Fitness First CEO Oren Peleg on the gym brand’s turnaround

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Fitness First CEO Oren Peleg

Four years ago, gym chain Fitness First teetered on the edge of administration. CEO Oren Peleg describes how a rescue package and multimillion-pound investment to reposition the international brand upmarket is helping to bring it back into shape

In early summer 2012, while Britain’s athletes prepared to flex their muscles at the forthcoming London Olympics, the spotlight on the financial pages shone on the ailing health of one of the country’s best-known gym chains. Just shy of its twentieth anniversary, Fitness First was teetering towards administration. Years of under-investment and expansion had left the chain with piles of debt and spiralling interest bills.

The lifeline came in June that year in the form of a company voluntary arrangement (CVA) for its UK business, administered by KPMG, a renegotiation of its property portfolio and a £100m loan injection. Sixty-seven gyms were to be offloaded to new operators. Two of Fitness First’s biggest lenders, Oaktree Capital Management and Marathon Asset Management, took control of the business from private equity group BC Partners. They agreed to write off more than £560m of debt in return for an undisclosed equity stake in the company. Oren Peleg, then managing director of Oaktree, was named chairman of Fitness First with Andy Cosslett (former boss of InterContinental Hotels Group) as CEO.

Peleg, who swapped roles with Cosslett last July, recalls the state of the business they inherited: “The UK and Australia operations were in double-digit decline, Germany showed relative stability with Asia growing but not to full capacity. Asia had a lot of growth opportunity. It was growing but the growth had slowed because the business was starved of capital. There was a franchise business in the Middle East. The business in India was really hurting because Fitness First assumed that Indians would be happy with UK-style clubs in one of the most treacherous real estate environments in the world. It was going nowhere. There were plans to close down India but we decided to turn it around because we felt India was an opportunity.”

A Fitness First gym floor full of equipment

Brand makeover

Fixing the business wouldn’t have been possible without addressing Fitness First’s massive debt burden. “Oaktree proposed a balance sheet restructuring which did something that hadn’t been done previously,” says Peleg. “They equitised all of the debt via a scheme of arrangement, then underwrote a £100m new money facility. Oaktree saved the business by pretty much writing off all its existing debts and underwriting a further £100m to be invested in the business. It effectively gave Fitness First a breathing line because at this point it could both use its profit stream to invest as well as this facility that Oaktree provided to it. The debt, in effect, went down from £586m to £100m. That £100m wasn’t drawn until the investment programme started.”

In the short term Fitness First focused on the basics – deep-cleaning clubs, repairing damaged equipment and ensuring the showers worked. Following extensive consumer research, a £200m three-year investment programme would focus on moving the brand more upmarket. A new logo was rolled out from January 2014 as clubs underwent an upgrade and within the business the culture onus shifted from selling to customer service. “What Fitness First used to do was pretty much build boxes and each box was just replicated. Our strategy was different. We believed that in order to create and build a sustainable and thriving business you have to build systems. Asia’s business is probably the strongest fitness business in that market. With Asia it was about giving them oxygen to grow. I think we had a much better understanding of how we wanted to grow.”

In contrast, Peleg compares the UK and Australia operation to the “squeezed middle” that has hounded many high street retailers. “Fitness First was getting squeezed. It was the original low-cost provider but it didn’t invest in its facilities and then suddenly all of these low-cost providers came in… you’re just asking for trouble. We had to reinvent ourselves. We did a huge amount of research about how to unlock building a sustainable full- service club. Among the conclusions we reached were that people stay longer in gyms if they use them, if they are engaged with other members or with you, and certain segments also use gyms more if they feel they are making progress.

“That drove our redesign, the team upgrade, the culture, and the look and feel of the clubs. A lot of the machines came out and we started to create environments for members to engage with other members.” The new strategy, says Peleg, also involved localising offerings both within a country and across countries. “Participation of our classes in Asia is as high as 70 per cent. You won’t see that in the western world. In Australia there is a trend of, what I call, ‘democratisation of sports science’. People are demanding the knowledge of athletes. They expect a lot of service, a lot of technical support and they expect to be pushed.”

