HEALTH AND FITNESS CLUBS Market UK 2004

SUMMARY

SUMMARY OF REPORT CONTENTS

The overall UK Health and Fitness market has been experiencing significant growth in recent years.

Our definition of the health and fitness market includes all private sector health & fitness clubs including both stand-alone health & fitness centres or gyms and in-hotel fitness clubs. The report also includes public sector facilities incorporating all local authority sports and leisure centres and swimming pools, whether or not they have a health and fitness facility, such as a health club, gym or weights room. These local authority centres may be managed in-house, by a trust or other non-profit making organisation, or by a private leisure management company.

There has been a rapid growth in the provision of health and fitness service, particularly in the late 1990's and early 2000's, though more recently growth rates have been slowing. The growth in the private sector has been the main motivating factor in the positive development, though the early 2000's have seen a shift in emphasis to the public sector. This reflects a slowdown in growth in the private sector, driven by a more cautious economic situation and the impact of the terrorist attacks. In addition, this shift also reflects an increased level of investment in public sector facilities including new building and upgrading of many existing facilities.

Key factors stimulating underlying growth have included increased public awareness of health and fitness issues, expansion in the private club sector, investment in Local Authority facilities, increased emphasis on niche market segments (such as females, the older generation, disabled users and the youth market), government schemes to encourage a health lifestyle and health service referrals.

However, there are a number of factors constraining growth in the overall market including increased competition, both in the private sector and between the public and private sector, a decline in lottery funding and a perception of poor value amongst the health and fitness facilities users leading to high loss rates.

Nevertheless, future prospects remain optimistic, as many of the above positive factors are likely to stimulate increases in use of health and fitness facilities, though the nature of the market is likely to change towards a more targeted approach, with niche sectors officering the opportunity to add value, but also requiring a more considered approach in terms of specialist equipment, certain exercise classes etc.

In addition, the level of competition in the market is likely to continue to be intense and as the improvements in public sector facilities continue there is likely to be further competition, particularly in the value sector of the market. As a result, growth is likely to be more modest in the future, and the rapid growth witnessed in the late 1990's is unlikely to be repeated.

The private sector accounts for around 63% of the total market in terms of value, with the public sector accounting for the balance. The number of health and fitness facilities, including leisure centres, in the public sector is higher than in the private sector, however the nature of private clubs in that you generally pay higher prices, payment is in advance for membership (rather than paying for what you use), and the private facilities attract a larger number of paying members per establishment.

In terms of membership, local authority health facilities are significantly smaller than the private sector, partly because local authority centres offer open access and do not necessarily limit usage to members only. It is nevertheless estimated that public sector facilities have a combined membership base of around 2 million, compared to private sector membership of almost 4 million.

In the private sector one key recent trend has been the reduction in the share of revenue accounted for by joining fees, with clubs discounting on joining fees to attract new members, but attempting to balance this with increased membership charges. Some clubs do not charge joining fees. Ancillary revenue accounts for some 15% of all revenue, compared to around 40% in the US, suggesting that the UK health clubs will be seeking to generate additional ancillary revenue over the next few years.

The private sector can be assessed by multiple and independent, with the independent sector accounting for 58% of outlets, but only 48% of revenue. The independent sector share has been eroded in recent years by the growth of the multiples, with many independents either acquired by the multiples, or going out of business.

In addition, the sector can be analysed by in-hotel and stand-alone clubs. This comparison is a little unfair as revenue from hotel health clubs is artificially low on the basis that residents are not generally charged for health club usage. As a result the share taken by the hotel sector includes external memberships and admissions fees, and accounts for only 7% of the private sector.

The private sector can also be assessed by sector, with 3 key sectors of Value market, Mid-market and Premium market. The mid-market clubs account for the majority at 46% by value, with the premium sector representing 28% and the balance taken by the value sector.

In the Public Sector, there has been significant change in recent years. The governments commitments to improved health and fitness services and their greater commitment to improving awareness of health and fitness issues has supported the market, but in addition, investment in new facilities and upgraded facilities and operation by private leisure management contractors has stimulated the sector to become a more credible alternative to the private health and fitness clubs.

Of those leisure centres managed under contract, around 51% are managed by leisure management contractors, whereas 21% are managed by trusts or other non-profit making organisations. An estimated 28% of all facilities under contract are still managed by in-house teams. This illustrates the significant shift away from in-house management in recent years.

The provision of lottery funding has given the sector additional investment monies, but this is expected to deteriorate over the short term future. The industry expects the PPP and PFI routes to generate greater levels of funding in the medium term future, though interest in leisure PFI's within the private sector has not been as high as the government had hoped, as many companies consider it too risky.

