• Business Edge

    Winter 2017

The birth of the 24 hour fitness phenomenon

CityFitness is one of New Zealand’s major fitness chains, a family founded business with links to the global industry’s pioneers.

Over 17 years, it’s grown from a small suburban Porirua club to 27 world-class fitness centres, with nearly 100,000 members, stretching from Christchurch to Auckland’s North Shore - and expanding.

CityFitness is proudly backed by BDO and we talked to CFO Mark Hughes about the story behind its success.

It was the year 2000, when Kiwi expat Mark Smith, a former chartered accountant turned fitness industry guru came home from the United States for a visit… and got the CityFitness ball rolling.

Smith had become a respected player in the American fitness industry, having left the world of audit in the 1980s to join a company serving a whole new generation of lycra-clad aerobics and weights enthusiasts – and went on to become CEO of America’s third largest fitness chain.

So, Smith had smelt opportunity in 2000 when he visited New Zealand, finding his nephew, a recent sports degree graduate, working in a club located in the northern Wellington suburb of Porirua.

“Mark Smith suggested that they purchase the club, and the first CityFitness was born,” says Hughes. “You could say that Smith was the brains behind the business.”

With Smith as founding shareholder, CityFitness’ growth journey was gradual at first, focused on building brand and membership and adding three new clubs in the Wellington region.

By 2007, the opportunity arose to expand into Nelson/Marlborough and with the help of Hughes, a local chartered accountant, Smith acquired three new clubs taking the total to seven clubs – a sizeable business needing a new level of back office systems and management.

“A couple of weeks later, Smith called me from New York and asked me to come on board as CFO. I said yes, on one condition that I could remain in Nelson.”

Hughes set about upgrading to a corporate online business system, integrated and scalable to support the company’s growth – which included a major strategic acquisition of Bodyworks Group in 2009, adding two more gyms in Wellington and two in Christchurch to the fold.

 

The New Zealand fitness industry is worth around $500 million, averaging 6.5% growth per annum compared to 1.2% across the economy.

 

Come 2013, CityFitness had 22 clubs - but the industry was facing disruption with the entry of small, 24-hour franchise gyms with achingly low price points into the market – a global trend.

“It was the most significant thing to happen to the industry,” says Hughes. “At first there were just two or three of these small 24-hour franchise business with membership price points starting at $12 a week at a time when full service gyms were set between $20 to $25.

“It had the effect of bleeding membership. We’d known it was coming and we had to change.”

This change coincided with Mark Smith taking up the CEO role at 24-HourFitness in the United States.  Unable to devote the time and energy needed to bring about the change required, he tapped his long-time friend (and existing shareholder) David Patchell-Evans “Patch” on the shoulder to help.  Patch increased his stake in CityFitness and swiftly set about matching the market, converting to 24-hour access across the network and slashing its membership fees – a model Patch had proven in Canada.

“I was cynical about it at first,” says Hughes. “I didn’t think it could work for CityFitness here in New Zealand. But Patch shipped me and a couple of colleagues off to Canada where we spent two weeks in Patch’s clubs – we all became converts.”

Conversion involved a combination of investment in new technology and a significant scaling back of the corporate model to deliver the new membership prices starting at $6.99 a week up to $13.99.

“Our philosophy was to keep it simple. One of the first things we did was to discontinue sales people and introduce online sales, removing a major cost overhead whilst allowing people to join in a safe and non-threatening environment from home or at a kiosk in one of our gyms.

“We also reviewed our corporate overheads and made substantial savings either through attrition or scaling back on activities that didn’t suit the model. That included converting our personal training model to a franchise model, with trainers as independent contractors.

 “With Patch coming on board and the changed business model, he invested more than $10 million into the company to enable refurbishment of the clubs, and new equipment to deliver a combination of low price points and quality gear, which we refresh every three years or so as needed.”

Whilst the company structure remained the same, the new the international shareholding also created new regulatory and tax requirements.

“We enlisted BDO’s audit function and their tax people who were able to work with their BDO counterparts in Canada to deliver a structure that achieved the objectives of being efficient for both the Canadian shareholder and the New Zealand operation.”

Headed by Doug Hatten as COO in New Zealand and Hughes as CFO, the model is simple and lean with three regional operations personnel, three fitness managers and within each club, a manager, front desk, cleaning staff and group exercise instructors.

“Doug and I are Patch’s go to guys in New Zealand. And, he’s a great guy. He comes out at least once a year and goes around all the clubs and meets all staff. He’s a very motivational person, well regarded in the industry and often a keynote speaker at conferences globally.

“He’s excellent in that regard and is very pleased with the investment he’s made and how things are going with the business.”

The change has been a significant success with CityFitness adding five new clubs to the network since 2014 and growing membership by 50,000.

“We’re delighted that we’ve now become an organisation that’s been able to attract a significant membership, opening the doors to another 50,000 people, who can become fit and healthy by exercising.

“Our entry price is one of the cheapest in the country, especially given what you get for that money. We’ve got a range of different membership options, all providing 24-hour access to all clubs nationwide, with the addition of group exercise.”

Now, CityFitness is on a roadmap to expand to 70 clubs nationwide, based on acquiring or developing five to six new clubs a year – with a strong focus on expanding further in Auckland.

As for the longer-term future in this dynamic industry?

“We keep abreast of what’s happening globally through Patch and Mark Smith. Certain things are fads, some are here to stay. Certainly, the model we have today won’t necessarily be the same in 10 years’ time. We need to continually reinvent ourselves and adapt to the market as people’s appetite for innovation grows and continues to grow.

“At the same time, we have to keep the methodology simple and keep the pricing model low.”