One in Four Health and Fitness Clubs Could Close by Year-End
Posted: November 19, 2020 in IHRSA
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BOSTON, MA – Based on data from major payment processing firms, 15% of fitness clubs and studios have closed permanently as of September 30. Up to one in four health clubs may close by the end of the year as club operators grapple with the coronavirus pandemic’s disproportionate impact.
“In over 50 years of the club industry’s history, this is the toughest time for the club industry,” said Rick Caro, a 40-year veteran of the industry and president of Management Vision, Inc., a leading consulting firm specializing in the club industry. “COVID-19 is affecting the businesses, their members, employees, and the community at large. Clubs are struggling with no real government support as a whole.”
At the peak of mandated closures in the spring, virtually all health and fitness centers in the U.S. were closed. Bankruptcies of national and regional health club groups reinforce the financial distress inflicted by the pandemic. The vast majority of facilities are small businesses at elevated risk of closure, typically lacking the leverage of larger boxes that often anchor shopping malls.
“It’s truly Armageddon for an industry that has historically outpaced GDP growth by a factor of 2-3 times and shown resilience to all economic downturns,” said Brian Smith, managing director of consumer investment banking at Piper Sandler Companies, a leading investment bank and institutional securities firm. “There is no overcoming an extended and forced government shutdown as we experienced earlier this year or extended capacity restrictions on the boutique industry that limit class sizes to 10-25% of normal capacity.”
“To simplify what is going on, health club operators are in the same position as Luke Skywalker in the automatic trash compactor scene in Star Wars. They are trying to hold off lenders seeking debt payments, landlords seeking full rent payments, members on freeze, and increased cost of operations related to safety/cleaning,” said Pete Moore, founder of Integrity Square, an equity and financial advisory firm serving the Health, Active Lifestyle, and Outdoors (HALO) sector. “Larger club groups are using Chapter 11 bankruptcy protection to reorganize, shed creditors, reject bad leases in order to reset and survive. Smaller footprint clubs and studios will also need to strongly consider filing for bankruptcy.”
To date, more than $15 billion in revenue has been lost, along with the economic activity that brick and mortar facilities contribute to their local communities. According to a ClubIntel study, U.S. fitness centers still in business are projecting a 37% decline in revenue this year relative to 2019.
“The fitness facility industry has experienced a perfect storm in 2020 as a result of Covid-19,” said Stephen Tharrett, co-founder of ClubIntel, a brand and consumer insight firm serving the fitness and club industry. “The trifecta of 15% of clubs permanently closing, the clubs still open experiencing monthly revenue declines, and reopening membership levels averaging less than 70% of the previous year, will result in not only 2020 revenues falling well below 2019 levels, but likely will result in 2021 levels falling below those of 2019.”
Mandates to operate at reduced levels of capacity, in some jurisdictions as little as 10%, have further curtailed club operations, including staffing and job creation. Hundreds of thousands of jobs have been lost due to the pandemic as the hospitality and leisure industry at large has endured one of the highest unemployment rates since April. Clubs have conformed to strict government regulations in terms of density, social distancing, cleaning protocols, contact tracing, air filtration systems, and health standards.
“Compliance with these mandates has caused many clubs, especially single-activity studios, to close because their economic model was no longer feasible,” added Caro. “Their subsequent lack of liquidity created the immediate need to discontinue their operations. This has caused clubs to close, costing jobs and leaving members with no alternative for needed physical activity and social interaction.”
Previous government programs have not been sufficient for all the health and fitness facilities affected by COVID-19. The Health & Fitness Recovery Act (H.R. 8485) filed by U.S. Reps. Mike Quigley (D-IL) and Brian Fitzpatrick (R-PA) creates a $30 billion fund to provide grants to affected health and fitness businesses. Club operators, employees, and consumers have sent more than 16,000 letters to Congress to support the bill.
“No operator is immune—big, small, franchised, or company-owned—and the industry, without any direct stimulus, will see the landscape forever change,” added Smith. “It’s amazing to our team that fitness is not deemed an essential service when so much data suggests a healthier lifestyle strengthens the immune system and lowers odds of catching COVID with no evidence existing that suggests health clubs represent any super-spreader risk.”