Interview Transcript

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?

Low-cost sits absolutely at the core of everything the business does. The facility is designed to be cost-effective to maximize a reduction in energy costs and water use. A key part is actually building it into the initial design. Then there is also the way you operate. An example we use regularly is that most mid-market operators spend 25% to 30% of their turnover on staffing. We spend 6%. Ironically, we do that by partly the way we operate, but also how we use things like CCTV and technology to reduce the staffing requirement. There is a huge focus on providing exactly what the customer wants without spending money on the things they don’t want. That is what a low-cost gym is. It provides excellent gym equipment without swimming pools, tennis courts or retail areas. In our view those all absorb unnecessary cost in terms of staffing, energy and so on. The culture really starts right from the beginning and is an integral part of everything the business does.

Organizationally, how many staff do you have on the ground per site? Is it only one manager per site or do general site managers sometimes manage more than one site in the area?

We have a manager and an assistant manager in every single site. We have a team of personal trainers who spend part of their time working for us but they are also self-employed and carry out their own personal training sessions for about a third of our members. Personal trainers spend part of their time cleaning and showing prospective members round, but the bulk of their time is carrying out personal training and inducting new members. It’s a combination of full-time management plus a personal training team. We outsource other aspects such as cleaning; all of our sites operate with contract cleaners.

How does personal training work? They are self-employed but part of their contract is to do inductions or show people around to earn the right to serve your members?

Our gyms typically have 10 to 12 personal trainers per site. Each of them spend 10 to 15 hours physically working for us. During that time, they work for us but also engage in training programs. The rest of their time is spent on personal training. During that period, they are self-employed and their relationship is very much direct with the customer.

So you pay them a part-time wage for those 10 to 15 hours and the rest of the time they train your members?

Yes.

How important is the personal training side of your offering?

About a third of members partake in personal training. It’s one of the things we’ve seen bolster the low-cost sector because many people give up more expensive memberships costing over £100 a month and join one of our gyms for £20 a month. They then spend what they saved on personal training. Many people find they need that one-to-one stimulus of a personal trainer to enable them to achieve their goals. Much of our membership base comes from the mid-market where they want to access personal training and are not bothered about swimming or tennis. The Mintel reports which cover this sector will tell you over 70% of people who use health clubs or leisure centers only ever use the gym area itself.

How would you say The Gym Group and PureGym differ?

There isn’t a huge difference between the two. Our branding is different but fundamentally we operate on a very similar basis. We’re both technology-driven businesses who are focused on providing an online experience, in terms of joining. We even buy the same gym equipment so I would find it difficult to persuade you there is a huge difference between the two. That is emphasized by the fact that, back in 2013, before we listed on the stock market, we considered merging with PureGym. If the CMA had agreed to that, the two businesses would be one entity today, but that didn’t happen.

Would you consider Lidl and Aldi to be terribly different? Ryanair and EasyJet are different, but are fundamentally very similar. PureGym and The Gym Group are also fundamentally very similar.

Are they also similar in square footage and the formats and locations you use for plots?

Yes; very much so. Similar sort of size. That comparison isn’t just with PureGym. The international low-cost operators such as Basic-Fit, who are the biggest European operator or Planet Fitness, in America, they operate very similar sized facilities. They typically occupy 1,500 square meters or 16,000 square feet of space.

How does the pricing differ between The Gym Group and PureGym?

Again pricing is very similar; typically around £20 a month. It differs based on location. PureGym bought many sites from LA Fitness so they have a few more sites in London than we do. Running costs in London are higher, therefore, so are the membership rates. On average across the whole country, pricing is very similar.

How do you set the price per gym in a particular region?

It is set site by site because it depends on what other competition is in the market; not just other low-cost competition but also premium operators. What does the local authority market charge in that particular location and how many competitors are there is what determines the pricing.

When we opened our first site in Brighton, we charged £15 a month. The local David Lloyd Center was over £70 a month, but their exact same facility in Liverpool was only £45 a month so £30 cheaper. Our pricing structure is different and is based on the local market. One of the big advantages of having an online business is that we can change the price at a site in minutes. If we want to run a particular promotion or want to consider either putting the price up or down, the benefit of an online business is the ability to do that very quickly.

