Wednesday 18 July 2018

Running out of puff

Gym queen faces having shareholding diluted in restructured company

This week's confirmation by the High Court of the appointment of an examiner to Jackie Skelly Fitness buys the embattled gym chain some time to sort out its financial problems. However, with consumers cutting back on discretionary spending the glory days are over for Ireland's once-booming gyms.

With 10 gyms, most of them in the Greater Dublin area, Jackie Skelly Fitness claims to be Ireland's largest gym and fitness group. Along with her partner Mark Tooke the former Aer Lingus ground hostess opened her first gym in Dublin's Clarendon Street in 1993.

Expansion in the early years was gradual rather than dramatic. It wasn't until 2002 after raising €5m in venture capital from ICC (now Bank of Scotland (Ireland)) and NCB that she opened her second gym at Park West.

Two more gyms followed in 2003 when Jackie Skelly Fitness opened for business in Swords and Ashbourne.

Few businesses caught the zeitgeist of the Celtic Tiger years quite like the fitness and leisure sector. It seemed to sum up the work-hard, play-hard ethos of those years to perfection.

With the newly affluent Celtic Cubs desperate to do whatever it took to keep the flab at bay Jackie Skelly Fitness grew like topsy. A fifth gym, in Navan, followed in 2005, with two more in 2006. The group added an additional two gyms in 2007 and 2008 to bring the total to 10.

This expansion didn't come cheap. While the Celtic Tiger may have increased the willingness of Irish people to sign up for gym membership it also made them much more discerning. The old-fashioned gym of yore, complete with its sweaty aroma, squeezed into the upper floors of a city-centre building gave way to purpose-built suburban fitness palaces.

In May 2005, Jackie Skelly Fitness announced that it was investing €10m in three new fitness centres. This investment came on top of the €3.5m which it had spent on refurbishing its original Clarendon Street gym. With the Celtic Tiger rapidly approaching its peak this was, with the benefit of hindsight, exactly the wrong time to be making such a large investment.

However, even before the bubble burst there were clear indications that the going was getting tougher for Jackie Skelly Fitness and the rest of the leisure and fitness sector.

The great big dirty secret of the gym industry is the proportion of people who, fired up with good intentions, join in January and, after a few visits, never darken the gym's door again. Depending on the gym, between a third and a half of all those who join at the beginning of the year drop out after a couple of weeks.

However, while members may have stopped visiting the gym they are still liable for the monthly payments. From the mid-noughties onwards the alleged unfairness of gym membership contracts was a regular staple of radio phone-in shows. As one of the largest companies in the business Jackie Skelly Fitness was inevitably drawn into many of the resulting controversies.

Matters weren't helped when it emerged that Jackie Skelly Fitness was employing debt collectors to chase members who had fallen behind on their monthly membership payments. Whatever the rights and wrongs of the affair, Jackie Skelly Fitness agreed with the National Consumer Agency in October 2008 to modify the terms of its membership contracts.

At the same time as it was coming under increased fire for the alleged unfairness of its membership contracts the group was also being confronted with an even more serious threat. In 2005 former supermarket tycoon Ben Dunne entered the health and fitness business. He built three mega-gyms in the Dublin area and, imitating the pile 'em high, sell 'em cheap principles he had learned in retailing, pursued a strategy of attracting very large numbers of members with very low membership fees.

At a time when Jackie Skelly Fitness, by no means the most expensive operator, was charging its members €75 per month (€900 per year) plus a €39 joining fee, Mr Dunne's annual membership fee was a mere €295. As the recession has deepened Mr Dunne, while maintaining his standard annual membership fee at €295, has unveiled a series of special offers which, depending on when one buys, have featured annual membership fees of €200 or even lower.

Even where members have not defected to Mr Dunne, many established gyms are quietly discounting in a desperate effort to retain members. One couple of this writer's acquaintance were paying their gym, not Jackie Skelly Fitness, €1,100 between them in annual gym membership fees. When, confronted with a significant reduction in their joint income, they threatened to leave the gym, their membership fee was immediately cut to just €500.

While this might be an extreme example there is little doubt but that most gyms are now unofficially discounting heavily.

This combination of lower disposable incomes leading to fewer people taking out gym memberships in the first place, intense price competition from the Ben Dunne gyms and the need to discount existing members' fees heavily has had a devastating impact on many established gym operators.

Including Jackie Skelly Fitness. On February 4 it applied to the High Court for the appointment of an interim examiner to protect it from its creditors. The High Court heard that, while the group had a turnover of €19.8m in 2008 this fell by over a quarter to just €14.4m in 2009.

A precipitous drop in membership numbers seems to have been the main reason for the collapse in turnover. Membership numbers had fallen by 15pc since last November and with very few new memberships being taken out in January, the traditional joining month for gyms, the company was anticipating a further 15pc fall in membership numbers this year.

Reading between the lines of the information disclosed to the High Court it's clear that, given the drop in 2009 turnover, Jackie Skelly Fitness was also discounting significantly last year to retain existing members.

Further adding to the company's woes was the fact that it owed Ulster Bank €12m and, with most of its properties rented, was locked into expensive leases with upward-only rent reviews for most of its gyms.

However, Mr Justice Frank Clark was satisfied that the company had a realistic prospect of survival and consented to the appointment of KPMG accountant Kieran Wallace as interim examiner earlier this month. This week the judge confirmed Wallace's appointment.

The appointment of an examiner protects Jackie Skelly Fitness from its creditors for up to 100 days and gives the company the opportunity of renegotiating leases with its landlords and securing fresh investment.

While the business will survive, both Jackie Skelly and Mark Tooke are likely to see their shareholdings in the company significantly diluted as its bankers and landlords convert some of their debt into equity. Another possibility is that one of the major UK gym chains takes advantage of the situation to snap up the company on the cheap.

Still, it might not be a good idea to write off Ireland's fitness queen just yet.

A breast cancer survivor, she has shown herself over the past 17 years to be tough operator. Don't be surprised if she emerges with a significant shareholding in the restructured company.

Irish Independent

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