24 Hour Fitness Worldwide, Inc.

views updated

24 Hour Fitness Worldwide, Inc.

12647 Alcosta Boulevard, 5th Floor
San Ramon, California 94583
U.S.A.
Telephone: (925) 543-3100
Fax: (925) 543-3200
Web site: http://www.24hourfitness.com

Private Company
Founded: 1983
Employees: 16,000
Sales: $1 billion (2003 est.)
NAIC: 713990 All Other Amusement and Recreation Industries

Based in San Ramon, California, 24 Hour Fitness Worldwide, Inc. is the largest privately owned and operated chain of fitness centers, with more than 300 clubs located in 16 states and Asia and a membership in excess of 2.7 million. As the company name implies, the centers are open 24 hours a day, seven days a week. They come in five types. "Active" clubs are basic fitness centers up to 25,000 square feet in size, offering cardio equipment, free weights and other weight training machines, and group exercise classes. Somewhat larger, from 35,000 to 50,000 square feet, are the "Sport" clubs, which also include a basketball court and swimming pool. Somewhat larger than these facilities, the "Super-sport" category is able to offer massage, sauna, and steam room amenities. 24 Hour Fitness's "Ultra-sport" clubs are in the 100,000-square-foot range, large enough to feature day spas, racquetball courts, rock climbing, and a running track in addition to the "Super-sport" offerings. At the other end of the spectrum is a new club type geared toward women, the Express Club, just 6,000 to 10,000 square feet in size, offering limited weight equipment, while emphasizing cardio equipment, group exercise, and personal training. 24 Hour Fitness is majority owned by private equity firm McCown De Leeuw & Co., which in February 2005 put the company up for sale.

Company's Founding Dating to the Early 1980s

The man behind the founding of 24 Hour Fitness is its chief executive officer and chairman, Mark S. Mastrov. He was born in Oakland, California, and raised in nearby Castro Valley. While attending junior college, Mastrov played on the basketball team and blew out his knee; to rehabilitate his injury he relied on Nautilus machines. While earning a business administration degree from California State University at Hayward, Mastrov began working out at a small health club, 5,000 square feet in size, in San Leandro, California. Because he was familiar with the club's Nautilus equipment through his rehab, the owner offered Mastrov a job training the staff on how to properly use the machines. Instead, Mastrov agreed to work four hours a week at the club in exchange for a free membership. He completed his degree and found work as a natural foods salesman, but switched to the fitness industry when the club owner decided to sell out in 1983 and asked if Mastrov was interested in becoming an investor. Mastrov raised $25,000 ($15,000 of which he borrowed from his grandmother), bought a stake in the business, and became the new manager of the club. His partner was a software programmer, and together they developed a front-end system for managing a fitness club, which they then sold to other clubs in the area. The project provided a valuable education, helping Mastrov to gain the fundamental business skills needed to run a fitness club. But perhaps of more importance was his feel for the business. After seeing that members were always lined up at the door when the club opened in the morning, while others were reluctant to leave at closing time, he figured that keeping the club open 24 hours was a selling point and could provide a competitive edge. The club made the change and took the name 24 Hour Nautilus.

A year after Mastrov and his partner took over the club, they recruited a third partner, Leonard Schlemm, who held a Harvard MBA in finance. Schlemm served as Mastrov's mentor, in many ways rounding out his partner's business education, so that in addition to knowing how to run a single club, Mastrov learned how to manage a large organization. The three partners soon fell out, however, with the programmer taking the software business and leaving Mastrov and Schlemm to run the club. While seeming modest in retrospect, Mastrov and Schlemm's goal at the time was to build a chain of ten Northern California health clubs. Mastrov began to raise his sights, however, after attending a Club Industry convention in the mid-1980s. Meeting with other club owners and gaining a better understanding of the industry fueled his creative instincts and competitive drive. Because banks refused to provide the funding he needed to grow a large chain of fitness clubs, the partners developed a business model that could fund expansion through cash flow, while keeping the company free of debt. A major component of the plan was the pioneering use of electronic fund transfers. This was coupled with the adoption of month-to-month payment plans that opened up club membership to a large number of people who could not afford a large outlay of cash.

