I had to read in yesterday’s Guardian newspaper that my beloved gym, Fitness First, is in financial difficulty. The sports studio chain, the world’s largest, is in negotiations with its creditor banks to secure a reduction in the interest it pays on loans of over £600 million. Apparently, it is already struggling to meet the repayments. The report reminded me of the lifelong membership (access to all studios worldwide) that Fitness First offered in 2008 for the handsome fee of 4000 euros. Compared to the typical monthly subscription fee for established members of 80 euros, the figure seemed reasonable and, without taking foregone interest rates into consideration, subscribers would reach their breakeven after four or five years. However, if one adds the realistic rate of return one would have demanded to make what was effectively a loan to Fitness First, say 7 percent, the breakeven date would stretch to at least an extra year.
I declined the offer and also warned one of my gym friends against entering into the engagement. We were after all in the middle of the subprime crisis and many people were discovering for the first time the meaning of the expression ‘counterparty risk’. So I was doubtful whether Fitness First would survive to the date when we would reach our breakeven. A similarly disastrous economic outcome would have been, as my friend recognised for himself, that the subscriber did not live long enough to profit from the advantage.
Even back then I realised that life often does not present binary outcomes – life or death – there are usually many possibilities in between. For example, there was the risk that serious illness or accident prevents someone from using the gym. Similarly, for Fitness First, I do not consider just survival or bankruptcy. The possible outcomes in between are equally worrying. It is fair to say that, whether or not it is able to make its interest payments, the gym chain is going to have to try to boost income and reduce costs. These days, when austerity and recession are causing consumers to rethink their budgets, a subscription to a sports studio for infrequent users is an easily dispensable luxury. So, not only could the membership fall, the proportion of frequent users (low margin) and lifelong members (no income) could rise. It is not in Fitness First’s interest to sell lifelong subscriptions to the former, and impossible to do so to the latter, so cost savings will have to made, probably affecting the level of service and the personnel. The facilities will perhaps be cleaned less frequently; the machines serviced and upgraded less regularly. But that doesn’t matter does it? L lifelong members could always recoup the loss of hygiene and wellbeing through a couple of extra hours training per week. They should look on the bright side – it’s only for the rest of their life.
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Tags: counterparty risk, debt