When club services became a commodity, Mike Grondahl got very creative
by Jennifer H. McInerney
Will Planet Fitness do to the fitness industry what Wal-Mart has done to retail?
With its low prices and laid-back attitude, this young club company is determined and, it insists, prepared to take on many of the industry's established leaders: Gold's Gym International, Inc., World Gym International, and Powerhouse Gym International.
Mike Grondahl, the cofounder and CEO of the firm, based in Dover, New Hampshire, asserts that Planet Fitness' boiled-down, fitness-only model-for both corporate-owned and franchised facilities-will not only put the traditional big-name gyms out of business, but will also chip away at the formidable followings that specialized miniclubs, such as Curves International, have attracted.
He, his brother, Marc, and their partner, Chris Rondeau, contend that fitness services are becoming a commodity-with similar facilities, prices, and programs-and they intend to capitalize on the situation . . . by offering a high-end product at bargain-basement prices.
"In a commoditized world, the company with the lowest price-point becomes the de facto 'king of the hill,' and . . . the operator with the lowest price-point becomes the 'pressure cooker' in which every other operator is in danger of being 'cooked,'" John McCarthy, IHRSA's executive director, observed last month in CBI (see "Memo from McCarthy," March, pg. 188). "In a commoditized universe, two factors-price and convenience-reign supreme. The customer asks only two questions about the product or service: which is closer and which is cheaper?"
The Planet Fitness business model assumes that affordability can be achieved without sacrificing either quality or value-the same premise that has conferred success upon Wal-Mart, discount airline Jet Blue, and Apple Computer, which has recently introduced some of its lowest-priced-but not low-grade-technology ever: the "Mac mini" and the "iPod shuffle."
For those who master it, commoditization represents a huge opportunity. For those who have helped create it, it presents a major challenge.
Fitness epiphany
Grondahl, 41, cut his teeth on traditional club models, believes he's identified their weaknesses, and clearly appreciates the upside possibilities posed by commoditization. "We're the model of the future," he proclaims. "Gold's, World, and Powerhouse are the model of the past . . . Our approach is great for the general public, but I think it's going to be very bad for a lot of people in the industry because many of your so-called 'super operators' are going to be wiped out along the way. Everywhere we go, we usually put somebody out of business."
Planet Fitness opened its first club in 1997, spent several years testing and tweaking the ideas and the implementation, and launched its franchise business in 2003. Today, it has eight corporately owned clubs and 32 operating franchises-most of them located in New England-with more than 37,000 members. In addition to New Hampshire and Massachusetts, its franchised stores can be found in Maine, Connecticut, New York, and South Carolina. Its business model is based on one of the least expensive membership fees in existence ($7.50-$20 per month); extensive cardiovascular- and strength-training equipment; a clean facility; a small staff; and, importantly, a nonintimidating environment.
"From the consumer's standpoint, what makes the model so effective is that the price is low, but, in addition, the risk is low," points out McCarthy. "As a result, Planet Fitness is attracting a tremendous number of people who've never been members before-individuals who, because they're not yet certain of the value of a club membership, are looking for a low-risk way to test the investment."
That appeal has yielded impressive growth and profits. In 2003, Planet Fitness reported revenues of $5.4 million and earnings before interest, taxes, depreciation, and amortization (EBITDA) of $1.4 million, a 26% margin; and, for 2004, it had revenues of $9 million (+66%), EBITDA of $2.7 million (+93%), and a margin of 30% (+15%). This year, Grondahl predicts with some confidence, he expects to rack up revenues of $11.5 million (+28%), EBITDA of $3.7 million (+37%), and a margin of 32% (+7%).
In 2004, just 7% of the parent company's revenues were generated by franchise fees, but that figure is expected to rise as additional franchises come on line and new locations mature.
Concept integrity
His earlier experiences with clubs and the pressures they're subject to-e.g., the need to price competitively, while paying overhead and producing a reasonable profit-convinced Grondahl that he could do things better. His answer, Planet Fitness, is not only designed to make life simpler and safer for the operator, but also to make memberships more accessible and appealing to the masses.
