Fitness Equipment Business Plan

Circuit Fitness Importing has identified three distinct customer segments that will be targeted for sale of the fitness equipment:

• Distributors
• Fitness Clubs
• Vertical Markets

The following section provides detail regarding each respective segment as well as background information regarding the industry, a large growing industry. The competition that Circuit Fitness faces is also provided.

4.1 Market Segmentation

Fitness equipment is distributed in the U.S. through distributors or direct from the manufacturer/importer. The majority of sales are done through distributors. Distributors typically carry one (sometimes a couple of) vendor for each type of equipment (strength, cardiovascular, etc.) and this explains the large number of distributors in the U.S. Manufacturers will typically provide an exclusive geographic area for each distributor to sell the products.

Large corporations (whether fitness clubs, franchises, corporations, etc.) that have significant buying power are often able to sidestep the distributor layer of the distribution channel by buying direct from the manufacturer. This means that Circuit Fitness Importing will have distributors as well as end consumers as target customers.

Distributors
As previously mentioned, distributors sell the bulk of fitness equipment. Data is sparse regarding distributors because the various industry associations (the primary association being IHRSA [International Health, Racquet and Sports club Association]) serve manufacturers more than distributors. The key information is that 60% of the fitness club market is composed of independent clubs, all of which purchase their equipment through distributors. The remaining 40% is composed of chains, franchises, etc., some of which purchase from distributors, some of which exert their superior buying power and purchase direct from the manufacturers.

Health Clubs
Health clubs are the second largest market of fitness equipment behind home fitness equipment (of a lower grade and price point relative to commercial equipment). The 1990s saw a significant increase in health club membership, 76% or 30.6 million people from 1997 to 1999.

In addition to significant increases in membership, health clubs have seen a shift in their customer demographics.

The demographic shifts are significant. Fitness clubs were once populated primarily by 18-34 year olds who were interested in body building. As Americans have made a paradigm shift they are now making the cognitive connection of fitness and health. Consequently, there is far greater cross section of the population having fitness club memberships. This is evidenced by the huge increase in club membership for over 55 year olds who are intuitively more interested in overall health than just fitness and strength. Additional demographics includes:

• Active, fitness oriented people are more concentrated in urban areas.
• 22% of club members are considered enthusiasts, evidenced by exercising 50 days a year at home, 96 days at a club.
• In metropolitan areas, 16% of the people exercise at clubs versus 23% at home.
• 5% of the club market is female-only facilities.

Sales of fitness equipment to clubs in 1998 was approximately $445 million. The projected figure for 2003 is $565 million, representing a 21% increase. The typical useable life of the fitness equipment in a fitness club (variances include maintenance, initial quality, and use) is 7 years.

Vertical Markets
Another market that will be attractive to Circuit Fitness Importing is the vertical market which includes non-health club environments such as hotels, hospitals, apartment complexes, corporations, universities, and senior citizen centers. This relatively new market is growing fast as consumers are increasingly valuing convenient access to exercise facilities.

Hotels

• 6,000 hotel fitness centers
• 68% of luxury hotels have fitness facilities
• Business travelers often use the existence of a fitness center as one of the key variables for hotel selection

Senior Living and Apartment Complexes

• 8,500 fitness centers within the complexes
• Proof of the shifting demographic to an older crowd using fitness equipment

Corporate Wellness

As a cost saving measure and a source of employee fringe benefits, corporations have been installing fitness centers within their offices. In a recently published study in the Journal of Occupational and Environmental Health, workers who participated in Xerox’s health-risk appraisal program which included active participation with the company’s fitness facilities, there was a 37% reduction in worker compensation claims and a 31% decrease in costs per injury. This provided Xerox over a two-year period with a 5 to 1 return on investment (ROI).

For Johnson & Johnson who studied the impact of a large-scale corporate health and wellness program, employees who participated within the program each saved the company $225 annually. The savings were generated from reduced hospital admissions, mental health visits and outpatient service. The bulk of the savings occurred between years three and four. When Johnson & Johnson evaluated medical expenditures for five years before the program and four years after the start of the program, the company saved $8.5 million annually. Both the Xerox and Johnson & Johnson studies provide solid quantifiable evidence that corporate wellness programs can have significant financial gains for the company.