The market leaders in the private sector include the following, David Lloyd Leisure, Esporta Group, Fitness First, Cannons Group, Holmes Place, LA Fitness and LivingWell. The leading companies are increasing their share of the market, with the leading 10 operators accounting for around 44% of the total market in 2003, compared to the previous year when they accounted for 41%. Other companies include Next Generation, LA Fitness, Crown Sports, Bannatyne Fitness, Virgin Active, Total Fitness, Peak Fitness and JJB Sports.

Leading hotel chains include De Vere Group, Six Continents Group, Thistle Hotels, Jarvis Hotels, Queens Moat House Hotels and Macdonald Hotels.

Major leisure management companies include Leisure Connection, Dc Leisure Management, CCL Leisure, Serco Leisure, Sports and Leisure Management, Parkwood Leisure, Community Leisure Services, Avalaon, Cannons and 3D.

Key opportunities and threats in the sector will include the corporate health and fitness sector, which has been one of the key growth areas in recent years, exemplified by the number of new specialist management companies entering the market and their increasing contract portfolios. Nevertheless it remains a key growth opportunity for future market growth, particularly as both the government and companies themselves see general well being and fitness as likely to reduce the amount of sick days taken over the year.

In more recent years, there has been a growing interest among UK health club operators to expand their networks abroad. This has been driven by the relative maturity of the UK health club market, which is the most mature in Europe. In particular, the Continental European market has been receiving attention, although Australia and the Far East have also provided attractive prospects. However, there is no proof yet that these markets are financially viable and sufficiently profitable.

Key health and fitness trends will also drive the market, including issues such as personal training, group exercising, low-impact training, more holistic approaches to exercise and in addition, the greater level of market segmentation required in the market, will also facilitate some added value propositions, perhaps stimulating some growth in revenue in the future.

TABLE OF CONTENTS

CONTENTS and LIST OF TABLES & CHARTS

1. INTRODUCTION 5

2. SUMMARY 7

3. ECONOMIC ENVIRONMENT 11

• 3.1 GDP 11
• 3.2 INFLATION & INTEREST RATES 12
• 3.3 UNEMPLOYMENT 13
• 3.4 HOUSEHOLD CONSUMPTION 14
• 3.5 HOUSING & CONSTRUCTION 15
• 3.6 STERLING 15
• 3.7 POPULATION PROFILE 16
• 3.8 CONCLUSIONS 18

4. THE HEALTH & FITNESS INDUSTRY 19

• 4.1 MARKET DEFINITION 19
• 4.2 PERFORMANCE 19
  • 4.2.1 Recent Performance 19
  • 4.2.2 Future Performance 21
  • 4.2.3 Mix of Private and Public Sector Revenue 22
• 4.3 NUMBER OF FACILITIES & MEMBERSHIP 23
• 4.4 MARKET SECTORS 25
• 4.5 KEY INFLUENCES 26
  • 4.5.1 Consumer Spending & Confidence 26
  • 4.5.2 Increased Awareness of Health and Fitness Issues 27
  • 4.5.3 Participation Rates in Sports, Games & Physical Activities 28
  • 4.5.4 Organisations/Campaigns Encouraging Sports & Fitness 29

5. PRIVATE SECTOR HEALTH & FITNESS 31

• 5.1 MARKET DEFINITION 31
• 5.2 MARKET PERFORMANCE 31
  • 5.2.1 Recent Performance 31
  • 5.2.2 Forecast Performance 37
• 5.3 REVENUE SOURCE 37
• 5.4 NEW CLUB DEVELOPMENT 39
• 5.5 MEMBERSHIP 42
• 5.6 MARKET SECTORS 44
  • 5.6.1 Private Stand-alone Health Clubs 45
  • 5.6.2 Hotel Based Health Clubs 52
• 5.7 FUTURE PROSPECTS 56

6. LOCAL AUTHORITY SECTOR HEALTH & FITNESS 60

• 6.1 MARKET DEFINITION 60
• 6.2 RECENT PERFORMANCE 60
• 6.3 NUMBER OF FACILITIES/ NEW DEVELOPMENT 64
• 6.4 FINANCE AND MANAGEMENT 66
• 6.5 LEISURE MANAGEMENT CONTRACTORS 68
• 6.6 FUTURE PROSPECTS 70

7. MARKET SHARES AND COMPANY PROFILES 72

• 7.1 MARKET SHARES 72
• 7.2 COMPANY PROFILES 74
  • 7.2.1 Major Private Sector Providers 74
  • 7.2.2 Hotel Chains 84
  • 7.2.3 Leisure Management Contractors 86
  • 7.2.4 New Entrants and Niche Operators 88

