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COVID-19’s Impact on the Fitness Industry

Jul 1, 2020

In March 2020, boutique brick-and-mortar fitness studios were the biggest driver of growth in the $85 billion fitness industry. Home-based workout programs were called “seasonal fads,” and group training was ranked as the third hottest fitness trend of 2020 by The American College of Sports Medicine. 

As fitness clubs increasingly focused marketing efforts on member experiences, which included building fitness communities and encouraging social fitness, the commercial real estate industry was counting on health clubs and gyms to reinvigorate strip malls, improve foot traffic, and reduce mall vacancies. General Growth Properties, the second largest mall operator in the U.S., projected 75% of its leases would be held by fitness-related businesses in 2020. The fitness studio footprint was expanding, with investment in capital expenditures following suit. 

Likewise, mobile apps supporting brick-and-mortar gyms and studios were booming. For example, ClassPass, Inc., a fitness booking app created to enroll subscribers in a variety of fitness classes at more than 30,000 member health clubs across the U.S., was valued at $1 billion in early January—not bad for a four-year old company. However, if Class Pass’ recent sales are any indication, things are not going well for fitness studios. A staggering 95% of ClassPass, Inc.’s, revenue evaporated in April, which led the company to reduce its workforce by 50%.

In the middle of March 2020, COVID-19-related shutdowns plus stay-at-home orders forced gyms and studios to pivot to an online service delivery model literally overnight. This was a near impossible task for companies geared toward large facilities, specialized equipment, and personal training. As the shutdown stretched from one month to four, sales data indicated that consumers were becoming more comfortable with home-based workouts. Sales of personal fitness equipment and technology have grown at record levels, along with subscriptions for online classes and streaming fitness services. 

As stay-at-home orders are gradually being lifted across the country, the aftershocks are expected to continue for brick-and-mortar-based gyms and studios. Examples are the Chapter 11 bankruptcy filings of Gold’s Gym on May 5 and 24-Hour Fitness on June 15. Confronting excess capacity, negative cash flow, and an uptick in contractor-filed mechanic liens, these companies intend to use Chapter 11 bankruptcy protection to restructure debt, right-size their footprints, reduce workforce, and renegotiate overly burdensome leases, while pursuing the additional financing necessary to fund the post-pandemic re-openings.

Both Gold’s Gym and 24-Hour Fitness cite COVID-19 as the reason for their filings. Tony Ueber, CEO of 24-Hour Fitness stated: "If it were not for COVID-19 and its devastating effects, (24-Hour Fitness) would not be filing for Chapter 11.” Furthermore, 24-Hour Fitness plans to close approximately 100 locations permanently, but will re-open the remaining 70% of its studios in June. 

Gold’s Gym plans to permanently close approximately 50% of locations (not including franchises) and hopes to re-open the remaining 50% in August. The bankruptcy filing does not impact 600 franchise-owned locations.

New York Sports Club and a number of other East-Coast based gyms warned of possible bankruptcy on the same day as 24-Hour Fitness’ bankruptcy filing. Town Sports International (“CLUB”) also may have to file for bankruptcy if it can’t negotiate better terms with its lenders due to a substantial reduction in cash flow because of the stay-at-home orders. As a result, CLUB furloughed much of its 7,000-person workforce and stopped paying rent.

Whether or not the recovery in health and fitness clubs is V shaped or U shaped will likely depend partly on how effectively studios execute their re-opening strategies. Clients will need to feel assured that all measures available are being taken to keep them safe. Online options will be an important back-up plan, and consumers will also likely look for flexible membership terms. 

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Susannah Prill

Susannah Prill is a Director in the firm. Her focus has been on business valuations in the context of, shareholder disputes, matrimonial and estate litigation.

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