Bally Fitness

OVERVIEW

Obesity is a serious problem in America where, as of 2004, two out of every three adults were classified as obese (Wells, 2006). In response to this alarming fact, the US Surgeon General’s office has voiced its concern about the effects of obesity. With such a highly publicized campaign against obesity, Americans have become increasingly-health conscious, driving growth in a variety of industries including the health club industry. During the ten year period from 1995 and including 2004, the health club industry saw an increase of 113% in the number of clubs, and in 2004 alone, industry-wide revenues totaled $ 14.1 billion (Wells 2006). Another key factor that has led to this growth in this industry is the increase in members under the age of 18, which doubled between 1993 and 2003, and the increase in members over the age of 55, which increased 273% over the same period (Wells, 2006).

BASIC ECONOMICS

From industry data (Wells, 2006), it can be deduced that since 2000, the demand for health clubs is increasing on average at 6.3% and the supply of health clubs is increasing on average at 11.8%. This sizable increase in the number of health clubs is due to the fact that new competitors can easily enter the market. The threat of new entrants is high because although supply side economies of scale do exist, there are mechanisms in place that provide a new entrant means to overcome the advantage. One example is that larger firms would require more equipment to fill their larger facilities, thereby incurring a greater cost, but be able to spread that cost over a greater number of patrons. However, smaller firms can overcome the issue by leasing smaller spaces with few amenities and, instead of making large capital expenditures for equipment, buy used equipment for a discount or lease new equipment. A small operator can open a club with $ 25,000 to $ 35,000 investment (Wells, 2006).

On the demand-side, benefits of scale do exist but to a lesser degree. Although patrons may want to be part of a network, it is not the sole factor that influences whether they join a health club or not. There are a multitude of factors that affect the decision including facilities available at the club, cleanliness of the facilities, friendliness of the staff, fees and the convenience of the club (Wells, 2006). Therefore, customers are not necessarily discouraged from buying from a new entrant if the new entrant meets their criteria. In addition, another barrier that does not discourage new entrants from entering the health club industry is the relatively low switching cost. These costs manifest themselves in the way of initiation fees with a median of $150. With low switching costs, a competitor has the ability to enter the market and take customers from other competitors.

As mentioned previously, new entrants do not necessarily have to invest a large amount of capital in order to enter the health club market, and therefore, capital requirements for entering the health club industry do not provide a barrier to the entrance of new competitors. Incumbency, irrespective of size, does garner several barriers to entry for new entrants into the health club industry. First and foremost, incumbents already have an established client base, and some of these clients may be locked into some type of contract. Additionally, incumbents may have the first access to prime locations. However, recent entry by clubs such as Curves, that open businesses in areas such as strip malls, negate the advantage that an incumbent may have. Moreover, due to the need for new competitors to open in alternative locations, it may actually become a liability for incumbents in terms of their current locations if new clubs are more convenient for some customers and draw customers from incumbent clubs. The implementation of technology has yielded significant results for 24 Hour Fitness in multiple areas including membership fee collection and personalized diet and workout programs. These systems are proprietary in nature and a new entrant would have to make an investment in acquiring similar software as well as training their personnel to use the new system. In the event that an entrant into the health club industry wants to provide complimentary goods, the entrant would have unequal access to distribution channels. In the case of Bally, they already have an established distribution channel for their nutritional supplements through 7,000 groceries and drugs stores and are selling Bally branded equipment via 8,000 retail stores. A new entrant would have to either displace Bally from their current locations or identify other distribution channels for their products such as health, vitamin and supplement stores such as Vitamin Shoppe and GNC. However, since the supplement industry