So the difference in the average price per member for PureGym versus The Gym Group is perhaps due to PureGym having more locations in London?

Their London sites charge more which skews the overall average revenue per member, but if you applied that nationally there is not a huge difference to the average pricing.

Do you set the price based on a target return invested capital and maturity of that plot? Take a London site charging £20 a month versus one in Liverpool charging £12 to £14, would the plots have the same underlying returns?

They obviously differ on a site-by-site basis so out of London rents tend to be cheaper. Running costs are, generally speaking, cheaper outside London. Staffing costs are a bit more expensive in London than they are elsewhere so all of those factors go into it. One of the key measures which people look at, particularly related to low-cost, is the average return on capital at maturity. We define a mature site as a gym which has been open more than two years. You would have seen from our financial data that we produce an average of over 32% return on capital per site across the whole estate.

Is there any difference in that return on invested capital for London versus elsewhere?

We don't separate it because you just have different metrics. You charge more but the rent is higher so your cost base is higher but so is your turnover. The net effect is very similar.

If you have a mature gym with 6,000 members after 2 years and the relative position of The Gym Group hasn't changed much versus PureGym or the mid-market or David Lloyd for example, when do you choose to adapt the price?

It will be based on many factors. Inevitably, capacity has an impact because if a gym is particularly full and because low-cost gyms tend not to have membership contracts, if the customer isn't happy with the service they provide or if a gym is overcrowded, they can leave. It's not something we want them to do but because we don't have any membership tie in, members can join for a day, a month or any length of period which suits them. We can use pricing to impact the demand. If we have a gym which is nearing capacity, we will use price to help us control that capacity.

Do you always look for a minimum gap between the mid-market players and PureGym?

We would expect to be similar to PureGym but that is one of the factors influencing pricing. We also look at other operators and consider what we are choosing ourselves. We have 184 sites throughout the UK, and in a town like Brighton, we have four gyms. We have nearly 50 sites in Greater London so our greatest competitor could be one of our own gyms. The nearest gym to Vauxhall is our own gym at Stockwell. We also to take into account the pricing of our sites and at what capacity those sites are.

How do you strategically roll out new gyms? For example, would you build a new gym next to or in the same small town as a PureGym or how do see the competitive landscape?

One of the factors is the size of the market and as you said a small gym, if it was a small town with a relatively small population, it would be highly unlikely to build a gym next door to a PureGym. Obviously in big cities where you find the bulk of PureGyms and The Gym Group, we can have a gym that might be less than a mile apart and both of them will be successful because even within a mile, you are serving a different market. Brighton is a good example where we opened our first gym near Kemptown. Our second gym is less than a mile away on the London Road and they service different markets within the community. For instance, the London Road site has more student members. Stockwell and Vauxhall are one tube stop apart which is very common in London but it is enough to create a different market.

It's interesting because in the more suburban or rural areas of the UK the gym is almost a local monopoly in the center because if there's a PureGym in a town that has 70,000 people, would you go and build a Gym Group next door?

We are unlikely to build it next door because all you end up doing is cannibalizing each other’s potential market. The point I'm trying to make is that, in a market of that size, you would certainly be able to build a gym a mile away because it caters to different markets. In Bristol, for instance, both The Gym Group and PureGym have several sites in the city center but they also have a number of sites surrounding the city. None of them are within a mile of each other but they all service different communities within the Bristol environment. Bristol is quite a big city but if you were going into a town with a population of 10,000 you might consider that to be a one gym town. If you knew there was a PureGym or a JD Sports gym, you might think twice about putting another site into a small community.

The total addressable market is really large because you can have the same low-cost gyms next to each other in these relatively smaller towns?

A couple of years ago, we reported on this in one of our annual reports but PwC did some fairly detailed research into the potential size of the low-cost market; this ignores the small box gym that we offer that is, obviously, smaller than our full offering. The PwC report clearly shows that the low-cost market could over double in size over the coming years. There certainly is plenty of market penetration and the reason for that is exactly as you have mentioned; you can develop several sites in big cities.