Mastrov and Schlemm steadily added 24 Hour Nautilus clubs in California through the rest of the 1980s. In 1991 the chain spurred further growth by hiring Mark Golob as vice-president of marketing. Golob, who started out in the music industry promoting the likes of Bruce Springsteen and Fleetwood Mac, turned to the fitness industry in the 1970s and became involved in promoting Jane Fonda's live workouts when her exercise videotapes were bestsellers. During his brief tenure at 24 Hour Nautilus, Golob drew on his experience with celebrities to develop promotional campaigns using Pamela Anderson, Arnold Schwarzenegger, and Mike Tyson, resulting in a sharp increase in club memberships.

By 1994 Mastrov and Schlemm were operating 32 Northern California clubs. Along the way, the chain focused on membership retention, eschewing the traditional "churn and burn" mentality of the health club industry that devoted more energy signing up new members than keeping existing members happy. The chain also attracted new business by offering membership fees well below the industry average. Given these beliefs, it was not surprising that Mastrov turned to the fast-food industry for inspiration on how to deliver a consistent product that kept customers coming back. In fact, he once told a reporter that the person he was most interested in meeting was McDonald's founder Ray Kroc, noting, "It would be interesting to see how he could keep quality in so many places around the world." Mastrov also took a page from fast food by only targeting markets that he could dominate by building a cluster of clubs. In this way members could find a club close to home as well as where they worked, permitting them to conveniently schedule their exercise sessions during the week and weekends. The company also began to develop a hub-and-spoke approach, offering different types of clubs and price points in the same market, so that some locations offered basketball courts and swimming pools while others provided the basic, cardio machines and weight training equipment.

Major Expansion in the Mid-1990s

The 24 Hour Nautilus chain was stable enough that Mastrov could now approach McCown De Leeuw & Co., a Menlo Park, California private equity investment firm, for funds to accelerate the company's expansion. McCown invested $30 million, money that was then put to use in 1995 when 24 Hour Nautilus acquired the Ray Wilson Family Fitness Center chain and its 68 Southern California units. A year later the company changed its name to 24 Hour Fitness, although many of the clubs continued to operate under the 24 Hour Nautilus name. During this period the company also began to expand beyond the California market, acquiring smaller chains in the Pacific Northwest and Southwest, as well as Hawaii. Schlemm also departed the company to pursue other opportunities, leaving Mastrov to run the enterprise.

In 1997 24 Hour Fitness filed to make an initial public offering (IPO) of stock. The decline of the stock market in October of that year, however, scuttled the offering. Instead, the company conducted another equity round, raising $75 million. 24 Hour Fitness then used some of that money to take its first international steps. In 1997 Fitness Holdings Europe Ltd. was formed, followed a year later by Fitness Holdings Asia. In 2000 these entities were merged with the domestic operation to create the present-day 24 Hour Fitness Worldwide, Inc. In 1998 and 1999 the company acquired health clubs in Sweden, Norway, and Denmark, then in 2000 opened centers in Germany and Spain. But management soon grew wary of the European market and elected to pull out. In the meantime, Ray Wilson, who had sold his fitness chain to 24 Hour Fitness in 1995 and briefly worked for the company, had built a new chain of fitness centers in Asia, which he then sold to 24 Hour Fitness in 2000. Some of these units were shed, but the company continued to operate centers in Hong Kong, Singapore, Korea, and Taiwan.

Although the company was still thwarted in its efforts to stage an IPO, 24 Hour Fitness had little difficulty finding backers. In 1999, new investors were brought in during a recapitalization of it, concurrent with another equity round. In 2001 24 Hour Fitness completed its seventh round of private investment, raising another $85 million. All told, since McCown De Leeuw's first investment in the mid-1990s, 24 Hour Fitness had amassed more than $500 million in equity from the likes of New York firms Triumph Capital, Lexington Capital, Blackstone Group, and Teachers Pension Fund, and Houston-based Rice Capital.

Company Perspectives:

Convenient locations, the latest equipment, affordable pricing, knowledgeable staff, and outstanding service—all available up to 24 hours a day, seven days a week—contributed to the company's tremendous growth and success.