As the company started to better understand segmentation in the market so it was able to improve its approach. “We realised we were indiscriminate about who we were trying to get into our gyms. The old Fitness First culture was ‘if you’re breathing we want you’. If you think of the old Fitness First, with people standing on the street with flyers, common sense will tell you that isn’t the smartest way to go. But when you have a deep understanding of your segment, you’re able to have a much more relevant conversation with them about what they care about.

“We discovered there are some segments who are willing to pay to get fit but don’t ever want to go into a gym. The amount you spend to convert them to become a member is very high and very penalising. Let’s not go after the person who [only] goes to the park and works very hard to get fit because it’s wasted resources. Let’s spend our resources in those who would invest in a gym.”

A swimming pool at Fitness FirstMetropolitan focus

Filtering the new cultural values throughout its staff meant finding skilled club managers via internal promotion and external recruitment from complementary sectors. “The industry wasn’t very good at thinking from the customer’s position but we tried culturally to become obsessed with the customer… Fitness people don’t necessarily make great hospitality people. To optimally manage a fitness club there’s an element of retail, there’s a big element of fitness and there’s an element of hospitality.

“We have tried to create much more informed profiles both culturally and skillset-wise. Then we started to build the team from the top downwards.

That transformation has taken us a long time… but once it clicks you see the acceleration of the growth. When teams start to feel that they’re winning, they begin to behave differently and seem to attract talent and then you’re back on to this winning flywheel.”

As part of its strategic review, Fitness First also reviewed its portfolio of clubs to target the key demographics. The group shifted its focus towards metropolitan centres and along key commuter lines (although it still runs successful operations in the shires). It discovered that some clubs were no longer sustainable as a full-service offering and lent themselves to being budget clubs run by one of the low-cost groups.

“We concluded that the business that wins is smaller than the business we acquired. You have this process where you are slimming down to what is sustainable and likely to thrive, and justify investment before you can grow and open again. If you look at the current plans in the UK they’re back into expansion mode for the first time in five or six years.”

The results do indeed appear to be paying off. In its last results, released last May, Fitness First recorded a slight decline in turnover to £469.4m due to gym closures and currency fluctuations. However, operating costs and £43.6m in interest payments resulted in an overall pre-tax loss of £35.7m, compared to £62.5m in the previous year.

“We have had to consolidate to sterling,” explains Peleg. “We’ve been through a period where unfortunately because we’re a global business we’ve just been hammered by exchange rates. From a valuation point of view you don’t feel that until you exit. From an accounting point of view, it’s very reflective. The last analysis I looked at I think our EBITDA [earnings before interest, taxes, depreciation and amortisation] would have been £10m higher had foreign exchange not done what it’s done in the way we consolidate accounts.”

By late 2015, speculation mounted that Fitness First’s owners were shaping up for a sale. “The reality is Oaktree have been amazing shareholders,” says Peleg. “They got rid of the debts. They and other shareholders have allowed us to invest our profits and drive this transformation. They have an obligation to their investors, which are, for example, the pension funds of policemen and teachers. We recognise that obligation. The changes we’ve made and the fact we’ve started winning in the marketplace have meant that people have started to pay attention to the business.

“We have an obligation to look at our portfolio… Our shareholders have invested all this money and they’ve owned us for this amount of time… What is the right balance between getting them capital back versus maximising the value of the business, which in some cases means holding a bit longer or finishing various initiatives? That’s what we’re in the middle of. Shortly you will start to see some of the results of that but we have to go through that exercise because at the end of the day they are investors and they do expect a return.”

For now Peleg says his responsibilities are to both support the markets to buy into the transformation of the business, and to the shareholders to make sure they are rewarded for the patience and capital they have invested.

What’s clear is that, after a rigorous financial workout, the business is now in much better shape.

Fitness First – find out more

fitnessfirst.com
@FitnessFirstUK

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About author

Richard Dunnett

Richard Dunnett

Richard Dunnett is an associate editor who writes about entrepreneurs, SMEs, FTSE 100 corporations, technology, manufacturing, media and sustainability.

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