Prepayment model can deliver knockout punch to gyms in long term: industry observers

WHEN gyms close abruptly, customers often cannot recover prepaid sums – and such prepayments themselves may have made the collapses more likely, said industry watchers and players.

With upfront payments, the trade-off is between short-term cash flow and “long-term viability”, said Lee Ee Yang, managing director of law firm Covenant Chambers.

Two recent casualties in Singapore are UFC Gym, the franchise of US-based Ultimate Fighting Championship (UFC), and boutique fitness studio Haus Athletics. Customers were left with prepaid memberships and packages that could neither be used nor refunded.

Gyms tend to offer monthly or yearly memberships, while boutique studios sell class-based packages.

Pay-per-use or single-session options exist, but are “typically pricier” and thus not as popular, said Sean Tan, president and co-founder of the Singapore Fitness Alliance (SFA).

Prepaid memberships and packages mean cheaper rates for consumers and upfront cash for operators. Yet they may imply a short-term focus.

Said Covenant’s Lee: “Gyms might be leveraging the fact that people give up after one to two months of exercise, and do not strive to build loyalty to form a long-term client base.”

“These businesses would struggle to generate enough cash flow to pay their operational expenses if their customer base does not grow as projected, or if there are shocks to the economy that impact their revenue growth.”

Cost pressures

High rents could have contributed to the demise of UFC Gym and Haus Athletics, as both had outlets in prime locations in the central business district, said observers.

Rents are rising elsewhere too. Body Fit Training Paya Lebar faces a potential doubling of rent for its outlet in Katong’s Kinex mall if it renews its lease this December, said owner Maria Patane.

Yet, location matters for getting a steady stream of members, said Simon Oberman, master franchisee of US-based gym chain Snap Fitness, which has an outlet in Woodlands, with a second opening in Toa Payoh in June.

“Rent is a killer for many players – a lot of them overcommit, try to go complex or premium,” he said. “Then again, if your rent is low, but your gym doesn’t have enough catchment, it’s a chicken-and-egg situation.”

Covenant’s Lee noted that Covid-era wage, rental and credit support schemes have ended, and landlords may now be unwilling to negotiate on rents.

Yet for many fitness businesses, volumes have yet to recover, said SFA’s Tan: “They’ve survived the worst years of the pandemic, and have held on with the expectation that revenues would climb back up to pre-Covid numbers. But the reality is that they haven’t.

“Members haven’t come back in droves, and have in all likelihood found other activities to engage in.”

Stiff competition, price wars

This is worsened by Singapore’s increasingly saturated fitness landscape, due to low barriers to entry.

“There may be more gyms and fitness studios than the market can sustain,” said Lee. “This can make it challenging for them to attract and retain customers, especially if they don’t offer a unique value proposition, or are in an area with many established competitors.”

This has led to price wars with flash sales and promotions. But such undercutting is a vicious circle and is unsustainable, said watchers.

Tan Wei Cheong, financial advisory executive director of Deloitte Singapore, noted that the gyms that collapsed were short of capital. They would “aggressively sell membership packages at unsustainable pricing” to cover overheads, spending the takings even before customers used their services.

Said Tan: “They must then continue to sell membership packages – and with more aggressive pricing each time – as they attempt to raise more cash to cover the gap created from using ‘future money’ in the first place.”

New entrants tend to face challenges in “gaining stability or market share” at the start, and being too optimistic with projections could put pressure on cash flow, said Julien Bera, country director of Virgin Active Singapore.

Profitability might not be accurately reflected by monthly revenue from package sales, said Bryan Tay, co-founder of functional training and boxing studio boOm. Operators should instead look at how much each class brings in: “How much of my money from that one class is going to my instructors? How much money from that one class is going to my rent and bills?”

For a “prudent” business model, upfront payments should be set aside in separate bank accounts, suggested Tan. When customers use their packages, these funds can then be progressively recognised and transferred to operating accounts: “This will ensure a proper matching of revenue earned versus cost incurred.”

Cheap packages involve long commitments – possibly “500 or 1,000 classes” – but business owners should ask themselves if they can fulfil such a number, said Anabel Chew, co-founder of barre studio WeBarre.

“Even I wouldn’t dare to sell (so many), because I don’t know what will happen in two to three years,” she added. WeBarre sells no more than 50 classes per package.

“You need to continuously sell packages in this business model,” said boOm’s Tay. “And that means you need to monitor how many (classes) you owe people, and how long you owe them for.

“If you’re not having people utilise the packages fast enough, you’re increasing your debt to them.” To avoid this, boOm is moving towards packages with shorter validity periods.

Little recourse for gym goers

Abrupt closures are a problem not just for customers with prepaid packages, but also those with instalment plans for memberships. Such payment plans may be with financial institutions or “buy now, pay later” vendors such as Atome and Grab.

Members who pay by card are liable to pay remaining instalments to the card issuer, notwithstanding a gym’s premature closure, said insolvency practitioner R S Ramasamy from Mirai Consulting SG.

Banks typically pay the full sum to merchants when an instalment plan is signed. Customers are therefore liable to pay instalments unless the merchant agrees to terminate the plan and refund the bank.

Months after the closure of Sky Fitness – whose liquidation he oversaw in 2015 – some members were still being billed for instalments by banks. The gym had shut unexpectedly, allegedly owing S$3.8 million.

In contrast, with recurring billing for a fixed-term contract or package, customers are not liable for further payments if the merchant closes. This is because “the contract entered into with the gym will be deemed frustrated”, said Rezvana Fairouse, associate director at law firm NLC Law Asia.