown, SuperMonkey scrambled an offering of various online exercise classes, one of which went on to attract 100,000 viewers.

Meanwhile, CDIB Capital-backed World Gym Taiwan has begun offering streaming instruction, including one-on-one lessons, which is a key value-driver and point of differentiation for the company. This is coupled with a concerted publicity campaign targeting universities aimed at explaining the benefits of exercise as a means of strengthening the immune system to fend off COVID-19.

“Going forward there will be more of a hybrid provision of the service, partially online and partially at the club. We see the demand is there and it’s not going away,” says Lionel Saint-Exupery, CEO of CDIB. “If anything, governments and local commissioners are going to be thinking of ways to put health at the forefront of people’s minds in general, and that will benefit the overall fitness industry. You can capture that, and we already are at World Gym, both at the clubs and at home through digital.”

World Gym Taiwan has been virtually unscathed by COVID-19, with five new locations already launched since the start of 2020 and at least 15 more expected within the year. The company currently has about 85 clubs, 450,000 members and 3,000 personal trainers, making it the largest operator by far in its home market. Revenue and profit were both up about 20% during the past quarter.

“Growth has always been free cash flow-funded,” Saint-Exupery explains. “That puts us in a position of strength at a time of crisis. We have the financial means to endure such a difficult period and we can afford to keep opening new clubs, be member-friendly and retain well trained, motivated employees, therefore strengthening loyalty and gaining market share.”

World Gym Taiwan doubtlessly had to invest significantly to maintain this traction. All clubs – which each occupy some 50,000 square feet and accommodate 6,000 members – have staffed up to meet new sanitation expectations while being outfitted with a range of new equipment such as thermal sensors to monitor members as they come in the door. There have also been payment concessions that allow members not using the facilities to temporarily freeze their memberships.

The main takeaway here is that these measures could not have been taken during the social and economic upheaval of COVID-19 with a heavily indebted business. This was precisely the problem with Fitness First during the global financial crisis. BC Partners acquired the company in 2005 in a levered buyout that left the company with few resources to prop up operations as the macro situation waned. Oaktree acquired the bankrupt business in 2012 through a debt-for-equity swap. 

Footprint question

World Gym Taiwan’s success also hints that gym survival during COVID-19 may also depend on a concentrated geographic approach. There can be significant cross-border synergies in standardizing best-practice operational procedures, but single-country fitness businesses are seen as more effective in exploiting economies of scale in terms of growing a portfolio of locations and sourcing equipment.

There are at least two counterpoints to this observation, however. First, gym operators diversified by geography during COVID-19 will have hedged their risk related to regulatory restrictions and social hesitancies in any one jurisdiction. Second, and perhaps more importantly, customer confidence around quality and professionalism is a critical survival trait that is best fostered through with an international image.

The Pure Group, a Hong Kong-based studio operator with expansion locations in Beijing, Shanghai, Singapore, and New York, has angled this thesis toward high-income professionals with high-profile urban locations. The FountainVest Partners-owned company also has significant interests in nutrition and apparel.

“Market diversification has been very beneficial for Pure’s brand,” says Frank Tang, CEO of FountainVest. “A lot of international executives from Hong Kong and Singapore are now based in Beijing and Shanghai. When they come to mainland China, they immediately recognize this familiar brand and its premium quality standards. Many premium commercial property operators in mainland China are also familiar with the brand and are highly interested in attracting Pure to their malls and office buildings.”

• Tweet  
• Facebook  
• LinkedIn  
• Google plus  
• Save this article  
• Send to  

• Topics
• Greater China
• Southeast Asia
• Consumer
• Buyouts
• China
• Taiwan (China)
• Navis Management
• Fountainvest Partners
• CDIB Capital
• Starquest Capital