A Case Analysis of Bally Total
Fitness’s External Environment

Group 2: Meghan Cree, Sarah Medve, Rachel Hamrick, Jacob Rath, James Wallerstedt, Samuel Kube

Due: 01/27/15

Word Count: 2039

Case: Bally Total Fitness By 2004, Bally Total Fitness was a major leader in the $14.1 billion health club industry. With over 400 million facilities worldwide, Bally was the “largest publicly traded health club operator in the United States in 2003” (Wells, John R., 1-7). Bally’s success was fueled by many components including membership revenue, various products and programs, and their recognizable, worldwide image; however, in 2004, Bally faced a major shock to its reputation. Fraudulent accounting practices were discovered and examined, resulting in an uproar from shareholders, complaining of financial misrepresentation. As a result, Bally Total Fitness faced a drop in their stock price, lawsuits from current shareholders, and a damaged repute. The following analysis will evaluate how the general external environment affects Bally Total Fitness, examine Bally Total Fitness’s current standing in the health club industry, options on how to rebuild its status in this industry, and solutions to implement for eliminating any skepticism among shareholders and increasing membership numbers.

Macro–Environment Analysis
Gym and exercise equipment manufacturers are constantly upgrading current models of exercise machines as well as developing innovative designs for new machinery. The new machinery supplies health clubs with the opportunity to introduce new ways to “get fit” and “get healthy”, a sociocultural trend that will soon be addressed. Aside from the cultural health trend, gym and exercise equipment manufacturers are provided with the opportunity to incorporate advanced technological developments in the creation of new machinery. New machinery gives financially stable health clubs who are able to steadily upgrade equipment, an advantage over smaller startup health clubs. On the other hand, a growing trend for smaller clubs, “who require minimal initial financial investment” (Wells, 1-2), to lease used gym and exercise equipment has been in effect. This paves the way for small studio-sized facilities to continue thriving in number.
Health Clubs have recognized a wide variety of age groups who are purchasing memberships. Commercial gyms, such as Gold’s Gym, 24 Hour Fitness, and Bally’s, target potential members aged 18-64, who require a wide variety of amenities, are comfortable in an open, coed environment, and can partake in a healthy workout without unlimited personal attention (though these clubs, often, offer a personal training option). Small, studio-sized fitness centers typically narrow their target markets down a bit further. Curves provides a safe and relaxed environment for inexperienced gym-goers and “women who were not comfortable in coed gyms” (Wells, 1-11).
The Centers for Disease Control and Prevention’s National Health and Nutrition Examination Survey estimated, by 2004, that 66 percent of adults, aged 20-74, were overweight or obese, while 17 percent of adolescents and children, aged 2-19, were overweight (Center for Disease Control and Prevention). With the increasing convenience of lifestyle amenities, especially in America, seen by the 1733.33% growth in spending on fast food from 1970 – 2000 (that is still continuing to grow) and increasing options for faster transportation resulting from technological growth, chaos among related health issues and resulting handicaps associated with obesity has begun a nationwide health culture.
Aside from physical image, obesity has created a large number of health concerns in both adults and children. The risk for diabetes, coronary artery disease, high blood pressure, and cancer, among many others, increases immensely in the American population as the prevalence of obesity exists at record highs. Health professionals are recommending, more and more, that their patients look into a steady health routine to prevent these subsequent health risks, a recommendation that commercial based gyms, like Bally Total Fitness, can turn their attention to.
A large factor imposing on health club membership growth is the unpredictable state of the economy. Following the financial crises of 1991, Americans feared losing their jobs and lacked the disposable income to spend on items like gym memberships, which at that time was considered a luxury; however health was not ignored. According to regional vice president of sales for 24 Hour Fitness USA Inc., Jim Rowley, member numbers remained steady throughout the 1991 recession (Lieber, 2002). People would rather focus on their health and avoid the high cost of health care than spend money on luxuries. Health clubs were then presented with the opportunity to expand their flexibility in membership costs by providing financing options and allowing members a membership without having to sign a three-year contract agreement, a technique that many small-scale facilities already had in place (Braverman, 2014).
Since the post-World War II era, the US government has devoted growing attention to the physical fitness of American citizens. This is because when soldiers began to be drafted after the bombing of Pearl Harbor, it became very evident that the average American male was unable to pass a standardized fitness test. In the 1950’s, numerous government agencies were created dedicated to promulgating the importance of fitness (Dalleck, 2005). Today, these entities, such as the Council on Fitness and Sports & Nutrition, continue to push for better fitness standards, culminating in such acts as the President’s Challenge, which is mandatorily administered to children beginning in middle school and continuing throughout high school. Healthier lunch options have also been made available to children in public schools and schools are now able to obtain official government certifications stating their food is healthy (Wentzell, 2014).
As young males became more interested in physical fitness beginning in the late 1940’s and throughout the 1950’s, bodybuilding soon blossomed into a fully-fledged regional, national, and even international sport. The International Federation of Bodybuilding & Fitness was established in 1946 and began hosting the annual Mr. Olympia competition. Over the course of several decades, this competition drew more and more international attention and is still active to this day (Dalleck, 2005). Another specific international event that garnered more international attention to the world of physical fitness was the rise to fame of Arnold Schwarzenegger, who won numerous bodybuilding competitions throughout the 1960’s to the 1980’s and transformed the body building public image (Farrey, 2007).