In 2008 I did some research into the biggest German operator McFIT who at that point had eight sites in Berlin. Today they have over 30 sites which are all successful. Over the past 10 years, they have taken more and more gyms but they are well spread out. Some are in city centers and others are suburban, but it just shows the sort of potential. Berlin is about the same size of Birmingham so it's a big city but it just shows the growth potential over time they have managed to develop, and the same is true for us. Ten years ago, we had one site in Brighton and we now have four. I am sure if we spoke in five years’ time, we would probably have six or seven.

Did you see any difference in the return on capital for the incremental Brighton gyms?

No, because they are far enough apart not to compete with each other. McFIT have seen the same in Berlin where they still show the same returns with 30 sites as they did nearly 10 years ago.

They could effectively be better because your brand is more established so you could get to breakeven quicker or have more starting members upon opening?

That is true, but there is another factor worth mentioning which is multi-site membership. We have a product called LIVE IT which entitles you to additional benefits. You pay another £5 a month and can use any of our sites. That is a huge differentiator, particularly to small operators. When you join one of our Brighton gyms you can pay an extra £5 and access all 184 sites throughout the UK. McFIT do the same in Berlin, where if you join one of their sites and pay a bit more money that then enables you to use all of the Berlin sites which will give you a gym near where you live or work.

The Gym Group has nearly 25% market penetration. 65% of all the low-cost gyms which were opened last year were either The Gym Group or PureGym so larger businesses are able to offer things that small operators cannot provide.

Can we walk through the process of opening a typical low-cost gym? Besides the location what do you typically look for when opening a new site?

So there are all sorts of factors and obviously, I am not going away any trade secrets. Demographics, size and quality is a starting point. There has to be enough potential members in the location. Low-cost gyms tend to be community gyms and most of their members will come from a mile or two of a site. We spoke earlier about one tube stop being enough to generate a different market, so what you are interested in is the people who live or work in the immediately vicinity. Visibility is a very important factor and the ability to get good signage.

In certain locations, car parking is vital. It is not terribly important in big cities or particularly in Central London, but in more residential location like Horsham or Worthing, car parking is essential. Then there is the actual building itself; does it work and can you easily convert it? There are also of course the financial dimensions. What rent are you considering and will the landlord give you capital contribution or a rent-free period? Many factors go into the final decision on whether to do a site or not.

With regard to the standard 15,000 to 16,000 square footage gym, in your report you state £1.4 million capex to open a new site. What portion of that is equipment expenditure and what do you include in that number to get up and running?

I will have to be a little careful because, as a public company, I can only comment on publicly available information. We spend as we've stated, about £300,000 on gym equipment. Our typical fit out cost, depending on the size, is about £1.3 million and we have also quoted that it is about £150,000 a site less than we were spending 10 years ago. The reason for that is buying power because we buy a lot of equipment, gym equipment being one aspect. We buy lots of lockers, flooring, air conditioning plants and lighting and buy that centrally.

That enables us to negotiate good terms because we spend a lot of money on gym equipment. This is not only for new sites because, with an estate the size of ours, every five years we refurbish them. We buy new gym equipment, lockers and boilers and we open about 20 new gyms per year. We obviously buy for those but also buy for the older estate because we have a very strong focus on maintaining the quality of our existing estate. Again, that is something small operators cannot compete with. We are able to buy gym equipment far cheaper than the smaller operator can.

How has the relationship with landlords changes as you have scaled?

It is very market driven. I launched the first low-cost gym in the UK in 2008. It was the start of a recession and the property market was very helpful for low-cost gyms launching. It is not surprising that both PureGym and The Gym Group which dominate the sector in terms of growth, took advantage of those property prices which were available in the market. Another big advantage of low-cost gyms is their ability to convert all sorts of premises. Presently and unfortunately, retail space is increasingly becoming available. You won't be surprised that we are spending increasingly more time converting retail space into gyms.

The same way, in 2008, where we converted office space into gyms because low-cost gyms are very good users of that space. They need to be able to negotiate good deals with their landlords, mainly on rent but also on whatever contributions they can agree. This is where covenant strength comes in and was one of the significant reasons why The Gym Group floated on the stock market in 2015. It helped because our gearing level is much lower than most of our competitors. Our covenant strength as a PLC is that much stronger. This enables us to secure the best property deals and we will continue to use that benefit. We have a similar situation as we come out of COVID-19. There is a lot more property on the market and I think rental rates will start to come down which can only be good for the low-cost gym sector.

