Specialty Fitness As A Banking Niche

Customer Segmentation

As banks look for deposits and more profitable relationships, one niche market that has emerged in the last three years is the rise of specialty fitness locations such as Orangetheory, Barry’s Boot Camp, 9Round, Cross-Fit, SoulCycle, FlyWheel, and others. In banking, these have come to be called “small format fitness,” and they represent a profitable and growing banking niche. These businesses have exploded in the number of locations and have capitalized on wellness and group exercise trends. In this article, we look at the profitability and approach in banking this niche customer segment.

 

Operations

 

According to IBISWorld, there are more than 7,200 fitness businesses in the U.S. generating $4B of revenue. Growth for these small format fitness franchises have been 6% or greater in 2018, and at $35 per class or $150 per month, margins have been strong.

 

Operators usually are under ten-year franchise Upfront capital costs ranges from $100k for “equipment-lite” establishments like Pure Barre and move to $1mm or more for places like Orangetheory. While, tenant improvements, treadmills, bikes, and other equipment add up, they are cheaper than other franchise concepts such as restaurants and present an incrementally lower risk profile.

 

The business model is largely membership/class fee driven with personal training typically making up less than 10% of revenue and merchandising composing less than 3%. Franchisees typically pay 6% to 8% of gross sales plus have some marketing expenses. Cash flow margins, as measured by EBITDA average around 9% with pre-tax profit margins of around 7%.

 

Bank Profitability

 

From a profitability standpoint, the industry offers some level of diversification away from real estate while having a slightly above average profitability profile with an average risk-adjusted return of 19% (below). This is an attractive customer niche not only because of the current trends but because it is specialized, clearly delineated and requires a small real estate and labor footprint relative to revenue. 

 

Orangetheory Profitability

 

Bank Products Utilized

 

To drive the above profitability and to reduce customer acquisition cost, the below ten-product bundle of banking products and services is suggested complete with the probability of sale derived from our own statistics and those of Barlow Research Association. This “look-alike” analysis analyzes what products and services a certain customer with above-average profitability already use. Thus, if you can sell the below-outlined package of products not only will it generate sufficient profitability, but it is also more likely to appeal to the fitness store owner thus speeding up the sales cycle and reducing acquisition costs.  

 

Small FOrmat Fitness Look-Alike Analysis

 

Risks & Mitigations

 

On the average C&I loan to a seasoned franchise owner, the probability of default is approximately 2.30% per year with a loss given default of 32.5% and an expected loss of 0.75%. Volatility is low at 2.24%, and after peaking last year, the probability of default is expected to increase slightly.

 

The risk, of course, is that these businesses are fueled by disposable income and in a downturn, consumers rotate back to less costly gym alternatives. There is some truth as the correlation if this niche to the general economy is above average at 46%. In addition, competition continues to heat up, and the consumer now has many alternatives.

 

Maintaining a strong membership base is critical, and new customer acquisition can be costly. Bank credit underwriters focus on credits where month-to-month customer retention is greater than 70%, and monthly new members are strong in excess of 30%.

 

Like most businesses, expense control is critical, and luckily the most of these businesses achieve operating leverage by having a high customer-to-employee count so that labor costs usually comprise less than 20% of expenses which helps reduce profit volatility. To benchmark this, many banks use $40,000 of revenue-per-employee as their minimum borrower cutoff. 

 

Putting This Into Action

 

If you are looking to raise deposits and increase the number of profitable relationships and you bank a metro area that has a large number of these small format fitness centers (the orange circles below), then this customer segment may be perfect for your bank. 

 

Location of Fitness Centers

 

Most banks know and go after medical professionals, law firms, homeowners associations and similar customers with above average profitability but few banks do the homework to find profitable customer niches where there is little competition. Small format fitness centers are an example of a defined customer segment with clear financial needs that a bank can focus on and in so doing, win an above average percentage of the business.