Time for this Dragon to Cut Costs to Keep his Health Clubs Fighting Fit

The downturn in consumer confidence and spending is hitting just about every business in the retail and leisure sector - and even a Dragon like Duncan Bannatyne is not immune.

In this interview with The Telegraph, Bannatyne explains how his health club business is having to deal with the first year in a decade where the size of the health club market (as measured in volume terms by the number of memberships) is in decline.

Falling demand, rising costs, intense competition from low-cost operators and uncertainty about the future strength of the UK economy - these are all external influences which will be keeping Bannatyne and his competitors awake at night.

What strategies for success should Bannatyne’s adopt? One approach tried recently has been to compete more aggressively on price, with membership fees reduced by as much as 20 per cent in some locations. Revenues are expected to fall by 1% in 2011, but costs have risen by 3% - which as a result ought to mean a fairly significant reduction in last year’s operating profit of £11m given that most of the operating costs of running health clubs are fixed.

Students might expect that cost-cutting will be a major focus of Bannatyne’s strategy over the next few years, with the Dragon not expecting the business to enjoy revenue growth for at least the next 2-3 years. Is this the right approach?

I suspect that the most significant external influence on Bannatyne’s strategy is the emergence of many fast-growing low-cost gym operators who are challenging the business model of established health chains like Bannatynes.

If, like me, you or your family & friends have grown tired of paying up to £100 a month for gym membership (and then being stuck into an onerous contract) then the low-cost gyms are competing effectively pwith an alternative that is priced much more competitively.

Brands such as easyGym, Klick Fitness, Fit4Less, and Pure Gym offer no-frills gym membership from £10 a month upwards, often with no joining or admin fee and without the need to sign a year’s contract. Admittedly, customers don’t get the full range of health or leisure club facilities, but at least customers only pay for what they actually use.

If the migration of customers from full-service to low-cost health club membership turns out to be a sustained change in the market, then it may be even longer before Bannatyne’s sees profits rise again.