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Weighty matters
Bally works to fend off bankruptcy
Kevin Craig opened his first Bally Total Fitness franchise in Jacksonville, Fla., in February, with plans to open several more. So hearing Bally’s announcement just five weeks later that the company might go bankrupt was akin to dropping a 50-pound weight on his foot.
But the 31-year-old is undaunted. As a franchisee he has financial independence from the corporation, and he said Bally will likely emerge from the problems a stronger company, anyway. “I’m not at all worried,” Craig said. “Everything they’ve got going now is pretty standard for a large company. They restructure and they’ve come out stronger than they were prior.”
Nevertheless, years of living a financially unhealthy lifestyle may be catching up with the country’s largest fitness company, which has nearly 400 centers around the world, including 30 franchises. The company is facing bankruptcy less than a year after announcing a new U.S. franchising program.
Illinois-based Bally delayed filing its annual report when it said it might face bankruptcy. The company has $827 million in debt but only $45 million in cash, and said it is exploring a “broad range of options to restructure its debt,” according to a release. If it can’t, “it may seek to reorganize its operations under Chapter 11.”
The fitness chain has had problems for years. Hundreds of customer complaints led to an investigation by the New York Attorney General’s Office and a 2004 settlement. In 2005 the company had to restate earnings for the previous three years. The company’s CEO, Paul Toback, resigned last year—shortly after the franchising announcement—amid a shareholder uprising.
Bally hasn’t met membership projections. The company said in March that cash collections from memberships fell 3 percent in 2006. It hasn’t turned a profit in five years and lost $5.7 million in the third quarter of 2006 alone despite growing revenues, according to its most recent financial report. Efforts to sell the company last year failed, and a share of its stock, which traded at $20 as recently as 2003, can now be had for less than $1, or about the price of a candy bar. It also faces a delisting from the New York Stock Exchange.
That heavy debt has kept the company from keeping up its facilities, a major consideration in a competitive industry built on appearances. “You have to keep up,” said Jim Thomas, a former health club owner who has been a fitness industry consultant since 1989. “The industry is just like the nightclub business or the restaurant business. Nobody wants to go to a place that’s not current and not state-of-the-art. They want to go somewhere new and trendy.”
Bally officials say they are focused on improving facilities. The company recently announced plans to purchase $15 million in new equipment. It borrowed $248 million last fall to refinance some of its debt, but $34.1 million of that is being used to improve its centers. “I have to believe the company is not stupid,” Craig said. “Something must be going on and they are not in a position of letting anybody know about it.”
Because Bally is the nation’s largest fitness operator, its struggles could hold a cautionary tale for the entire $17.6 billion fitness industry, which has grown rapidly in recent years. The number of U.S. fitness centers grew by nearly 90 percent between 1999 and 2005, to more than 29,000, according to the International Health, Racquet and Sportsclub Association, or IHRSA.
Yet membership appears to be stagnating. While the number of health club members grew 35 percent, to 41.3 million, between 1999 and 2004, that growth slowed to a halt in 2005, according to IHRSA figures.
Bally targets a more traditional gym-using audience, including urbanite fitness buffs between 18 and 34 and older “fitness inclined” women ages 25 to 45. Yet many experts say there is little growth in the market for those groups, given that they are already likely gym members. Seniors are the biggest growth market, according to IHRSA, and children are No. 2.
“The industry has typically gone after the more athletically fit, motivated individual as opposed to people who need it for health reasons,” said Thomas, “But one of the greatest growth markets is baby boomers who want to improve their health. None are looking for a hard body. A lot of clubs are not satisfying that.”
And the industry itself is diversifying. New, smaller, fast-growing clubs are targeting specific niches. Curves for Women grew into one of the largest fitness companies since 1992 by targeting women. Cuts Fitness for Men and Butterfly Fitness, for women, are two of the fastest growing franchises. Planet Fitness uses low-cost memberships and bodybuilding discouraging policies like “no grunting” to target an “entry level” market, said CEO Michael Grondahl.
Bally officials acknowledge that the increasingly competitive environment makes it tougher to attract and retain members. Corinne Gudovic, a Bally spokeswoman, said the facility improvement should help. So should an extensive effort to determine its target audience.
The company also hopes that franchising will improve its market penetration, especially in smaller cities, said Bob Moschorak, managing director of franchising operations and development. He said Bally’s strong brand and its management and support system are attractive to prospective franchisees.
Yet that program is on hold without an annual report. Bally can’t bring any new franchisees aboard without the uniform franchise offering circular, or UFOC, a disclosure document required of franchisors. The UFOC can’t be completed without the annual report. It’s uncertain when that report will be filed. “I’d really like to see it filed myself,” Moschorak said. “I’m eager to get this franchising program running.”
For the moment, Bally is counting on the existing franchisees like Craig, who bought into Bally in 2005 after moving to Jacksonville from New York. His center opened in February in 4,500 square feet of space that will ultimately be its karate studio and tanning salon. The rest of the facility, which will be 33,000 square feet, is under construction and will be finished in June.
At the moment, Craig has plans to build four or five Bally clubs in Jacksonville, and he would like to build facilities throughout Florida. The parent company’s troubles, he said, aren’t scaring away developers, who say Bally brings traffic to their centers.
Nor are the troubles scaring away customers. “We actually had a sales increase” immediately after the recent announcement, Craig said. “When it was first announced, I got questions for a week. Now, everyone has forgotten about it. It’s like it never happened. Nothing has changed at the health club. We’re operating just fine today.