How has the landlord's contribution changed from 2008 to the better times of 2015 to today?

It very much depends on the size of the landlord; larger landlords are more prepared to give capital contributions. Quite often smaller landlords, of whom a lot of our landlords are, cannot physically afford to give capital contributions and therefore tend to give more in rent free periods. That is where you have seen more of a change. The level of capital contribution from 2010 onward tended to reduce in size and there was more benefit coming from rent free periods. That is beginning to revert as there is so much retail and other space available on the market.

How many months free rent does a small landlord typically give you?

It very much depends on the negotiation but something around 12 months.

How long does it typically take to get a gym open from one of those small landlords?

We have openly commented that it takes us 10 to 12 weeks to fit out a gym. That assumes we get a shell site which is clear and supplied with normal services such as gas, water and electricity. We start marketing the site three months before it opens. On average, we consider a site to have reached maturity within two years of opening. We have openly commented in our annual report that, on average, our sites are doing better than break even within six months of opening. That very much depends on the time of year a gym opens. Probably, a gym which opens in January fills up quicker than one which opens in summer, but the average is to reach a breakeven point in under six months.

Do you exclude the rent payment because you typically get 12 months rent free?

No, from an accounting point of view you do. Even though you do not physically pay the rent, in terms of accounting standards you still have to show the rent that you would normally pay. You take the whole rent roll over the life of the lease and divide it by the length of the lease. On a 15-year lease, you would take the total rent, divide it by 15 and then apply that to your accounts every month.

If we assume that larger landlords have more property in London and are more likely to give you capital contributions, how does that change the attractiveness of opening new plots in London?

It would not be true to say that is necessarily the case. Many retail parks outside London are owned by big landlords. If you looked at our landlord list, it is quite diverse. We have people who own one property and large pension funds who we might have six or seven sites with. They are not necessarily in London and could be spread out all over the country.

My question was more around, were there previously more premium and expensive locations pre-COVID that you wouldn't have been able to enter, but now post-COVID, with a decline in retail plus potentially higher capital contribution from landlords, the economics make more sense for you to open a low-cost gym even in higher quality retails parks or premium locations in London?

That would be true but one of the factors but, to some degree, related to COVID-19 it is an unknown as to how city centers are going to return. One of the factors of a low-cost gym, which is open 24 hours a day, is the fact that 35% of its members have never used a gym before. You also attract many shift workers and because of the price point you attract people who work in shops as well as taxi drivers and right across the social spectrum. Therefore, that has a huge impact on particularly gym capacity.

If you are able to attract people who are going to use the gym from 5:00 AM through the early hours of the morning, you can handle more volume. That is one of the issues and nobody knows what will happen post-COVID, particularly in Central London. With retail, bars and restaurants closed down and increasingly more people working from home, that may change the dynamics related to the type of property that you try to acquire. There may be a shift away from city centers to residential rural locations. Nobody really knows yet but most people assume the work from home concept will be more prevalent in future.

From a planning perspective, is it harder to open a 24-hour gym in a residential area?

Not with low-cost gyms because they are not noisy. There is background music but there is no food and beverage, no alcohol sold so you do not have noise related concerns about planning. You can see that from our estate, where all our sites bar one operate 24/7 and obviously all with planning consent.

It is interesting how low-cost gyms attract users who are not typical gym users. If they come early in the morning or late at night it enables you increase the utilization of your assets which increases the unit economics. Is it crucial to target shift workers or taxi drivers who work non-peak hours?

The Gym Group was originally backed by Bridges Ventures who are a social investment fund. They were attracted to The Gym Group because of the diverse demographic profile of its members. We attract members who are on benefit at one end of the scale and multi-millionaires on the other and everything in between. That is what drives a change in the market place in just the same way more people travel by plane, prior to COVID, because of Ryanair and EasyJet.

It is a very different market, similar to Lidl and Aldi. There is no social stigma to shopping at Lidl. You go there because you can buy good quality product at a very competitive price. It is why you see all sorts of people flying with EasyJet because it is cost-effective to do so and there is no social stigma with flying with EasyJet or Ryanair. The same applies to low-cost gyms. If you’ve got two people running on a treadmill next to each other in kit, you would not have a clue whether one is a multi-millionaire with a Ferrari in the car park or somebody has come by bus because that is how they travel.

