Bally Total Fitness Holding Corp.

views updated

Bally Total Fitness Holding Corp.

8700 West Bryn Mawr Avenue
Chicago, Illinois 60631
U.S.A.
(773) 380-3000
Fax: (773) 693-2982
Web site: http://www.ballyfitness.com

Public Company
Incorporated: 1995
Employees: 12,600
Sales: $661 million (1997)
Stock Exchanges: NYSE
Ticker Symbol: BFT
SICs: 7991 Physical Fitness Facilities; 7997 Membership Sports & Recreation Clubs

Bally Total Fitness Holding Corp. is the largest commercial operator of fitness centers in the United States. The Company has close to four million members and operates 325 facilities in 27 states and Canada. Bally Total Fitness offers a variety of services in their fitness centers, including personal training services and BFIT Rehab, a physical rehabilitation service. They also sell a variety of health, fitness, and nutritional products—including their own BFIT Nutritionals—at BFIT Essentials retail stores located inside several of the fitness centers. Facilities offer the latest in cardiovascular and strength training, as well as a variety of aerobic programs, from spinning and step, to low impact and yoga. Club members may purchase either single club memberships or premier memberships, allowing the use of Bally Total Fitness Centers nationwide.

The Beginnings of Bally Total Fitness

Bally Total Fitness has roots that extend all the way back to 1931 and a company by the name of Lion Manufacturing. Lion Manufacturing, which later became Bally Manufacturing, was formed as and expanded as one of the largest producers of coin-operated amusement games. Bally Manufacturing continued its growth in the entertainment industry for the next fifty years, developing and producing products such as slot machines, video games, and pinball machines. Bally Manufacturing also entered into the casino business by becoming the owner of a series of a few different gaming hotels.

In a push to become a leader in the recreation industry, Bally Manufacturing later purchased Health and Tennis Corporation of America in 1983, creating Bally Health and Tennis Corporation, which became a subsidiary of the Bally parent company, now named Bally Entertainment. Bally also acquired Lifecyle, Inc., an exercise bike manufacturer, renaming it Bally Fitness Products, Corporation. With this expansion, Bally became the world’s largest owner and operator of fitness centers by the year 1987. With the purchase of the American Fitness Centers business and 19 Nautilus Fitness Centers, Bally Health and Tennis Corp. continued to grow throughout the remainder of the 1980’s and into the 1990’s, at one point operating a total of almost 400 fitness centers in the United States and Canada.

The Bally Total Fitness name was developed in 1995, as Bally Health and Tennis Corp. consolidated all of its various health clubs under one name. Before the consolidation, the Bally clubs were operated under several different names, such as Bally’s Health and Fitness, Vic Tanny, and Jack LaLanne. The move to consolidate under the Bally Total Fitness name was done in an attempt to unify the clubs and to increase Bally’s already recognizable national image. Bally’s marketed this change with a promotional campaign featuring the slogan “Turn on Your Life” and television’s Terri Hatcher, from the hit show ‘Lois and Clark’.

New Leadership for Bally Total Fitness in 1996

In January 1996, Bally Total Fitness Holding Corporation emerged from Bally Health and Tennis Corp. after being spun off from Bally Entertainment. This move completely separated the health and fitness arm of the Bally operation from that of the Bally gaming and entertainment arm. Now on its own, Bally Total Fitness Holding Corp. began to institute a strong campaign to improve its operations and head into the next century as a leader in the fitness center industry.

In October 1996, Lee Hillman was named president and Chief Executive Officer of Bally Total Fitness, and was put in charge of paving the way for Bally’s growth. Hillman took over for the retiring Michael Lucci Sr., who had decided to step down after leading the company through the early 1990’s. Hillman, who was in charge of making Bally Total Fitness profitable—after years of muddled fitness and gaming operations had eroded profitability somewhat—had worked in a similar situation under Bally Entertainment CEO Arthur Goldberg, who had turned that company around several years earlier. Hillman’s main focus now was to increase the shareholders’ value, through efforts at expansion, increasing revenues per square foot, and increasing operating margins.

The company already operated over 340 fitness centers in the United States and Canada, so the focus of Bally’s expansion was not to increase the number of fitness centers, but to expand the variety of products that the company had to offer. Selling only one product—memberships—the company had well over 120 million visitors each year. With the desire to sell a variety of products, Hillman looked to his customers for ideas. He noticed that the customers all came into the fitness centers with T-shirts, sweatsuits, shoes, and socks, yet Bally did not sell any of those items. He also noticed the tremendous opportunity in the market of vitamins, nutritional supplements, and protein bars. He saw all of these items as avenues for increased product offerings from Bally Total Fitness.

Another avenue for increased exposure of the Bally name became the use of strategic partnerships. Bally entered into a deal with Florida-based ContinueCare Corporation to operate physical rehabilitation services in its fitness centers. The partnership was a perfect match for Bally’s, because the fitness centers already had the necessary equipment and the demand for physical therapy often comes between 10:00am and 5:00pm, the least busy time for Bally’s fitness centers.

