Jetts Fitness founder Brendon Levenson says the financial crisis has shown that the 24-hour, no-contract fitness model can withstand dire conditions and indeed is pretty much recession-proof.
Indeed, he expects Jetts to play a big role in the doubling of 24-hour gyms around the country to 600.
The business, which started in Queensland and has spread throughout Australia and to New Zealand, is 97% franchise-run, with many multiple unit owners.
Levenson, who has a background in personal training, says the company looks for small business and management experience when signing up franchisees, and the company has knocked back more than 1,000 prospective franchisees.
He says the key to the company’s success is focusing on what the customer wants, rather than what it wants. Jetts holds on its members, he says, because they don’t feel locked into paying for things they don’t use, and enjoy the flexibility of exercising when they want.
The company turned over $43 million in the 2010-11 year and Levenson expects revenue to grow by 50% this financial year.
Four years on do you sort of feel like you are where you wanted to be when you started?
We’re always very, very clear on where we wanted to be from a growth point of view. It’s always hard to predict or almost impossible to predict what it’s like when you get there but I think we’re in a place where we thought we’d end up.
I saw the 24/7 space as a very big opportunity in the Australian market and I knew it would move pretty fast, so it was really about getting a model that we could scale quite quickly but still focus on quality over quantity. So it was getting that balance right between very quick growth and good execution. That’s always been the big focus for which I think we’ve been able to handle quite well.
What teething problems did you experience?
If I look back 12 to 18 months ago to when we were in our third year and we opened 40 clubs, the challenge we had was that imbalance between working capital, resources with staff – and then we added 40 clubs. So you get some dilution with your standards across all your clubs when you open that many but we’ve been able to catch up on that in the past 12 or 18 months which is fantastic. That wasn’t a significant challenge but it’s certainly something that’s hard to manage when you’re going through that phase of growth. The good news is we’re over-resourced now which is great for us heading into the next phase of our growth.
You’re pretty much everywhere now in Australia except for the Northern Territory. Is your plan to continue in Australia or looking overseas for the next step?
We ventured into New Zealand just over 12 months ago and that’s been a very successful move for us – we’ve now got 20 clubs. At this stage there’s still plenty of growth left for us in the Australian market. The Australian market in the 24/7 space is around 50% saturated so we’ve still got another 50% growth in this market.
How big would the market get?
I see a market where there’s around 600 clubs in Australia. That’s including all 24/7 operators. So it is by far the fastest moving segment in the fitness industry. There’s not a lot of activity in the big box space. It’s very much in this sort of lower-cost express 24/7 segment that we’re getting a lot of club growth. Around 97% of those are franchisees.
And how do you find these franchisees and what are the attractions for them?
Interestingly enough the majority of our franchisees have come through referrals from our networks which has been great. We’ve probably spent no more than $20,000 on franchise recruitment in terms of advertising. It’s all been through positive word-of-mouth from existing franchisees or people within in our network.
What we find now is a big chunk of our prospects come from members so people that are actually members of clubs who are actually looking for a business opportunity and they see it from a consumer’s point which is the best way to view the product. So they start doing some figures and calculations in their mind and the next thing they’re on the phone to us. So we certainly have no shortage or issue in generating franchise prospects. The key for us is that we’ve rejected probably thousands of people now since we’ve started. So we’ve been very, very selective with who we take onboard.
So what are the qualifications for franchisees? What are you looking for?
Well the two big ones for us is either experience in small business in the past or middle management experience. So we’re looking for people that aren’t necessarily from the fitness industry and 95% of our franchisees aren’t from the industry. We’re looking for people who’ve got ability to manage a small team and they understand small business practices. And then we look for people that look to open multiple sites. About 60% of our network has more than one store. That’s a very high percentage and that’s the model we’ve deployed. For us it’s a much stronger proposition to work with an existing franchisee than to recruit and train a new one.
And how do they manage it time-wise though? I assume they don’t have to be there 24 hours but do they have to man the business every day?
The model is that it works on a staffed and unstaffed basis. So the club is accessible 24/7. From a franchisee’s point of view a typical franchisee with a club that’s been opened for longer than three months will put in anywhere between five and 10 hours of work to manage that business a week. So it’s very lean on time which is a really attractive model for small business owners today from what we’ve found and I guess that gives them the opportunity to own two or three clubs.
How much is it to become a franchisee?
The total setup costs to get a club open are around the $500,000 mark. So it can range anywhere between the $400,000 and $600,000 as the sort of min and max range. But half of that includes gym equipment so their actual cost is typically $250,000 to $300,000 and there’s a leasing component for the gym gear which is the biggest capital expense.