• There are 4,000 corporate wellness fitness centers in the U.S.
• On average companies realize a 20% reduction in health care costs by implementing a corporate fitness and wellness program.
• The actual increase in productivity is in the process of being measured but will provide even greater data supporting corporate wellness and fitness centers.

Hospital Fitness Centers

• In 1997 there was 1,219 hospitals with fitness centers, ranging in size from 1,500 – 8,500 square meters

Other Non-health Club Markets

• 10,500 additional facilities, including airports, country clubs, and shopping malls

4.2 Target Market Segment Strategy

Circuit Fitness Importing has chosen the three enumerated market segments for several reasons:

• Distributors– this is the network of companies that sells the bulk of fitness equipment to health clubs in the U.S. Specifically 60% of the health clubs make their equipment purchases through the distributor network.
• Health Clubs– the larger health clubs, because of their size and superior buying power are able to eliminate the distributor layer of the distribution channel and purchase equipment directly from the manufacturer. While the distributors are unhappy about this, there is little leverage that they can attempt to apply to the manufacturers because of the sheer size advantage that the larger clubs have.
• Vertical Markets– these markets, by virtue of the fact that they are outside the traditional industry of fitness equipment, and also because of some of the companies’ size, are able to buy direct from the importer or manufacturer. While these companies within the vertical market are more difficult and widespread in terms of identifying and contacting, they will still be a good source of sales.

4.3 Industry Analysis

The American fitness market is valued at $5.8 billion. While the industry is valued and tracked as a stand alone industry, it is generally considered part of the larger sporting goods market. In 2000, the fitness market grew at a 6% annual rate, almost twice the rate of the sporting goods market.

One trend that has been a significant driver in the growth of the fitness industry is the increasing recognition of the relationship between health and fitness. The societal epidemic of obesity has driven people to fitness clubs in an effort to take control of their health (weight, well being). This has helped Americans value the importance of fitness as it relates to their health. Looking good is no longer more important than feeling good and having a healthier and happier lifestyle. This is important because it provides a far larger foundation of customers with a more intuitive appeal toward fitness. Additionally, Baby Boomers (the post war bulge in population, people born between 1946-1964) have become more committed to exercise and fitness. This is fueled by their recent increases in disposable income as well as the perceived threat of not being able to enjoy their later years because of a decline in health.

The fitness industry is currently witnessing two significant trends. The first trend is the desire for equipment that is able to target specific body parts. Americans are also increasingly aware of the decrease of free time they have. Consequently, people are looking for machines that provide the greatest fitness benefit in the least amount of time.

Another trend the industry is experiencing is the accessibility of fitness equipment in nontraditional venues. In the 1990s fitness equipment was available primarily to people through fitness club membership. Beginning in the late 1990s and 2000, the industry has seen a trend of accessibility of fitness equipment in vertical markets which encompasses hotels, hospitals/rehabilitation centers, apartment complexes, corporate wellness facilities, and universities.

4.3.1 Competition and Buying Patterns

Circuit Fitness Importing faces competition from several large sources. The sources take the form of other fitness equipment manufacturers and importers. Circuit Fitness Importing is lumping both the manufacturers and importers together because they are often the same company or a subsidiary. In the case when they are a separate company, importers only import a specific brand of equipment so it is really a manufacturing brand versus a manufacturing brand.

• Precor– this is one of the largest manufacturers of fitness equipment. Precor makes both home fitness equipment as well as commercial grade equipment for fitness clubs. Precor manufactures both strength equipment as well as cardiovascular equipment.
• Paramount– this is a large manufacturer of both strength and cardiovascular equipment. Paramount however, only sells commercial grade equipment, they do not sell home units.
• Cybex– this is a large equipment manufacturer that sells a variety of light-commercial equipment. The light-commercial equipment is a mid-price point, higher quality and price than the home fitness equipment but not as expensive as commercial equipment. Light-commercial typically finds placement in vertical market customers where there equipment is not being used 24 hours a day, and therefore the units can be scaled back a bit in terms of quality and still remain functional for the industry average of seven years.