Another partnership was developed with Metris Companies to deliver a co-branded MasterCard to Bally’s customers. The MasterCard, another step by Hillman to expand the products and services, offered a competitive interest rate, and customers who used the card could take advantage of significant travel benefits and savings, while also collecting valuable savings on Bally’s memberships.

The last of the initial changes started by Hillman was to shift the company’s marketing focus away from heavily discounting memberships to attract new customers. Instead, the company began focusing more on people who were serious about their health. Bally stopped offering deep discounts to customers who paid cash up front for long term memberships and they soon actually saw new membership revenue begin to rise.

Building a Strong Foundation for Growth in 1997

Bally Total Fitness returned a profit of $2.5 million for the first quarter of 1997. According to Hillman, the profit was not so much a sign of the changes starting to take effect, but more a sign that the company was still solid. He felt that the changes made would only serve to further increase profitability. With bright days ahead, the income earned during that quarter marked an important step for Bally Total Fitness.

With initial plans working well, Bally continued to expand its operations in step with Hillman’s five-year plan. Part of this included closing some of the less profitable fitness centers, redesigning other existing centers, and building newly designed facilities. New clubs were built with more space for weight machines and cardiovascular areas and less space for the lesser-used swimming pools and basketball and racquetball courts. The new design cost 60 percent less to build, while providing space for 40 percent more people.

Also introduced in 1997 were 40 ‘BFIT Essentials’ retail stores. These stores operated right inside the fitness centers, and offered items ranging from vitamins to T-shirts to gym bags. The fitness centers could now offer the products that customers traditionally had been purchasing away from the Bally Total Fitness Centers, which was yet another step toward increasing overall profits.

Despite all of the new changes, Bally Total Fitness still showed a net loss for the overall year of 1997. Several signs pointed in the right direction, however, as membership revenues continued to increase. The company’s goal for the following year was not only to increase revenue, but also to introduce new profit centers. With the addition of personal training centers in the facilities, BFIT Essentials retail stores, and the rehabilitative services, Bally built those strong profit centers that were ready to show results in the future.

The Return to Profitability in 1998

The start of 1998 marked the real move of Bally Total Fitness toward becoming a profitable entity. Bally Total Fitness once again experienced growth in membership fees, bolstered by sales of all-club premier memberships. These memberships allowed customers to use their Bally memberships at any Bally location around the country, which was a very appealing feature to business people who tended to travel a lot but did not want to sacrifice their work-out schedules to do so. Continued growth in revenues from personal training, BFIT Nutritionals, and BFIT Essentials retail stores also helped the centers to raise profits.

In early 1998 Bally Total Fitness introduced its new BFIT Energy Bar, a snack bar designed to act as an energy source during and after workouts. This product became the twelfth in a growing line of BFIT Nutritionals, including BFIT-RX, a meal replacement shake, BFIT for men and women, a daily multi-vitamin, and SnackFit—snack crackers that acted to reduce between-meal cravings. Sales of these nutritional products reached nearly $1 million per month after fewer than eighteen months in existence.

Company Perspectives:

Bally Total Fitness is committed to offering its members the best resources to help them achieve their personal fitness and health goals at an affordable price.

Now solid within the fitness centers themselves, Bally’s next move was to increase brand visibility and perception. Bally signed an agreement with Baywatch Production Company, owner of Baywatch, the most watched television show in the world. The deal included several promotions throughout the year, including an episode to be filmed at a Bally Total Fitness Center. Bally also penned an agreement with Quintana Roo to become the official sponsor of the United States Triathalon Series, in an effort to attract the serious athlete to the fitness centers.

As growth continued, Bally looked to outside sources to fund the development. In May 1998, Bally sold 2.8 million shares of common stock, with the proceeds of $83 million being used to build new fitness centers and acquire club-related real estate. The expansion came fast as Bally acquired nine new clubs, including entering into the densely-populated San Francisco bay area with the acquisition of the Pinnacle Fitness and Gorilla Sports Club chains.

As new centers were acquired through construction and aggressive acquisition, and the new programs and services became successful, Bally Total Fitness announced revenues of $365.4 million for the first half of 1998. Revenues from the new products—personal training services, BFIT Nutritionals, BFIT Essentials retail stores, and BFIT Rehab Centers—also surpassed 1997 levels.

Plans for the future included opening close to 110 new BFIT Essentials retail stores by the end of 1999, while also continuing to expand the number of BFIT Rehab Centers to over 100 and building more fitness centers in the coming years. With these plans in place, and with revenues from memberships and other products continuing to grow while the fitness centers operated more effectively and efficiently, Bally Total Fitness moved closer to being the biggest operator of fitness centers in not only quantity, but in quality as well.