It is a socially different type of environment, and of course as part of that, price is a big driver and the sector is very much described as low-cost but it is more than just low-cost. It is more about the fact you appeal to a wider cross-section of people. By definition, many lower-paid people who work in retail and hospitality will be able to afford a low-cost membership, but they are quite often shift workers so they find a low-cost gym very attractive because they can use it any time they want. They can use it before or after a shift when most gyms are quite often closed. This is why PwC believes the market has considerable growth potential.

How would you segment the customer base by demographic, income or job type?

It would depend so much on where the gym is. We have gyms next door to major council estates throughout the UK which are incredibly successful. We also have sites, like Guildford, in highly affluent areas. The whole benefit of low-cost is that if does not only appeal to people with limited income but it also appeals to those who want to give up a £200 a month membership and spend the saving on personal training. We give people more flexibility and choice.

How do you approach the pre-opening marketing strategy to get 3,000 members as quickly as possible?

One of the keys to it is we employ the local manager very early on. He or she will join us three months before a site opens. We start with awareness marketing; things like sole distribution, Royal Mail drops, social media and leaflet dropping outside transport hubs, to ensure the market knows we are coming in the following three months. As part of that, we offer discounts, such as waiving joining fees or giving a lower price, if you commit to effectively signing a direct debit application prior to opening.

That price increases as you get closer to joining. In the month before a site opens there is a very intense marketing campaign, similar to what has happened previously but also taking up a lot of advertising space in the local vicinity and stepping up social media activity. As an online business, our aim is to drive people to our website and 94% of our members join online. The key factor is the earlier you join before a gym opens, the less it costs you and we guarantee you pay less for a period of time after opening.

Does that general manager have a budget they can spend in those three months to ensure you manage the cost of that?

Yes, but some of the advertising costs are spent centrally. We do a lot of TV advertising, particularly in January and February, so some of the marketing spend is inevitably central, but each manager has a budget to spend on activity locally. Things like handing out leaflets at the local train and bus station will be organized locally.

Is that marketing budget included in the £1.4 million capex spend?

The marketing spend is a pre-opening cost spent before the gym opens and is therefore capitalized as part of the £1.4 million. Once the gym opens, then marketing is part of its operational cost.

Most of those costs are for the discounts encouraging people to sign up pre-opening?

Yes; the Americans have a very good and probably better description of the market. They refer to our market as low-cost high-volume which describes it better than purely low-cost. It is similar to Lidl and Aldi; how do they compete with the likes of Tesco? They do not sell as many products but the products they do sell they buy in bulk. They buy more cornflakes.

Fewer and deeper SKUs.

Yes, so describing our sector as low-cost high-volume is probably more accurate.

What really drives economies of scale in the low cost sector? Going by the economics in your report it is roughly 25% of revenue with the other 25% being the opex. Is it down to the relationship with landlords and the discounts and better deals you make as a larger player?

It really goes across the whole sector. Obviously, in your capex costs, the more gym equipment you buy the better deals you can strike, but it goes right across the capex field including lockers, air conditioning plant and boilers. We buy and replace many of those every five years but it also applies to operational costs. Energy for instance; if you commit to buying certain levels of electricity, water and gas you can do deals based on volume. This is something we do that a single operator cannot do to the same degree. Purchasing power really does come right across aspects of capex and operational cost.

When a gym is at maturity and because the low-cost sector has a no contract policy, how does churn and retention?

Churn is not a particularly relevant metric for low-cost gyms because of the way they operate. We have quoted the average first period of membership of one of our members is 10.1 months. Of course, we monitor churn but it isn't a terribly important metric because many aspects of low-cost gyms are different.

In most of our sites, 25% of our members are students. They come and go three times a year. They come in October, leave at Christmas and come back afterwards. They are not real attrition because they come and go. You get members who want to use the gym in the winter and the autumn but want to run or cycle outside when the weather is better. That is fine in a low-cost environment and we track, in our view, more important things like returning members. 25% of our members who join each month are returning members. If you said to somebody like Lidl, Aldi or EasyJet, is churn important, their focus is returning customers and so is ours. Whether they stay for a long period of membership or come and go, it does not matter as long as they return. Our focus is much more oriented toward that than it is to membership churn.