At this point, the company was opening 20 to 25 clubs a year, as revenues approached the $1 billion mark. In addition to attracting investors, 24 Hour Fitness was forging alliances with celebrity athletes. Basketball star Magic Johnson joined forces with 24 Hour Fitness to open athletic facilities in underserved urban neighborhoods. The first Magic Johnson Sports Club opened in Richmond, California, in 2001, and over the next two years five others followed, the facilities located in Los Angeles, Dallas, and the San Francisco Bay area. Tennis player Andre Agassi also became involved with 24 Hour Fitness, developing his own signature fitness club. The first of four 24 Hour Fitness Agassi Super Sports Club facilities opened in Las Vegas in February 2004. A key reason Agassi chose to partner with 24 Hour Fitness was the chain's 2003 agreement with the U.S. Olympic Committee in which the company became a sponsor for the next three Olympics. In addition, 24 Hour Fitness established a Commitment to Athletes Support Program, which granted club memberships to eligible athletes training for both the summer and winter Olympic Games. The company also donated equipment to upgrade U.S. Olympic training centers in Colorado Springs, Colorado; Lake Placid, New York; and Chula Vista, California, as well as provided training equipment at High Performance Centers.

Introducing Xpress Zone in 2004

Moreover, 24 Hour Fitness agreed to work with the Olympic Committee's Sports Science and Sports Medicine Divisions to create specialized training programs for U.S. athletes. This research also helped the chain to develop exercise programs for its regular members. In 2004, for example, 24 Hour Fitness introduced its Xpress Zone circuit training regimen: 30 minutes of exercises designed to be completed in a specific order to provide a full-body workout for club members pressed for time. Such an idea was typical for the innovative chain. Mastrov, a frequent traveler because of the international scope of 24 Hour Fitness, thought there might be a market for fitness centers located inside airports. As a result, 24 Hour Fitness opened a 14,000-square-foot center called Fitness on the Fly, at Las Vegas's McCarran International Airport. The chain also was willing to pick up on the ideas of others, such as Curves, a company that developed smaller clubs that catered to people intimidated by standard health clubs, offering timed workout programs. This studio approach to the fitness center led to the creation of 24 Hour Fitness's Express Club concept.

24 Hour Fitness added another sports star to its signature line of sports club in 2004, signing an agreement with basketball player Shaquille O'Neal to open a 24 Hour Fitness Shaq Sports Clubs facility in Miami, the first 24 Hour Fitness center in the Miami market. In January 2005, 24 Hour Fitness added to the fold cyclist Lance Armstrong, five-time winner of the Tour de France. The first 24 Hour Fitness Lance Armstrong Sport Clubs facility was scheduled to open in Austin, Texas, in the summer of 2005. These centers were to include large indoor cycling rooms. In addition, 24 Hours Fitness became a sponsor of Armstrong's Discovery Channel Pro Cycling Team.

According to press accounts in 2005, McCown De Leeuw retained Merrill Lynch & Co. to seek out buyers for 24 Hour Fitness. The New York Post reported, "Firms such as Apollo Advisors, Bain Capital, Cerberus Capital Management and Texas Pacific Group are said to be interested in taking a look at the fitness outfit. Other potential buyers could include some hotel, leisure and recreation companies.… Buyout firms are drawn to health clubs because they have proven to be stable cash flow generators, and also generally reflect high returns on investment." By May the company had found a buyer in Forstmann Little & Co., which had pledged $1.6 billion to take control, planning to continue to operate and grow the 24 Hour Fitness chain.

Principal Operating Units

Express; Active; Sport; Super-Sport; Ultra-Sport.

Principal Competitors

Bally Total Fitness Holding Corporation; The Sports Club Company, Inc.; World Gym International, Inc.

Key Dates:

1983:: The company is founded.
1994:: McCown De Leeuw makes an initial investment.
1995:: Ray Wilson Family Fitness Center chain is acquired.
2000:: 24 Hour Fitness Worldwide, Inc. is formed.
2005:: The chain is put up for sale and Forstmann Little & Co. emerges as the buyer.