Virgin Active to open eight clubs this year Virgin Active News

CAPE TOWN – At any given moment the Virgin Active chain of health clubs has at least one or two pilot projects running. Some are discarded after an initial trial; others are rolled into clubs where the community uptake is expected to be positive.

In its Constantia gym for instance Woolworths is running the eatery as well as a shop stocked with a basic range of convenience foods. The club at the Moses Mabhida stadium in Durban has a suite of boardrooms that members can use at no cost. And, after a successful pilot, Virgin and Adidas will roll out running clubs at 24 clubs across the country.

The intention is not to open up new streams of revenue, but to ensure gyms remain relevant in an increasingly competitive market. “Gyms are no longer simply about exercise,” says Virgin Active MD, Ross Faragher-Thomas. “They are lifestyle centres where people choose to spend some of their leisure time. Our offering must be compelling.”

Virgin’s business model, like other gyms, is based on a membership model, so limiting churn also makes good business sense. Gone are the days of longer-term contracts (we have a one and two year contract option), made infamous by the likes of Sharper Image which collapsed in 1997. Customers can’t be locked into long term contracts and pay monthly. The churn rate is high, estimated at 36% to 39% year on year – though many of these customers return after a break.

The addition of “value-adding” options has seen the churn rate fall by 8% in the past nine months. “There is a link between perceived value in the product and the extent to which customers stay with us,” says Faragher-Thomas.  For this reason the club no longer uses a cookie cutter approach to designing its gyms – facilities are developed in accordance with the surrounding community’s needs. So, for instance Virgin in Soweto boasts a hairdressing salon and the club at Boulders has a resident club DJ.

A tiered pricing structure has also been developed. Clubs are segmented into bands and prices vary accordingly – from R240/m up to R550/m (we only have one Classic Club priced at R1 200 p/m).

Virgin Active must be doing something right. The company (which includes a sizeable chain in the UK and smaller chains in Spain, Portugal, Italy and Australia) has generated double-digit revenue and profit growth for 11 consecutive years – including through the recession. In 2011 Virgin Active recorded sales of over R1.5bn and an estimated Ebitda of R350m (the profit figure is not disclosed).

The Virgin Group acquired the ailing Health & Racquet Club business in 2001, following the liquidation of LeisureNet. At that time there were 85 (nine of which were closed) clubs in the SA operation. In the past decade it has invested more than R1bn, opening 25 new clubs and increasing its membership base by about 200%.

Last year saw the Virgin Group exit part of its investment. It sold 51% of the chain to UK-based private equity group CVC Capital Partners in a deal that valued Virgin Active at £900m, or just under eight times the previous year’s earnings before interest, tax, depreciation and amortisation.

At the time CVC executives said they were attracted to the deal because of the company’s consistent and significant growth. More importantly because they believe they can support Virgin Active’s growth in existing and new geographies. This will be achieved through a combination of further rollouts of clubs and targeted acquisitions.

According to Faragher-Thomas the new private-equity partners have been nothing but supportive and are working proactively with Virgin Active’s group CEO (and Virgin Active Group co-founder) Matthew Bucknall to grow the group globally.

Locally Virgin Active plans to open eight clubs this year and another seven or eight p/year for the next three years. In almost all cases these will follow the bigger club format (2 500m² to 4 000m²). Despite the presence of competitors like Planet Fitness, Curves and hundreds of local clubs, Faragher-Thomas believes the market can easily sustain this growth. “Big cities are densifying and smaller regional cities and towns are expanding.” In addition, the middle class is growing. “As long as our product stays relevant, and as long as health & fitness remains a lifestyle trend, we will grow.”

Financing this growth requires careful management. At the same time as the company is building new clubs, it is also refurbishing existing infrastructure. Last year’s upgrade of Constantia cost R25m, of that R5m was for new equipment. According to Faragher-Thomas, capex costs for the next three years (new and replacement) are estimated at R300m to R350m per year.  This is funded internally and at this point the company has no need for outside capital.