The corporate facilities, which serve as a model for the franchised units, average 12,000-26,000 square feet in size; are open 24 hours a day; have more than 100 pieces of cardio equipment, including stationary bikes, treadmills, climbers, and elliptical cross-trainers, plus free weights and strength-training equipment (the ratio runs 60% cardio, 40% strength); and conduct small-group, strength-training clinics.
The package at franchised facilities may differ slightly; some, for instance, may be open for fewer hours or provide personal training services.
More telling are the things that the clubs don't deliver: high fees, lots of employees, daycare, and aerobics or group-exercise classes. Dues average $15 a month, which positions them below those of companies, such as Curves, that, in the past, were the industry's low-cost providers. "Individuals who work out three, four, five times a week are willing to pay $39 or more for a membership because they'll get value out of it," notes Grondahl. "But, today, a lot of people are so busy that they can only work out once or twice a week-that's the market we tap. We're serving the market that everyone else has turned their backs on."
Aerobics and other exercise classes have been avoided for a simple reason: Grondahl is convinced that they're rarely profitable. Operating clubs with a skeleton staff-often consisting of just two people at a given time-also strengthens the bottom line.
One of Planet Fitness' most significant departures from the norm is its firm rejection of the industry's lingering hardcore reputation. Its clubs go out of the way not to cater to zealous bodybuilders or powerlifters. There are no squat racks, dead-lifting platforms, or dumbbells heavier than 80 pounds, and "lunkhead" behavior-e.g., grunting loudly, dropping weights-isn't tolerated. In fact, franchisees are required to install a "Lunk Alarm" (similar to a police siren) that can be activated at the first sign of inappropriate behavior. If a member errs twice, they're ejected from the club-forever.
The company's commitment to a casual nonintimidating environment generates memberships. Grondahl estimates that, for every lunkhead a club loses, it attracts 200 new members. "Gold's, World, Powerhouse-they helped create the fitness revolution," he observes, "but their brand, their image-which most people still associate with bodybuilding-is going to hurt them in the long run. The hardcore market just isn't viable anymore."
Franchise opportunity
Most Planet Fitness franchisees are industry veterans who, previously, had operated other fitness franchises, Grondahl explains. They pay an initial franchise fee of $25,000 and a monthly fee that operates on a sliding scale, starting at $500/month and topping out at $3,500. Equipping a club can cost $250,000-$500,000, and start-up marketing expenditures may run another $15,000-$50,000. The total investment required to bring a new unit online can range from as little as $550,000 to as much $1.2 million.
For that figure, the franchisee receives the concept, the name, the logo, siting and construction assistance, staff training, and access to an extensive menu of other materials and services, including what Grondahl regards as one of the most sophisticated and successful marketing plans in the industry. "We have an extremely complicated, proprietary marketing system, and I'd be shocked if anyone else were able to work it out on their own," he says. "That's one of the reasons I don't believe there are going to be very many knock-offs of Planet Fitness."
Typical of the franchised stores is a 26,000-square-foot club in Plymouth, Massachusetts, one of three owned by the same company, all of which were formerly a different fitness franchise. The club, which opened last July, is a spacious, clean, and well-appointed facility, with more than 100 pieces of cardio equipment (all outfitted with Cardio Theater), a circuit-training room, and an expansive strength-training area. On a busy day, 1,000 members make use of it, despite the fact that there are five competing health clubs in town. On one recent snowy weekday afternoon, before the rush-hour crush, more than 100 men and women of various ages were enjoying their workouts in this relaxed environment.
Planet Fitness, Grondahl says, is now prepared to add one new franchise per week, and he doesn't have to beat the bushes to do so. Until recently, prospects could apply for a Planet Fitness franchise "by invitation only."
"If somebody tries hard enough, they can usually get in front of us-it's a little challenge they have to figure out," offers Grondahl, declining to elaborate.
Where will commoditization and his unique concept take Grondahl, Planet Fitness, and the industry? "I think, over time, that the industry is going to become much more clearly segmented," he reflects. "You're going to have clubs like ours, and very plush ones that are charging between $100 and $200 a month . . . The clubs caught in the middle-the $39-, $50, and $60-a-month operations-are going to be in a lot of pain."
