The Planet Fitness franchise strategy is a great example of how finding the right business model coupled with a strategic plan continues to make them America’s fastest growing health club company.
Brief History of Planet Fitness
The Grondahl brothers, Marc and Michael, bought a failing Gold’s Gym in 1992 in New Hampshire. During the next 6 years they worked on turning the business around while building their customer persona and shifting the mentality of who used the gym. To make the experience affordable they came up with the $10 membership model to drive footsteps. Their first three locations colored within the lines of what the gym should be. They still had weight rooms, child care, fitness classes and a juice bar. It was only when they opened their fourth location in Portsmouth in the late 90’s did they flip the operations of the facility to a 24-hour bare bones equipment only gym.
This location would go on to serve as the template for their growth strategy and the ability to franchise the business. As of 2022, they are now up to 2,410 locations.
The Planet Fitness Early Strategy
Their initial strategy was to take a faltering business and make it profitable. Seeing profitability as the main driver they anchored their strategy on marketing, branding, and operations.
Marketing & Branding
Within marketing, they focused on the customer and building a persona so they could serve them wherever they opened. From here, they needed to attract customers, and so they created their $10 monthly membership. Their marketing strategy was about knowing who their ideal customer is and then how to price a membership in line with their expectation. Branding would become a key component of the business with their now infamous purple and yellow machines. Coupled with their marketing, their wanted to be known for their slogan of “Judgement Free Zone”. They focused on unconventional approaches to the idea of a gym by saying “We’re not a gym we’re Planet Fitness” and making light out the typical mantra of “feel the burn”.
Operations
Lastly, their Operations focus is what allowed them to create the franchise model they have today. Born out of necessity, the Grondahl’s found running their first 3 locations was time intensive. They had to deal with the nuances of the ancillary services they offered. Child care services meant children getting hurt, incident reports and even issues hiring and keeping childcare staff. Fitness classes would result in no-show instructors and scrambling to fill their place. The juice bar may have an equipment issue that required an immediate fix or suffer lost revenue. To fix this, operationally, they decided to have a 24-hour equipment only facility. The strategy was to greatly reduce or eliminate the burden of having to “maintain a facility” to allow them to grow to more locations.
Their operational strategy is truly what allowed them to accelerate and build a replicable business supported with understanding who their customer is and how to reach them.
What is the Planet Fitness Business Model?
The business model for a franchisee is based on collecting monthly and annual dues from members. The goal is to retain, grow, and upgrade the member base. Planet Fitness has seen the average monthly membership increase from $16.52 to $18.01 as per their 2022 annual filing. They have also introduced their PF Black Card with a higher price point and on average 62% of members hold this card.
For the franchisor, the business model is based on collecting royalties, vendor commissions, and the sale of fitness equipment to franchisees. As of January 1, 2023 royalties are 7% and locations are expected to spend 7% of monthly membership dues contributing to local and national marketing efforts. Fitness equipment is required to be refreshed every 5-7 years and with the number of new locations, this is a viable stream of income for the franchisor.
What is the current Planet Fitness Strategy?
Planet Fitness does not have a publicly available strategy; however, from reviewing their 2022 annual report here are the take aways:
- System Growth
- Grow the system from within with multi-unit franchisee groups
- Focus on recurring revenue from memberships and equipment sales
- Focus on 20,000 square foot stores and leveraging mall tenants closing to secure long-term lease deals
- Marketing
- Leverage National Marketing Fund (2% monthly contribution from franchisees) to continue to reach and engage U.S. audience
- Be a leader in fitness for everyone campaigns – “Judgement free zone”
- Affordable fitness with a $10/model in the U.S.
- People
- Employee engagement and workplace culture with focus on Diversity, Equity, and Inclusion
- Planet Fitness University – 80+ courses to help train and engage staff
- Health & Safety – creating safe environments for customers and staff
How Does the Strategy Impact Franchisees?