Do you not see a period when you reach full capacity of 6,000, if you have 20% churn, you have to go out and look to acquire those new customers to replenish that base. Or are you saying it’s more a free-flowing transactional business?

It is but inevitably we have peaks. Gyms are busier in January, February and March than they are in July and August. That is not surprising so inevitably you get different periods of time which we monitor, particularly during busy periods like January so that we do not over stretch our capacity. Because there is no membership contract, you can leave at any point, and if you are unhappy because you cannot get onto a treadmill, why stay? We watch that carefully but it is one of the benefits of the 24/7 environment. The other factor that 35% of our members are first time gym users, is a consistent figure.

At our oldest gym in Hounslow, the number of people who were first time gym users joining in 2019 is exactly the same as it was in 2008. The other factor with churn is people moving out of the area. Students come and go, so do people who live in flats, and there is also the age profile of our members, the bulk of which are between 18 and 45. This is skewed by students but the average age is 30. That age group profile is much more transient than somebody of my age for instance.

When I was in my 20s, I never stayed anywhere more than 18 months but now I have lived in the same house for the past 10 years because I am 67 now and I do not move around as much as I used to.

I wanted to ask how you look at the difference in the smaller formats. You mentioned 6,000 to 7,000 square feet for smaller versus 15,000 to 16,000 for the bigger gyms. How does that change the unit economics of the smaller formats?

You cannot see one at the moment because they are all closed, but if you went to see one of our small box gyms, when you walk in you would be quite surprised. They look bigger than you would expect and the amount of gym equipment is not that different. What is different is the way the changing facilities work. A typical small box gym tends to be in a much more residential area and therefore many members tend to go home to shower. They may use lockers but do not necessarily change in the facility.

That is not to say a small box has no showers, it does, but it generally has a unisex changing area with lockers, but a much higher proportion of its members will change at home. The metrics are different which we have seen for quite some time. At our second site in Guildford, which is in a residential area and very close to Surrey University, we saw from day one that at 6:00 PM and it would be absolutely packed with hardly anybody in the changing rooms. That was because people arrived changed and went home for a shower.

We have always seen that in residential locations. You are unlikely to see a small box gym in the city center; they are more common in residential towns. Smaller markets might be 10,000 to 15,000 people, but you will still see lots of gym equipment.

Are they much cheaper to build per square foot than the ones in the bigger cities?

The first ones we did were quite often retail warehouses which is the way I describe them. They are relatively easy and straightforward to convert. They come with plenty of car parking, tend to be quite visual and, of course, a big benefit which low-cost has always brought, is the footfall. High volume brings a lot of footfall to developments which is why we are popular in retail developments. We bring many customers to the site, some of which are mixed leisure schemes with ten-pin bowling, cinemas and restaurants. You also see low-cost gyms in retail parks with shared car parking.

Does bringing more customers to site increase your bargaining power with a landlord?

Yes and on a number of occasions, we have converted retail space. We have taken part of a Sainsbury's store at Spurs football ground and at Murrayfield, outside the Scottish rugby ground. Low-cost works very well with somebody like Sainsbury's because we both bring custom to each other and share the car park. We have recently done a few conversions of Lidl or Aldi where they moved to bigger premises elsewhere in the town and where we took either part of or the whole of a smaller Lidl or Aldi unit.

Is the operational expenditure as a percentage of sales lower than the bigger plots because you have less staff? Maybe you have just four or five PTs and just one manager for a small box?

Yes; some of the operational metrics are lower and because the space is less, rates are less and energy costs are lower.

As you scale The Gym Group and increase your market penetration, how do you see the return on capital changing for new plots?

We have set ourselves with a 30% return hurdle. When we look at any new site, whether it’s a small box or a standard site, we look for a 30% return. However, we take into account all of the local metrics related to that site such as the rent, how much we think we can charge and how many members the site will take. Looking at our reports, we have shown over 30% return on investment since we first started so we are not seeing any change to those metrics.

In 2030 when we look back and that metric is 20%; what do you think the reason could be why that could decline?

