When Should Health Clubs Buy New Equipment?

Members and staff are always hungry for new equipment. But when is the right time to invest? Brent Darden explains.

Darden Brent Cycling Bikes Column

The decision to spend money, or “reinvest,” in updated facilities or new exercise equipment is never an easy one. Typically, membership prospects expect it, members request it, staff push for it, and investors/owners often resist it. Further, when is the right time to make such reinvestments?

Perhaps most importantly, will the improvements generate more revenue or a return on investment (ROI)?

Change is rampant in the health and fitness industry. Today, it continues to show signs of reaching maturity, and diversification is evident on all fronts. There’s prolific competition in virtually every market segment—“big box” clubs, boutiques, specialty studios, CrossFit gyms, budget clubs, corporate facilities, hospital entities, online workout programs, etc.

Quite simply, the challenge to retain and attract members has never been greater, and organizations that want to be relevant into the foreseeable future must be committed to a path of continual improvement. Facilities, programming, services, and equipment have to evolve and present a fresh value proposition to survive.

Achieving differentiation in a crowded market is critical to success. As the centerpiece of health and fitness centers, one of the most recognized points of differentiation is a facility’s design and its offerings, whether one’s talking about multipurpose, fitness-only, aquatics, tennis, movement, or small-group training operations. Consumers also demand and expect quality exercise equipment that’s current, offers variety, is plentiful, includes the latest entertainment features, and, of course, is in working order at all times.

Thoughtful discussions regarding possible upgrades in these two areas—differentiation and consumer demand—should be undertaken regularly, as they likely offer a reasonable ROI.

Outlined below are some considerations that may be useful during planning and discussions:

  • When did the most recent significant investment in new exercise equipment—not just a few replacement pieces—take place?
  • Would a walk-through of all exercise equipment areas reveal any noticeably outdated equipment? Although most strength equipment can last a lifetime—it shouldn’t. The condition of equipment speaks volumes about the tired/outdated status of the overall facility.
  • How much is the club currently spending, per month, on the repair and essential maintenance of older exercise equipment, particularly its cardiovascular pieces? Are there cardiovascular units that are seemingly “out of order” on a consistent basis, even if they’re being repaired immediately?
  • Adopting a strategy of replacing a few pieces of exercise equipment at a time—usually cardio selections—is important to ongoing customer satisfaction and member retention. This approach generates goodwill within the member community, and sends a consistent message to users that “their” club is constantly reinvesting in the product offering. However, although this “benefit drip” helps retain existing members, it does little, if anything, to attract new ones or to maintain a competitive advantage in the marketplace. It should be augmented periodically with a major/noticeable equipment rejuvenation that produces a “wow” factor.
  • Evaluating the “highest and best use” of available space in a facility should be an ongoing endeavor, and informed by proven industry standards. Analyzing usage patterns, capacity metrics, revenue generated per square foot, opportunity costs, and fit with the chosen value proposition, should all be considered.
  • In recent years, there’s been a renewed focus on customer/member satisfaction by most health and fitness businesses. Driven by the expansive proliferation of exercise options available to consumers, leading facilities are measuring and evaluating their customer service performance like never before.
  • According to The IHRSA Health Club Business Handbook, a distinction must be made between “repairs and maintenance,” which is an ongoing, month-in, month- out, operating expense at every facility, and “maintenance cap-ex,” which involves essential replacements of physical assets. The former appears on the income statement; the latter appears on the balance sheet. It’s recommended that annual maintenance cap-ex be set at approximately 4% of revenue or $4 per square foot.

In addition, at least once every five years, a facility will need to spend approximately 10% of revenue to make market-driven improvements, such as acquiring the latest exercise equipment, updated locker rooms, a new small-group training studio, or dedicated performance-programming space.

Then, once every 10 years, most facilities will require a total overhaul/reconfiguration if they wish to maintain market momentum and remain competitive. This once-a- decade, total-facility renewal can cost 20%–30% of sales.

Thus, over a 10-year period, total capex—i.e. maintenance capex plus improvement capex—will often, if computed on a straight-line basis, require a budget allocation of at least 6% per year.

Research reported in IHRSA’s 2015 Profiles of Success found that “Investing in capital expenditures not only maintains the club; it can contribute to an increase in revenues and the bottom line.” In addition, “The upper-quartile of health and fitness centers that spent more on reinvestment reported significantly greater pretax earnings, as a percent of total revenue, and reported a much higher increase in revenues.”

  • To offset the costs of reinvestment, as well as ever- rising operating expenses, most leading facilities have developed a practice of increasing monthly dues on an annual basis. Typically, these modest increases are 2%–3% of the current dues rate.
  • During the last decade, many health and fitness facilities have effectively adopted an idea common in country clubs, which is to levee an “annual assessment improvement fee.” Essentially a one-time annual fee, collected with the express purpose of reinvesting in the facilities and equipment, these monies are used to make upgrades/ new purchases. The objective is clearly communicated to the general membership.
  • The worldwide members of REX Executive Roundtable, representing over 5,000 health and fitness facilities, meet regularly to collectively share best business practices. Many have successfully collected member annual assessment fees ranging from $19 to $59, with an average charge of $29.

Reinvestment in equipment and facilities is an absolute necessity in the health and fitness business. The exercise environment we live in continues to be so dynamic and fluid that productive changes have to be taking place constantly.

Think about it. Just a few years ago, there were no CrossFit gyms, cycling and barre studios, Orangetheory facilities, bud- get clubs (e.g., Planet, Anytime, Snap), or online group classes offering all modalities. If maintaining a prominent position in the community of health- conscious consumers is part of an organization’s vision, providing a quality product is paramount.

Shift happens ... ...but the response is what matters!