Franchisees are the anchor to the growth of the company. Recurring revenue and the increase in membership options will allow franchisees to drive local growth. Their contributions to the National Marketing Fund will allow Planet Fitness to have a $250 million war chest for campaigns in both the U.S. and Canada. Lastly, the franchisee purchase of fitness equipment and on-going new location growth will allow the franchisor to continue to grow their revenues and footprint. The Planet Fitness strategy hinges on franchisee buy-in and execution.
What happens if they don’t execute their strategy?
Their 2022 annual report highlights what will happen if they don’t execute their strategy:
If we fail to successfully implement our growth strategy, which includes new store development by existing and new franchisees, our ability to increase our revenues and operating profits could be adversely affected. Our growth strategy relies in large part upon new store development by existing and new franchisees. Our franchisees face many challenges in opening new stores, including:
- Availability and cost of financing
- Selection and availability of suitable store locations
- Competition for store sites
- Negotiation of acceptable lease and financing terms
- Disruptions in the supply chain for required build-out equipment and materials
- Securing required domestic or foreign governmental permits and approvals
- Health and fitness trends in new geographic regions and acceptance of our offerings
- Employment, training and retention of qualified employees
- Ability to open new stores during the timeframes we and our franchisees expect
- General economic and business conditions.
Franchisee Risk
In particular, because the majority of our new store development is funded by franchisee investment, our growth strategy is dependent on our franchisees’ (or prospective franchisees’) ability to access funds to finance such development. If our franchisees (or prospective franchisees) are not able to obtain financing at commercially reasonable rates, or at all, they may be unwilling or unable to invest in the development of new stores, and our future growth could be adversely affected.
Our growth strategy also relies on our ability to identify, recruit and enter into agreements with a sufficient number of franchisees. In addition, our ability and the ability of our franchisees to successfully open and operate new stores in new or existing markets may be adversely affected by a lack of awareness or acceptance of our brand. As well as a lack of existing marketing efforts and operational execution in these new markets.
Buy-In
To the extent that we are unable to implement effective marketing and promotional programs and foster recognition and affinity for our brand in new domestic and international markets. Our and our franchisees’ new stores may not perform as expected and our growth may be significantly delayed or impaired. In addition, franchisees of new stores may have difficulty securing adequate financing, particularly in new markets where there may be a lack of adequate history and brand familiarity. New stores may not be successful or our average store membership sales may not increase at historical rates, which could materially and adversely affect our business, results of operations and financial condition.
Store Opening
To the extent our franchisees are unable to open new stores as we anticipate, we will not realize the revenue growth that we hope or expect. Our failure to add a significant number of new stores would adversely affect our ability to increase our revenues and operating income and could materially and adversely affect our business, results of operations and financial condition.
How do they measure success?
It has to be assumed, success for franchisees, team members, corporate locations, and corporate staff will be made up of a balanced scorecard that embodies the components of the strategy. At the time of this writing, this information was not available although they do discuss in general terms the overall concept of performance criteria in their 2022 annual filing.
Notable Statistics From 2022 Annual Report
- Of the $3.9 billion in revenue, $3.5 billion was generated from franchise locations
- 2410 stores of which 2176 are franchised and 234 are corporately operated
- Growth projection of 4000 stores within U.S. market
- 111 franchise groups operate the 2176 stores
- Locations are typically 20,000 square feet
- Largest franchisee group owns 186 stores
- Corporate stores average $1.8 million in revenue with a 34.8% EBITDA (this % factors in royalties)
- 7% royalty fee
- 7% of monthly location membership revenue is applied to local marketing
- Locations contribute 2% to a National Marketing Fund
- Target member makes up 80% of U.S. and Canadian population over age 14 who do not belong to a gym
- 17 million gym members
- PF Black Card members make up 62% of membership base
Planet Fitness SEC Filings and Reports
Conclusion
Planet Fitness has been driven by a vision from the get-go. Now, with their growth tied to franchisee success, it becomes even more imperative their strategy is clear for franchisees to buy-in and execute.
