There is something simple but powerful about the low-cost provider business model. Companies that are built with a culture of reducing costs to pass savings back to customers tend to carve out advantaged positions in many retail categories.
We’ve studied Aldi, Amazon, Costco, B&M and Dollar General, Admiral / PGR and many other low-cost providers to understand what drives the persistence in returns for discounters across categories. The discount gyms, including Basic Fit (BFIT), The Gym Group (GYM) and Planet Fitness (PLNT), also fall into this category. We also interviewed the founder of The Gym Group, the UK's second largest discount gym, last year.
Over the last 15 years, two factors have been driving the growth in discount gyms:
These two structural drivers plus the cheap and convenient offerings of discounters has led to increasing market shares across all regions; Planet Fitness owns ~20% of the US market, UK discounters ~12%, and BFIT has a lower but growing share of European fitness. It’s also clear from studying PLNT's oldest markets that discounter penetration can reach levels beyond 20%.
What's interesting in the discount gym investment debate is not future growth but the sustainability of the returns on capital.
Discounter gyms in all corners of the world earn similar ~30% cash-on-cash returns. We hosted an IP investor dialogue to explore the sustainability of ~30% pre-tax ROIC and compare and contrast GYM and BFIT’s opportunity.
From the reported accounts, this is roughly the cost of opening a GYM and BFIT discount gym:
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