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.
The first thing we could discuss is the addressable market. Clearly, part of the bull case is that it’s huge. What is your sense of the potential limitations in that market size?
Analyst 1: From my understanding, the core markets for Basic-Fit is Benelux and France, where they are highly penetrated, at least way more penetrated than in other markets. If you compare the penetration of the European market, in terms of low-cost gyms and overall gym penetration, versus the US and probably the UK market, penetration is lower. I don’t want to base the whole thesis around the penetration of the low-cost gym market, but I would like to better understand the advantages that Basic-Fit has against other players in the market and if the market and tailwinds are enough to support more growth.
That was my sense. The fitness penetration in the US is around 20%. Part of the bull case of Basic-Fit is Europe getting there. Do you think there are any limitations why Europe, France and these different cultures in fitness, will get there?
Analyst 2: Comparing Gym and Basic-Fit, the growth runways are clearly different. I think the unit economics are, actually, very similar but the membership growth rates and the duration of growth are likely superior for Basic-Fit than Gym. There are a couple of things there and one is the obvious point about lower starting penetration levels; in aggregate, probably 12% versus 15% of Basic-Fit versus Gym’s markets. Then there is this opportunity to be the dominant market leader, versus the UK’s duopolistic structure which makes Planet Fitness-type market shares potentially more achievable in Europe.
You’ve had Planet, essentially, single-handedly driving the US’s penetration, whereas you have a number of players in the UK. In some markets, like the Netherlands, you have got more duopolistic structures. The third element that lends itself to thinking about these growth runways is, essentially, an attitude, favoring geographic expansion for businesses like PureGym and Basic-Fit and not so much Gym Group.
When I’ve tried to think about the valuation premium of Basic-Fit versus Gym, it largely has to be judged in that context. It does strike me that expanding into new markets is more valuable and lower cost when the portion of new joiners that are expanding the TAM is very high. They’re not prizing them away from competitors.
Is that also because, in the UK, you’ve basically got the Gym Group and PureGym aggressively expanding. It’s almost like a land grab, with these two, it seems?
Analyst 2: Yes, I think it’s a land grab but, obviously, Gym Group is confined, really, to the UK and being a duopolistic participant in the UK. I do think that you have clearly seen the top one or two pulling away in many, many markets and there is this real difficulty in getting beyond 50 sites and these smaller, low-cost players just seem to crumble. Meanwhile, the market leaders start to press this very hard to replicate lever, which is multi-site membership premiums and just reinvesting that entirely back into the cost proposition, so the distance just widens and widens.
Are there numbers on how many people use multiple gyms?
Analyst 3: About a quarter.
Analyst 4: I think it’s a little higher now. In 2016, it was 25%.
Analyst 2: I think it’s 27% in the UK and it’s £7 on a £20 membership and it’s 100% margin. It’s pretty meaningful.
How do you look at post-Covid normalization of home workouts potentially eating into market share or changing that consumer behavior, that could reduce or impact the TAM?
Analyst 3: I think there are a couple of things. I think that home workouts are, generically, not as much of a threat in Europe as they are in the US. If you look at the footage of an average home in the UK and Europe, versus the US, there is just not as much space to do a home workout. The second thing is, if you look at GYM and joining behavior, over the last two years, every time the lockdowns ended, you’ve seen a huge increase in membership.
I think, probably, what ends up happening is that working out at home and working out at the gym are complementary. There are a lot of things you can do at the gym that you can’t do at home. I don’t think it is a replacement experience.
Analyst 4: I would add two things to that. The first thing is, in the US, the average household only spends $150 on sports equipment so this idea that everyone is going to have a Peloton or buy all the weights, is kind of crazy. Secondly, these low-cost gyms are, basically, on-premise fitness equipment rental businesses. You have access to all the cardio and weight equipment, for €20 a month. If you were to recreate that experience at home, firstly, you need the space and, secondly, it would cost you tens of thousands of dollars.
If you are working out 10 times a month, for €20 a month, that’s effectively €2 per workout; you’re never going to be able to recreate that experience, at that cost, within your home. The spend is not there, for a household, to get the content within your home and the space is not there. I don’t really see it being a threat, over the long term, unless everyone works out in the metaverse.
In your mind, five years forward, Basic-Fit new unit growth has plummeted, much more than you expected. What do you think the main reasons would be?
Analyst 4: Maybe the pandemic continuing. The problem with that analysis is that it assumes consumer behavior changes and that takes a long time. I don’t think that happens in five years. For it to happen, there would have to be some sort of macro catastrophe or another pandemic or worsening of Covid. Other than that, for some reason, capital markets dry up, Basic-Fit stock plummets, it takes a long time for members to come back and they won’t have the capital to reinvest into new store growth. But I don’t see that happening.
It would either be just a really bad recession or some external pandemic that would affect their ability to open stores.
How reliant are they on capital markets? Obviously, they’ve got some debt out and need the leases, but is that a potential limitation if we see the cycle turn and they can’t finance that?
Analyst 3: They’re going to rely on the capital markets until the end of 2023 and, after that, they should be self-funding, unless they take the pace of growth up another level.