Question 2

What is driving the health club phenomenon? What are the basic economics of the
health club industry? What value is created? What does it cost to deliver that value?
How do these costs behave?
Selected
Answer:
The driving points of health club phenomenon are:

Growing awareness about health related issues and concern

about obesity and its effects among Americans is one of the key
elements of the health club phenomena.

Increasing desire to maintain and control weight, get in shape,

meet people and reduce stress has also got people going to the
health clubs regularly.

Several health clubs identified the new needs of consumers and

built facilities that are one-stop centers for most of their health
and fitness needs.

Consumers get the benefits of various work-outs regimes and

can also hire a personal trainer-all under one roof.

Customized training regimes to meet each member’s personal

needs also enabled them to choose the work-out best suited to
them.

Economics of Health Club industry

The health club industry consisted of 26,000 health clubs in the

U.S. However fifty largest firms acquired 33% of industry
revenue and 38% of clubs was not-for-profit which had Young
Men’s Christian Association as the key player.

The for-profit industry was divided into 4 main formats:

Owner-Operated clubs: Comprised of the majority of all
health clubs. Over the years they built chains of clubs in various
parts of the country and maintained centralized procurement,
program design, marketing, finance, accounting, and
collections. Franchised clubs: A successful health club concept
was franchised to buyers who agreed to pay a fee to operate a
club and in return received professional advice and advertising.
Design and management companies and Health Spas also are
a vital part of the health industry.
 Most health clubs charge customers for a one-time enrollment
fee and then a monthly subscription fee. Minimum subscription
period in most health clubs was 1 year but Bally’s required a 36
month subscription from its members.. About 70% customers
renewed their subscription and 30% dropped out.

Clubs proved the basic facilities to members at he cost of

subscription paid, however they also made as much as 28% of
their revenue by providing additional services like personal
trainers, massage therapy, pro shops, and tennis programs.

The industry is also seasonal and many members enroll after

New Year’s and during winter.

Clubs discount their enrollment fee heavily to attract customers

and the marketing efforts of the clubs are focused on acquiring
new customers from the demographic termed as “uninitiated
believer”.

Motivation and retention of the employees was very important

as they were responsible to deal with members of all kinds

Value Creation

Clubs create value for their members by providing them state-

of-art facilities. Latest equipments are purchased from a select
few manufacturers that give quality work-out satisfaction to
customers.

Additionally, clubs also provide various facilities like diet

control, weight control, aerobics, personal trainers, health bar,
pilates training, elliptical motion trainers and yoga all under one
roof. This gives members a wide range of work-outs to choose
from and obtain higher health quality.

Members can also get customized help from trainers and can
choose the regime best suited for them.

Costs and its impact

It cost roughly $1.5 million to set-up a 40,000-50,000 square-

 foot health club where one would have to spend half a million
on equipment alone. Other option to set-up a club was to lease
or buy used equipments.

Labor is the largest cost incurred by a club. Retention,

motivation and recruitment of skilled friendly labor were
considered key challenges by the industry. About 43% of total
revenue is spent on labor.

About 72% of revenues were collected in form of dues from

members as part of their subscription and 28.1% revenues were
generated from additional services that clubs provided.

Feedback: [None Given]

Question
3
How structurally attractive was the health club industry in 2004? What average level
of returns would you expect it to support?
Selected
Answer:
The health club industry was moderately attractive in 2004.
There reasons being:

- The industry was flooded with competitors which

included for-profit and not-for-profit players.

- There is heavy investment required to set-up a

reasonable club that can accommodate today’s needs
of consumers

- There is a lot of distrust and confusion as far as the

role of salesman is concerned

- Although there has been growing awareness among

people about health concerns, the number of people
who exercise regularly has been stable at 50 million
for 10 years.

- Clubs do not make a lot of money from enrollment

and customers are now moving towards Pay-as-you-
go habits. Basically, members do not want to bind
themselves in a contract but rather pay per visits.

- Retention and motivation of staff is a debatable issue

as far as health industry is concerned. A lot of effort is
required to be applied a qualified and friendly staff.
 - Revenue per member is not fixed as the member may
drop out anytime they wish.

- However, it is encouraging to find out that 70% of

members renew their yearly subscription every year.

- Finally, diversification of target market and addition of

new programs can provide members good reasons to
switch back to their clubs.

The industry should support a positive Earnings Before

Interest and Taxes (EBIT) in the range of 5%-10%. Falling
beyond that would cause problems that need to be resolved
with respective

Feedback: Some good points, but apply Porter's five forces model systematically.
Describe and characterize the strength of each force and then consider
how they interact to determine industry attractiveness.
Question
4
What do you see as the key trends in the industry in 2004? How do you think these
trends will affect profitability over time?
Selected
Answer:
Some of the trends in the health club industries as seen and
forecasted by experts are:

- Consolidation of several health clubs and expansion of few

others by going public to obtain funds and confidence from
investors.

- Convenience and availability of basic facilities would continue

to lure members as they are on the run and need a quick work-
out at a place that is close by.

- Another trend that was catching up was Pay-as-you-go pricing

where members did not want to bind in a yearly commitment
but preferred to pay per visit. Many clubs such as Ballys
adopted the system and were able to lure members.

- Health club were primarily targeted towards demographic that

was within the age group 18-34. However, they are now
diversifying their target market to include not only kids but also
baby boomers that have shown active participation in health
clubs over the years.

- To add to the already existing programs clubs resort to

providing their members with more focused approach on
weight control by offering subsidized exercise programs.

- Concerns about obesity are also addressed by clubs by

 offering customized work-out regimes

Feedback: Explain how these trends will influence future profitability.

Question
5
What advantages did Bally's scale bring? What challenges did Bally face in 2004?
What would you recommend?
Selected
Answer: Bally owned around 400 outlets in U.S and had operation in
about 50 countries. With a customer base of 3.6 million and
annual revenues of $954 Bally was the largest publicly traded
company.
This large scale gave Bally many advantages such as:
- Recognition and confidence from public who
support and own part of the company. They have
personal interest in the well being of the company.
- Bally also became a nation wide name and obtain
brand name. Taking advantage of its brand
recognition and value, Bally ventured in nutritional
products, weightlifting gloves, treadmills, stationary
bikes. All of these we were sold on large basis. As a
result Bally would make $150 annually by selling
nun-club items.
- Because of its size, Bally was easily able to target a
larger demographic and facilitate their needs in their
clubs.
- Centralized procurement, program design,
marketing, finance, accounting, and collections gave
Ballys control over its core business and each club
offered more or less the same facilities.

Challenges
The current problems ar Bally are pertaining to
- Poor accounting standards
- Unethical and inconsistent sales practices-
- Sudden changes in managements and job description
- Stiff competition in the market
- To grow awareness of health benefits
- Motivation and retention of skilled labor.
- Acquire higher percent of customer base
- Deal with structural changes in the industry due to
changes in customer preference
Due to changes in accounting policy and manipulation of
accounts, Bally had a charge back of $583 million in 2004. It
lost investors confidence and was under investigation from
SEC.

Their investors had lost confidence as the SEC was

investigating their accounting

Recommendations
- Bally gain investoer confidence by adopting ethical
goverance
- Diversify into different market and demographics
- Offer new programs to its curent customer base
- Stay ahead of competition by using technology that enables
smooth operation and reduces cost.
- Develop marketing program that generate more sales and
profiability
- Develop incentives to keep employees motivated.