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| Health & Beauty.. |
Golden opportunity
Gold’s Gym looking to bulk up
| The fitness franchise has new owners, a new franchise deal and an eagerness to grow. |
Tom Davidson is 41, but he looks like he could still wreak havoc on the football field the way he did as a linebacker for the University of North Dakota in the late 1980s. So it’s not surprising that Davidson owns a Gold’s Gym—the chain of fitness centers that for years was synonymous with muscle heads.
But even though Davidson is a fitness buff and an ex-jock, he represents a new generation of Gold’s franchisees—people who are in it because it’s a good business, not just a good workout. Davidson spent years trading commodities in New York and then stocks in Minneapolis.
When his employer, Dain Rauscher, relocated to New York, Davidson stayed behind and became a Gold’s franchisee, opening his first location in an abandoned K-Mart more than two years ago. “When I went to the first (franchise) convention in Vegas four years ago, most of the owners were gym rats,” Davidson said. “You could tell they were into working out and body building. But each year since then the ownership base has gotten a little more sophisticated; there are more business people.”
Gold’s is looking toward these investors to fuel the chain’s growth. The 600-unit company wants to capitalize on its well-known brand in an uncertain fitness market by adding 200 locations by 2010.
It has focused its attention on this growth after more than two years of at-times difficult negotiations with franchisees on a new agreement that will ultimately cost gym owners higher royalty fees. The franchisees, which for years paid an industry standard flat-fee per month in royalties, will now pay on a percentage of revenue—just like most franchise systems.
The venerable chain started in Venice, California, in 1965 and was popularized by the 1977 Arnold Schwarzenegger movie “Pumping Iron.” TRT Holdings, the Texas-based group that owns Omni Hotels, purchased the chain in 2004. Soon thereafter it proposed moving to a franchise agreement charging franchisees a 3-percent royalty.
Franchisees were worried early on. “There was a lot of confusion, a lot of fear,” said Ginger Collins, a former Gold’s franchisee and now executive director of the Gold’s Gym Franchisee Association.
Now, however, Collins believes that franchisees will be better off. The association and Gold’s spent more than two years negotiating a new agreement before reaching a deal in February. During those negotiations, she said, relations solidified between gym owners and their franchisor.
As a result of the negotiations, some older franchisees were given the option of choosing a basic “legacy” agreement with a higher flat-fee royalty charge.
More are expected to choose a second, mid-range deal known as a “Legacy 2” agreement that charges a royalty of 1.75 percent, and less once a gym reaches certain revenues. In exchange, Collins said, franchisees get the right to renew, transfer their agreement in a sale or buy territories in non-contiguous areas. “We expect a very large percentage of people to convert” to this deal, Collins said.
Some may go to the agreement with the 3-percent royalty fee, in which Gold’s would provide all the franchisor services. Others may leave the system—opting against making the improvements Gold’s wants franchisees to make. Collins said that Gold’s is making a concerted effort to get all franchisees to comply with their covenants.
Even if some franchisees leave the brand over the issue, Collins said franchisees overall will benefit and called Gold’s compliance effort “positive.” “A lot of people have put a great deal of money into compliance,” Collins said. “There are some people that may leave.”
Making these efforts are important to help the company compete in the increasingly competitive $16 billion fitness market. “New people are coming into the segment every week,” said Keith Albright, Gold’s senior vice president of franchising. “They are well funded with a well-thought-out business plan. You’ve got to be able to offer programs that are attractive to members.”
The fitness industry has been growing over the years, fueled by an increasingly health conscious population willing to spend money on gym membership, or take advantage of work-based wellness programs. There are 9 million more gym members in the U.S. than in 2001, according to the International Health, Racquet & Sportsclub Association. That growth continued a trend that dates back at least to the late 1980s.
Yet the number of health clubs has grown at an even faster clip. Indeed, the average number of members per gym has fallen since 2001, from 1,893 in 2001 to 1,455 last year. While the industry has some fast growing players, some gyms are struggling—Bally Total Fitness, which filed for bankruptcy in July, is the most notable. Much of the membership growth is among people who wouldn’t otherwise join a gym—a group that Gold’s doesn’t necessarily attract.
Thus, it must compete with the bigger fitness centers for the same pool of members.
Still, Gold’s officials believe there is considerable room for growth, noting that only 15 percent of Americans are members of a health club. They say that growing concern about obesity and health issues could push more people to a gym. They also say that some of the newer fitness companies, like Curves, that cater to entry-level exercisers could be training grounds for its future members.
“There’s a whole raft of entry-level fitness organizations,” Albright said. “God bless them. They’re creating new fitness consumers. We’re going to get some of them. Some people who go to Curves eventually go to a full-service gym like Gold’s. They do a great job for us in terms of creating new fitness consumers.”
For his part, Davidson believes that Gold’s owners are making all the right moves. “They want me to grow and open up more clubs,” he said. “They’re all about growth.” And Collins believes that TRT’s moves will help the chain get bigger. “I feel very strongly that, when everything is said and done, the brand is going to be stronger,” she said. “It’s going to grow. We have savvy business owners, support from our franchisor, and we’re moving forward.”
