The Gym Group: Low Cost Economies of Scale | In Practise

The Gym Group: Low Cost Economies of Scale

Founder of The Gym Group

Learning outcomes

  • Why the low cost sector is set to double penetration in the next 5 years
  • Member demographic and why member churn is an irrelevant metric
  • Scale advantages of The Gym Group versus smaller operators
  • How The Gym Group has 6% of sales in labour cost versus 25% for mid-market gyms
  • Capex per plot and marketing spend pre-opening and at maturity
  • Scale benefits when negotiating with landlords
  • Potential pressures on incremental return on capital as Gym scales
  • Future competitive challenges in the UK low-cost sector
Print

Executive Bio

John Treharne

Founder of The Gym Group

John is the Founder of The Gym Group and has over 30 years experience building and scaling gyms in the UK. In 1991, he started Dragons Gym, a PE-backed family gym, which he grew to list on AIM in 1997 before selling to competitor Crown Sports in 2001. John then ran Crown Sports for 3 years before opening the first low-cost gym in the UK in 2007. John scaled The Gym Group to over 180 gyms today and is currently a Founder Director of the business.Read more

View Profile Page

Disclaimer: This interview is for informational purposes only and should not be relied upon as a basis for investment decisions. In Practise is an independent publisher and all opinions expressed by guests are solely their own opinions and do not reflect the opinion of In Practise.

John, can we take a step back to the 90s and could you provide some context to the structure of the UK leisure market?

I started my first business, Dragons Health Clubs, back in 1991. It was a very different market then. The market was dominated by mid-market operators; the low cost sector didn’t exist. Rather like you see now, there was no Lidl, Aldi, EasyJet or Ryanair; there was no Gym Group or PureGym at that point. The market was very much dominated by Fitness First, LA Fitness, David Lloyd Leisure and Esporta which was, interestingly, a business I went on to run toward the end of the decade. A very different market.

Were Dragons gyms similar to mid-market gyms today?

The focus was, predominantly, on the family market and providing a wide cross-section of facilities. Obviously, gyms and classes, but also swimming, food and beverage, beauty therapy and retail. It was very much targeted at a family market, as is David Lloyd today. Fitness First were the biggest operator at that point and it’s interesting that, now, LA Fitness has disappeared completely and Fitness First has been bought out by, predominantly, low-cost operators.

What did you learn in those early days running Dragons that you took on to The Gym Group?

It was the first time I’d set up a business and started trading it, so marketing particularly. Probably the most important thing is learning the importance of your customer base and looking after the customer. At the end of the day, they are what enable you to be successful and survive. Putting them at the forefront of everything you do is key. How you market to that membership base; how you entice people to join your facility, as opposed to somebody else’s, is fairly key.

The biggest lesson l learned was how important site management is. As you start to build a chain of sites, it’s critical you surround yourself with high-caliber, local management. Many operators get that wrong. They believe they can successfully run a business from the center. In my experience that doesn’t work. It is essential to recruit the very best local management you can afford.

How do you incentivize those site managers? I assume you have one site manager per gym who effectively manages the unit?

Absolutely. I suppose that is the key differential. My belief – and it applies just as much to Dragons as it does today, to The Gym Group – is that you empower managers to manage their individual sites and make them totally responsible for everything which happens in them. Obviously, they are responsible financially, for marketing, sales, cleaning and maintenance. That doesn’t mean they don’t get support; of course they do, from the center. But they are ultimately responsible for that.

Let me give you a really good example of it. I can remember, when we had our third site, at Vauxhall, a helicopter, unfortunately, crashed into the building from which we operated which meant that our gym was immediately closed. The manager immediately arranged for our members from that particular site to use a nearby site. They arranged it and communicated it by text and email to everybody within 15 minutes of the incident occurring. That is a really good example of good quality, local management. It didn’t take a week for head office to sort it out. It was dealt with, literally, in a matter of minutes.

How do you incentivize and compensate the general managers of sites?

I’ve always believed in ensuring they are properly rewarded. We tend to pay our management slightly above the going rate but more importantly we give them an effective bonus structure. Involving the management in the whole process of budgeting, agreeing the targets for that individual site and then giving them good financial rewards for actually delivering those results. This is not done only annually but bonuses are paid to our managers on a quarterly basis. If they’ve had a really good January, February and March, at the end of March, they get a bonus for that effort. I always feel it is important that bonuses are timely. There is an annual element to any bonus scheme, but if you just do it at the end of the year, people have forgotten about the efforts they put in nine months previously. Having a bonus scheme that rewards people annually, but also quarterly as well, is critical.

What key metrics at the site level are managers compensated on?

Revenue, profit and return on investment. They have a real benefit in every aspect of running a site. We mentioned revenue and so on but if they turn unneeded lights off, they are contributing to their bonus scheme. They really are rewarded for keeping control over income, but also cost.

In terms of the capex cost of £1.4 million to build the plot, are the site managers involved in this capex or only the operational costs once the gym is up and running?

No. We involve them in things like the gym equipment that will go into their sites because we believe every site has slightly different demands. Our managers understand that better than anybody else. In terms of purchasing, it is much more cost effective to do that centrally. That enables us to negotiate things like gym equipment but also everything else as well, such as lockers, flooring, air conditioning plants and so on. Those are always going to be better purchased centrally.

How do you train your general site managers to keep those costs low? Is it just in the person’s character to have that mindset to turn the lights off when they are not needed or do you have processes to train them?

It is part of the recruitment process. We look for managers who may well have learned those skills working for different businesses. Most of our management have a gym qualification. They may come from retail, hospitality or other businesses, but generally multi-site and where they are used to dealing with the importance of customer interaction. Whether they’ve worked in a cinema, a ten-pin bowling alley or a restaurant is not terribly important.

Which costs do general site managers find the hardest to keep down?

Sign up to read the full interview and hundreds more. No credit card details required.

Audio

The Gym Group: Low Cost Economies of Scale

February 22, 2021

00:00
00:00
Sign up to listen to the full interview and hundreds more. No credit card details required.