There could be all sorts of things most of which I don't know about yet, but if there were increased competition levels that might have an impact on pricing.

Do you mean PureGym or other low-cost players could decrease their prices?

They haven't done it yet, but an overseas operator like Basic-Fit could appear from Europe or Planet Fitness from America.

Do you think that is likely?

Because PureGym and The Gym Group are so dominant, it is unlikely but it could happen. Their pricing elsewhere is similar to ours so I am not sure that would have an impact on price. One of the questions many people currently ask is regarding online exercise. With COVID, more people are exercising at home, does that mean when gyms can reopen that people will continue to work at home and they will also work out at home? Some people will of course, but I think the vast majority will go back. We have already had an experience of that during the first lockdown and we reopened and saw people come back in droves. Online will have an impact but I do not think it is likely to be that profound.

On the point of barriers to entry because Planet Fitness or Basic-Fit could enter if they wanted, is there any reason besides yourselves and PureGym being so large it would deter other players?

There are definitely some barriers to entry and market analysts have asked that since 2008. The major ones we see are purchasing power and we have spoken about how size differentiates. Covenant strength is a huge impact, not only on the ability to secure sites but to secure the best sites which are likely to achieve the best return. We have the marketing muscle to be able to invest in TV advertising which the single operator could not even contemplate that sort of cost. We are constantly investing in technology with our membership platform and website. We spend millions of pounds on tech every year which a single operator could not do. It’s not one thing, but the combined impact of purchasing power, covenant, technology, marketing, and a product like LIVE IT. A one-off operator cannot provide four sites you can join in Brighton whereas we can.

Are Sports Direct, whose focus is not purely on gyms, not as strong a proposition?

They are a good example and with Mike Ashley's backing they are a significant operator but they do not have many gyms nor do they buy as much gym equipment. That could change of course, but that is the case as it stands at the moment.

My last question is around European or even US opportunities. We have seen PureGym recently purchase Fitness World, the Danish company; how do you look at opportunities to move into Europe?

It is certainly an opportunity and something The Gym Group will look at. We had the opportunity to float on the stock market in 2015 and, at that point, we were about to move into Europe. The Gym Group has not bought anything outside the UK but I think it’s quite possible to go into Europe.

Could you enter the US?

It could be the US, Singapore, Australia or South Africa.

Do you think it could work anywhere, effectively?

There is no reason why not and, of course, markets like Australia, New Zealand and South Africa have very strong connections with sport and leisure generally, but clearly Europe would be the logical first step. I would not assume it would be restricted to Europe.

Why did you choose to list the business versus continuing to take private equity money?

We were private equity backed and had two previous private equity owners – Bridges Ventures and Phoenix Equity Partners – and could have done another round of private equity. I think there have been certain benefits of listing. Covenant strength is one of them. Much of the money we raised on IPO was used to pay down debt so that has helped strengthen.

PureGym have a similar strength and are PE owned so does that make a difference?

The Gym Group's cash burn during COVID is dramatically less than PureGym.

Do you get better plots for that or are you better capitalized and can therefore better negotiate with landlords?

It makes our property covenant much stronger, not just with PureGym, but compared with anybody else in the sector because we are the only listed business on the main UK market. Basic-Fit are listed on the Amsterdam market and Planet Fitness are listed on the New York market but, in terms of the UK, we are the only listed entity. So covenant strength is one of the benefits. The other benefit is also attracting good quality people. There is a certain traction of working for a public company. There is also the attraction of share ownership. All our team have the option of acquiring stock on an attractive basis and also receive stock on a beneficial basis as part of their bonus scheme. Those are things that, as a private equity backed business, we would not have. Our investors also have a longer-term view on things whereas private equity tends to be fairly short term. Most of our investors are long-term institutional investors.

Without giving away too many trade secrets, in what country could you see The Gym Group operating in? You mentioned Australia and South Africa but is there anywhere else you think is particularly attractive?

I think there are markets in Europe, generally. There are a number that would make sense. There are some markets that are more saturated than others. Germany, for instance, has many low-cost operators. On the other hand, Germany is a big country with a population of 80 million. Holland is much the same where it is dominated by Basic-Fit. I am not sure it would make sense for The Gym Group to appear in Germany or Holland but aside from those, there is lots of open space.