Here's a Retail Format That Seems to Be Amazon-Proof

Despite the general gloom of the retail industry, there are plenty of segments that are thriving. But there aren’t many of them that are also impervious to Amazon.

The fitness industry is turning out to be a retail share winner and increasingly occupying mall and other retail real estate left vacant by bankrupt apparel retailers or department stores shuttering their doors.

“It’s a sector that’s not being hurt by Amazon, which is the key,” Jefferies analyst Randal Konik told eMarketer Retail.

The fitness industry has seen the number of health clubs rising each year to nearly 36,540 at the start of this year, up each year since at least 2005 for a total growth of 36% over that time, according to industry trade group the International Health, Racquet & Sportsclub Association, or IHRSA. A record 66 million plus Americans used a health club in 2016 since IHRSA began tracking the statistic in 1987 while the number of individual members also rose to a record 57.3 million. As a result, U.S. health club industry revenue increased about 7% to a record $27.6 billion last year, IHRSA data showed.

“We have greater conviction in the industry's bright trajectory,” Konik, who covers low-cost fitness club chain Planet Fitness and Life Fitness and Cybex equipment parent Brunswick Corp., said in an 82-page report, his first deep-dive on the fitness industry. “Industry dynamics remain compelling… Health/wellness is a (long-term) trend. No longer are club memberships solely in the hands of affluent households.”

The IHRSA data also suggest the industry may still have plenty of room for growth: only 19.3% of the nearly 300 million Americans ages 6 and older belong to a health club, it said.

However, while the overall sector outlook is positive, the fitness industry also has been undergoing a shakeup of its own not unlike apparel and other sectors: On the one hand, low cost and no-frills chains such as the 1,300-plus store chain, Planet Fitness, which charges up to $20 a month, are gaining ground. Meanwhile, upscale niche boutique fitness studios from Soul Cycle to Pure Barre are also taking share.

But mid-priced players such as Town Sports International, parent of such chains as New York Sports Club, are getting squeezed.

For instance, boutique fitness studios have increased their dollar share of the market to 35% in 2015 from 21% in 2013 while the share of traditional gyms declined to 65% from 79% during the same period, Jefferies report citing IHRSA data said. Meanwhile, budget gyms like Planet Fitness have seen growth of 70% the past two years and premium studios like Soul Cycle, which charges $34 for just one class and doesn’t offer membership, has seen a 21% increase during the same period, according to the Jefferies study, citing IHRSA and Mintel data. In a sharp contrast, the mid-market gym only saw a 2% growth during the same period.

In another telling contrast, Town Sports International’s comparable sales have declined in each of the past four years. The company said in April its Q1 revenue declined to $99.1 million from $101.3 million a year earlier as it closed stores. It continued to lose money.

On the other hand, Planet Fitness CEO Chris Rondeau said earlier this year its Q4 results marked 10 years of straight quarterly same-store sales gain. In Q4, same-store sales jumped nearly 11% on top of a 6.2% increase a year earlier, he said, adding growth was driven partly by an increasing number of first-time gym users.

“Our 2016 performance added to our confidence that there's still a long runway for future growth,” he said on the call.

In another supporting sign for the company’s growth optimism: More than two-fifths of about 1 million new members it surveyed last year told Planet Fitness they had never belonged to a gym prior to joining the club. “We are clearly growing the overall market by successfully targeting the approximately 80% of the population of the US and Canada that currently does not go to a gym,” Rondeau said, adding the company has been making investments with national advertising “that reinforces differences between Planet Fitness and stereotypical gyms.”

“Low-cost gym operators are creative in fine-tuning the cost model,” Konik said in the Jefferies report. “With an average of 7,000 members per club, an operator like Planet Fitness is better able to absorb burdensome overhead costs relative to more mid-market competitors like Town Sports International and now bankrupt David Barton Gym.”

Built-out investments and operating expenses are often much less for budget chains because they don’t have amenities like saunas and cafes, Konik said, adding that some of them are seeking to further cut costs by allowing members to scan fingerprints or use personal ID numbers to gain facility access, cutting spending on receptionists or membership cards.

With the growth of overall fitness industry, more fitness clubs are also taking over some other traditional retail real estate. At Oakbrook Center in Chicago, for instance, General Growth Partners, the No. 2 US mall developer, said a fitness center will replace Sears Auto Center in a downsized Sears.

General Growth Properties CEO CEO Sandeep Lakhmi Mathrani said in an earnings call this month that GGP is “experiencing demand from” fitness centers among other retail concepts. 

Meanwhile, private equity investors are taking notice of the space. L Catterton, which has stakes in consumer and retail brands from Edible Arrangements to Noodles & Co., has invested in several boutique studio names including Pure Barre and CorePower Yoga.