8. KEY OPPORTUNITIES & THREATS 91

• 8.1 CORPORATE HEALTH AND FITNESS SECTOR 91
• 8.2 INTERNATIONAL EXPANSION 93
• 8.3 SUPPLIERS TO THE HEALTH CLUB MARKET 95
• 8.4 HEALTH & FITNESS TRENDS 97
  • 8.4.1 Personal Training 97
  • 8.4.2 Impact of Exercise Trends 98
  • 8.4.3 Classes 99
• 8.5 CUSTOMER SEGMENTS 100
• 8.6 MEMBER RETENTION STRATEGIES 101

9. FUTURE PROSPECTS 102

TABLES & CHARTS

• CHART 1 INTEREST RATES AND INFLATION (RPI) FROM 1990-2005 13
• CHART 2 PDI & SAVINGS RATIO 1980-2005 14
• TABLE 3 EXCHANGE RATE FLUCTUATIONS 1997-2003 - DOLLARS, AND THE ECU TO THE POUND STERLING, SPOT RATES 16
• CHART 4 AGE DISTRIBUTION OF THE RESIDENT UK POPULATION 2001 ('000) 17
• TABLE 5 UK HEALTH & FITNESS MARKET 1997-2007 £M (AT CURRENT PRICES) 20
• CHART 6 MIX OF PUBLIC AND PRIVATE SECTORS 2003 23
• TABLE 7 NUMBER OF FITNESS FACILITIES 1997-2004 24
• TABLE 8 UK MARKET MEMBERSHIP NUMBERS 2002 & 2003 25
• TABLE 9 UK HEALTH CLUBS SECTOR SHARES 2003 25
• TABLE 10 UK LEISURE INDUSTRY SPENDING £BN 26
• TABLE 11 UK MARKET PRIVATE HEALTH CLUBS 1997-2007 £M (AT CURRENT PRICES) 32
• TABLE 12 BREAKDOWN BY REVENUE SOURCE HEALTH CLUBS 2000-2004 £M (AT CURRENT PRICES) 38
• TABLE 13 NUMBER OF FITNESS FACILITIES 1997-2007 40
• TABLE 14 MEMBERSHIP NUMBERS PRIVATE SECTOR 2002 & 2003 42 CHART 15 SHARE TAKEN BY STAND-ALONE AND HOTEL BASED HEALTH CLUBS 45
• TABLE 16 PRIVATE HEALTH CLUBS BY TYPE 1998 AND 2002 (MARKET SIZE CURRENT PRICES) 46
• CHART 17 SHARE TAKEN BY MULTIPLE AND INDEPENDENT HEALTH CLUBS 47
• CHART 18 SHARE TAKEN BY MARKET SECTOR BY VALUE 48
• TABLE 19 PREMIUM STAND-ALONE HEALTH CLUBS - KEY BRANDS* 50
• TABLE 20 MID-MARKET STAND-ALONE HEALTH CLUBS -KEY BRANDS* 51
• TABLE 21 AFFORDABLE STAND-ALONE HEALTH CLUBS- KEY BRANDS* 52
• CHART 22 ESTIMATED MIX OF HOTEL-OWNED AND INDEPENDENT OPERATED 2003 53
• TABLE 23 THE UK IN-HOTEL FITNESS CLUB MARKET 1997 - 2003 53
• TABLE 24 UK PRIVATE IN-HOTEL HEALTH CLUBS - KEY BRANDS 56
• CHART 25 PRIVATE SECTOR MARKET SIZE FORECAST 2000 TO 2007 56
• TABLE 26 UK MARKET FOR LEISURE CENTRES 1997-2007 £M (AT CURRENT PRICES) 61
• CHART 27 REVENUE BREAKDOWN PUBLIC SECTOR LEISURE CENTRES 63
• TABLE 28 NUMBER OF LOCAL AUTHORITY LEISURE CENTRES 1997-2003 64
• CHART 29 LEISURE CENTRES WITH HEALTH AND FITNESS FACILITIES2003 65
• CHART 30 MIX OF FACILITIES UNDER CONTRACT BY OPERATOR TYPE 67
• TABLE 31 UK PUBLIC SECTOR HEALTH & FITNESS CLUBS - KEY BRANDS 69
• CHART 32 PUBLIC SECTOR HEALTH AND FITNESS MARKET 2000 - 2007 70
• TABLE 33 KEY PRIVATE HEALTH CLUB OPERATORS - MARKET SHARE ESTIMATES 2003 73
• CHART 34 UK COMMERCIAL MARKET FOR FITNESS EQUIPMENT 1996-2006 AT CURRENT PRICES 95