Limbering up: Gym Group CEO Richard Darwin on the fitness chain’s growth

Low-cost gyms have powered their way into the spotlight of the UK’s £5bn health and fitness market. Budget gym operators were highlighted as the fastest-growing segment of the industry in the latest findings by PwC, having increased their market share to 12% of total revenue in 2018, up from 3% in 2012. PwC’s report shows 15% of the UK’s population are members of a health and fitness organisation – by 2026, it is expected to grow to 17%. Corresponding with this, 3.7% of the UK’s population are members of a low-cost gym – a proportion that is predicted to climb to between 5% and 7% by 2026, fuelled by demand for value and convenience. It is a resilient side of the market that is likely to provide some comfort for the growing ranks of landlords looking to fill sites left vacant by struggling retail and leisure tenants. And low-cost operator The Gym Group, which commissioned the research, is among those that are looking to beef up their presence by opening more sites. [caption id="attachment_976286" align="alignright" width="200"] Richard Darwin[/caption] Richard Darwin, who was promoted to the chief executive role in September after joining the company as chief financial officer in 2015 – the same year that the company floated – tells EG that he has a “keen interest” in property. Under his leadership the acquisitions and real estate team, headed by property director Jonathan Spaven, aims to open a further 15 to 20 sites this year, with around £1.3m-£1.4m allocated to each site’s fit-out. The no-frills fitness chain, which currently operates 160 budget gyms, posted a 35.6% uplift in revenue to £123.9m in the year to 31 December 2018, alongside a 31.6% increase in adjusted EBITDA to £36.8m. Having a tech-driven estate has been vital to running the business with low operating costs. “We use technology to be able to offer a very streamlined operation,” says Darwin. “For instance, you enter through an [entrance pod], we use CCTV quite often and our sites are 24/7. We use technology and remote monitoring to be able to offer that.” Filling vacant spaces Staying reactive to trends in property has formed a core part of The Gym Group’s expansion strategy. Darwin says that in the early years of the business, which was founded in 2008, the company focused mostly on converting unused office spaces into gyms, as well as former leisure sites. However, the turbulence in the retail sector – resulting from the rise of online shopping, squeezed consumer spending and increasing overheads – has recently led the gym operator to turn more attention to empty shop units. Additionally, Darwin points to an uptick in opportunities arising from new-build residential schemes. He cites the launch of a gym in Sutton, Surrey, this year, in which it took space on the ground floor of a residential block close to a Sainsbury’s supermarket. Click below to listen to Richard Darwin discussing with EG how the low-cost fitness industry is faring and how the company plans to take advantage of empty retail spaces. Winning over the landlords To fund its expansion, the gym operator’s net debt during the year increased to £46m. However, Darwin says that leverage has remained relatively low, which has proven crucial to boosting its appeal to landlords of potential new sites. “As a listed company, we typically have less debt than perhaps other private equity-backed firms, so the strength of our covenant is absolutely key,” says Darwin. “On top of that, we have grown very rapidly. We have almost doubled the business overall, in terms of the number of sites, over the past two and a half years. This means that for landlords we’re a must-go-to partner if they’re looking to fill a particular space. “We really want to make sure that we cover all the opportunities in towns that traditionally have been for boxes averaging 15,000 sq ft, but going forward it will also be for our new small-box opportunity.” Going small The fitness chain traditionally opens sites averaging around 15,000-16,000 sq ft as a standard format, with the smallest at around 9,000 sq ft and the largest at approximately 22,000 sq ft. But in the same vein as a growing number of brands in the leisure and retail space, it has decided to experiment with shrinking its offering into a smaller-box concept measuring between 5,000 and 8,000 sq ft. The company aims to open its first small-box concept later this year, followed by a potential expansion. The logic behind this is clear, as a cost-effective means of offering a convenient location for customers and furthering its reach in different catchments. Moreover, PwC found that the low-cost gym market in the UK could double in size to around 1,200-1,400 locations (from 654 tallied in December 2018), with half of future growth coming from smaller catchments. In The Gym Group’s case, the aim is to capture this share by targeting areas with populations of under 60,000, especially those that border city centres, and are usually considered as either commuter or market towns. For Darwin, the smaller-box concept lends itself in particular to out-of-town retail parks rather than high streets, given the demand from these catchments for parking capabilities. “In the sort of locations that we’re talking about for the small-box concept, parking is really important,” he says. “It enables us to go to towns outside London and outside the big cities that previously would have been too small for us.” The fitness bug Trading prospects for the fitness industry are forecast to remain high, while fitness becomes steadily more normalised as a social activity and public awareness of its health benefits heightens. Within this, the no-frills nature of the budget gym category means it is more likely to stay resilient to external pressures on consumer spending. “A lot of growth is coming from low cost, which is really fuelling our ability to expand around the country,” says Darwin, adding that the newly extended range of site sizes that the gym chain can open will facilitate this. Darwin adds: “Health and fitness is only ever going to increase in popularity, simply because people are more aware of it. Much has been written about the fact that the latest generation of school-leavers are even more likely to want to participate in health and fitness. So we only see the trend and the demand increasing over the coming years.” To send feedback, e-mail pui-guan.man@egi.co.uk or tweet @PuiGuanM or @estatesgazette