Industry Competition
Competition is high within the Gym, Health and Fitness Club industry and it is continually increasing. Both external and internal rivalry exists for the players in the gym, health and fitness industry, making it a necessity to differentiate in some sort of fashion. Internally, this industry contains a number of well-known commercial and private-owned fitness facilities. These facilities participate in marketing and financing efforts to offer the best options for new and ongoing members to increase customer retention rates, which is their leading source of generating revenue. Whether consistently upgrading equipment, waving or lowering initial membership fees, adopting pay-as-you-go memberships, developing supplemental health products, or providing exceptional customer service, these major industry participants must offer the best options for new and ongoing members. External competition arises from leisurely activities and industry operators (IBISWorld). Fitness clubs are competing with different industries to attract several different age groups to exercising at gyms instead of going to a club or bowling. They also face competition from operators who offer the same amenities as a gym without it being their primary selling point. These operators include exercise studios, country clubs, and home fitness equipment companies, among others.
Buyer power is high in this industry. Because virtually all gyms purchase the same, or similar, exercise equipment and offer similar group fitness classes, potential members can go and get similar amenities for the health club offering the lowest prices. On the other hand, there is a large number of buyers for this industry. In 2004, over 41 million Americans owned a gym membership and over 17 million attended their gym on a regular basis. These memberships; however, do not always correlate with retention.
The power of suppliers is low in this industry. Over 55 percent of the Gym and Exercise Equipment Manufacturing industry market share is dominated by 3-5 highly profitable firms; however, many alternative options exist. Though these firms produce various designs of common equipment, such as elliptical and treadmills, the machines serve the same purpose giving the gyms more bargaining power than the suppliers that they purchase from.
Because the health club industry is so fragmented, there are not many barriers keeping new health clubs from entering the market. As of 2004, small, owner-operated clubs made up the majority of health clubs. These small-scale gyms required a smaller initial investment to get started making it relatively simple to open up a gym, purchase equipment, and contract the necessary licenses.
There are a number of substitutes that both commercial and privately owned gyms face. For all ages, convenience has become a major factor and driving force of the decision to purchase a gym membership. Education and employment is considered a top priority and lives are becoming too busy to drop everything and drive as far as 10 minutes to exercise. Instead, consumers are beginning to purchase at home exercise routine videos and equipment.

Gym, Health, and Fitness Club Industry Analysis
The structure of the gym, health and fitness industry is fragmented and the life cycle of this industry can be characterized as growing (IBISWorld). The industry contains a low level of market share concentration due to many operators having a local market niche that they cater to (IBISWorld). There are large players in the industry; however, there is no dominating gym or dominating technology in this field. Fitness centers offer commodity-type products because working out is not a necessity. The fitness industry is majority unregulated as it is made up of smaller private firms and certification is easily obtainable (Bixler). This results in low barriers to entry as well as low economies of scale as small firms are concentrated on competing through specialization (Carvelli).
One opportunity available for Bally Total Fitness is increasing its size by buying out some smaller, private fitness centers. Bally will be able to take advantage of an opportunity where an acquired firm might have outperformed Bally, such as if the acquired firm specialized in certain yoga classes giving them the opportunity to focus more on developing economies of scale. Bally can also focus on the niche markets of “baby boomers” and the “average joe” customer in order to cut down on unnecessary input costs. CEO of Bally, Paul Toback, expects any changes to be “more evolutionary than revolutionary” (Wells, 1-8) and we plan to fulfill these changes by evolving slowly with the desired niche market to fulfill these needs.

Financials The industry share concentration, or HHI, for this industry is 2080.14. This number suggests a mature industry, however characteristics of a fragmented structure better fit the current fitness industry. Bally is at an accounting competitive disadvantage because its ROA is lower than the industry standard.

Solutions
To ease the mind of the public, both potential members and stockholders, Bally plans to fully comply with a formal external audit. Bally also plans on allowing the SEC to conduct a full investigation of its books and accounting procedures and will comply with any recommendations and advice with either the auditors or SEC. As Bally begins to rebuild its reputation, it will consolidate its accounting procedure via the internet, complying with GAAP. We realize that client may be reluctant to pay online, so we will continue to allow in store payments while simultaneously advertising the ease and safety of paying from home. Along with the ease of paying, we will also begin offering many different payment types which will include a pay-as-you-go and a one-year contract among others.

Works Cited:

Bally Total Fitness Management. "Bally Total Fitness Holding Corporation."Yahoo! Finance.
Bally Total Fitness, n.d. Web. 27 Jan. 2015.
Bixler, B. (n.d.). Franchise Chatter Guide: What Investors Need to Know Before Jumping Into the Fitness Industry.What-investors-need-to-know-before-jumping-into-the-fitness- industry. Retrieved January 20, 2015.
Braverman, B. (n.d.). 6 Rules for Saving Money on a Gym Membership. Retrieved January 22, 2015.
Carvelli, V. (n.d.). The State of the Personal Fitness Industry - AAPTE. Retrieved January 20, 2015. Web.
Centers for Disease Control and Prevention. (2010). Prevalence of Overweight Among Children and Adolescents: United States, 2003-2004. Web.
Centers for Disease Control and Prevention. (2010). Prevalence of Overweight and Obesity Among Adults: United States, 2003-2004 . Web.
Farrell, McKenna (2014, December 1). Gym & Exercise Equipment Manufacturing in the US. Retrieved January 20, 2015.
Farrey, Tom. (n.d.). Conan the Politician. Retrieved January 19, 2015. Web.
Kane, T. (n.d.). Past. Present! Future? Economic Growth in America. Retrieved January 21, 2015.
Turk, Sarah. (2014, December 1). Gym, Health & Fitness Clubs in the US. Retrieved January 20, 2015.
Wells, John R. (2005) Bally Total Fitness. Barney, Jay B., Hesterly, William S. Strategic Management and Competitive Advantage (3rd ed. PC 1-1 – 1-12). Upper Saddle River, NJ: Prentice Hall.)