What target market are you going after? I assume you’ve sort of got an inner city slant at the moment or would that change?
We’ve got quite a big proportion of our clubs that are in regional towns. We do attract a broad market because there are a lot of attributes to the model that fit with a wide range of consumers. Some people are attracted to the low cost, some people are attracted to the no contracts, some people are attracted to the 24/7 access. So I guess in terms of really defining our target market it’s that 18 to 45, they’re typically looking for a better quality of life, they’re aspirational, they’re working long hours, they’re time poor. I guess one of the biggest factors that we find in terms of the psychographics of our members that they’re independent, they are in control, they are happy to come and have a workout without too much interaction from staff and that’s what draws them to the model so our USP work out on your terms which sits really well with our customer.
Tell us a bit about your background.
The majority of my business career has been in the fitness industry. So I started off as a personal trainer and I set up a personal training studio, then bought a gym, setup another gym and then sold those and then we set up Jetts. So I guess I’ve been in the industry in the last 10 years and half of that has been with Jetts.
A recent report into the gym industry by IBISWorld suggested that margins in the industry are quite slim but they are expected to rise over the next five years. Do you find that to be the case also?
We’ve actually got an extremely profitable model with the Jetts concept. I don’t think there will be a whole lot of price pressure in the market over the next five years. I think the market’s settled. The 24/7 movement has been around for about four or five years and that sort of low cost model has kicked in and the bigger clubs have maintained their pricing point. So I don’t think price is going up in the sector, I don’t think the average price of membership will be going higher. Where there might be a little bit of squeeze is in your fixed overheads. But I think the measurement with IBISWorld has been done on the bigger clubs and the bigger clubs have definitely felt the squeeze off the back of the GFC and with the introduction of Jetts and others.
You started up just before the GFC. Were you prepared for that? Was your model suited to that or was your model rocked as well?
Look the GFC was not something I was bragging about at the time but it was a bit of a blessing in disguise for us. Members who were paying $80 or $90 at another gym questioned what they were spending in all areas of their life and members still want to workout but when things get a bit tougher, it’s not so much about cancelling their membership but it’s about looking for a I guess a gym that provides them with better value and that typically means lower prices. So we came in at about half the price of a big club but providing the same high level equipment in a nice environment with a few added extras such as no contracts and 24/7 access. So I guess the GFC was a bit of a boon for us.
I imagine the no contract is very attractive to a lot of people but when you look at the numbers do you find that people end up staying there for 12 months or 24 months anyway?
That’s the interesting thing with our model. Typically the industry standard has been 12 month or 24 month contracts and the reason why that is, is typically you’ll find that a member will join up at a big club and they’ll get toured on all the bells and whistle facilities, your steam rooms, your pools and everything and what members find after about three months that they just simply don’t have time or the need to use that stuff. But they’re locked into a contract at a fixed price so the value proposition in their mind completely changes and they decide they want to cancel and they can’t because they’re locked in. So I saw that as a real opportunity to align I guess the gym product and the membership with what a customer actually wants as opposed to what a corporation may actually want. So it was an interesting test for us.
We weren’t the first chain to go with a no contract model as standard and what we find is our retention rates are actually the same and arguably better than clubs that actually offer contracts because members are paying for what they use and what they get so they’re not thinking about cancelling three months in because what they signed up for in the start is what they’re getting three months later.
So it’s not like they’re wasting money.
That’s right, so the only time when we lose members is if they’re moving house or if their circumstances change financially or another way that is completely out of their control. We don’t get a lot of people that are disgruntled that are saying, “Look I’m just not using this, I’m just not using that.” So it really helps with our retention and we can maintain a no contract model commercially and that’s the best thing for the customer. The freedom to come and go as they like.
How are you seeing the economy at the moment? Do you think that we are heading back into GFC-like circumstances, and I assume if we are that your business will benefit from that?
I guess it’s a bit of an unknown. The Australian economy I guess is insulated with what we have with mining and our resources but you know it could certainly be an external factor through Europe or the US that triggers another debt crisis. For us I guess we’ve been through what was one of the worst economic periods for the past century so I’d be pretty confident going into a GFC style event that we’d at least maintain or even prosper. But I certainly wouldn’t go out praying for it because it affects all other areas of life. We’ve been through good times and bad times and we’ve come out well on both sides so it has proven to be recession proof. That’s a good thing, it’s good for our franchisees to know that if things do go pear shaped, they’ve still got some cashflow and things aren’t going to go too pear shaped for them.
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