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Wellness Industry 2016-08-29

The How and Why of going for a fitness franchise answered

Growing year- on-year at 6.1 per cent in 2014-15, the sports clubs and gyms are expected to grow at 6.8 per cent CAGR in 2015-20.

The How and Why of going for a fitness franchise answered

According to a recent study, a new venture has 85 per cent chance of being successful if it’s a franchise while if you go on your own, you have only 15 per cent chances of succeeding. Of course, these kind of figures can be disputed and only should be filtered through one’s experience of life and business. My own tells me that this probably may be true or closer to the truth.

But when it comes to India, one needs to be very careful in taking the franchise route. To understand why I’m saying this, let’s first understand what franchising is and why one opts for a franchise rather than doing one’s own business.

Franchising in one word is risk mitigation.

Risks exist in every business, whether one starts a franchise or otherwise. These risks may come from reading the market wrong or getting the pricing wrong, betting too much on investment too soon, operations, execution risk, timing of launch etc.

In case of a franchise, you simply expect that all these risks will be reduced (they can never be eliminated) because the franchisor has gone through the journey, overcome them and knows how to guide you in such situations. So when you are evaluating a franchise opportunity, first examine if a franchisor knows how to mitigate risks.

It’s a given that the franchisor you are in talks with has a proven business model, otherwise you wouldn’t have approached them. But the key is as to whether he has enough experience and exposure of mitigating the risk, especially if the franchise business you are looking at is young or promoters are young and may not have had enough exposure to surprises and shocks.

The other part I will look at is the clarity of business model and how differentiated it is, especially in the fitness industry. There are so many ‘me too’ commoditised versions that fit the mould (refer to my earlier article on the subject) that it’s only a question of time that they’ll be gone.

So, for the fitness industry I will either look at the legacy of many years or a very sharply differentiated offering. Be very, very careful of succumbing to the glamour of the industry or the franchisor in this industry. The glamour does not help the brand last.

But there is one big factor that one needs to taken extra care of in the franchisor-franchisee relationship, which is, expectations. In India, since franchising and fitness industry, both are at the nascent stage, the expectations from the franchisee’s side are not defined and as the relationship matures, the franchisee starts feeling he/she is doing a lot and the franchisor is not doing enough.

On the franchisor’s side, the biggest issue is that most or many franchisors go into franchising as they think that it’s fast money with no capital outlay. I have encountered many such franchisors in my journey. For example, there was someone who offered a tea café franchise after opening three stores and having no previous background of the industry. Why would one do that?

Franchising should be done when the entrepreneur needs partners to spread across the market and reach out to clients faster.

This is because the big question one will ask is that if there is so much profit, why would one want to franchise and not do it on their own.

But a clearly defined and successful business model is a must. The fitness industry is risky as franchisors themselves don’t have clearly defined business models, so unless you find one, don’t go for it or opt for a brand with a legacy of many, many years.

To guide the franchisee, I will offer a metrics, which I call 'Strategic Drivers or SDs', to choose a franchise in the fitness industry:

SD1: Affordability

If the business model is built around affordability, the chance of success is higher in India in the fitness sector. This means capping the investment and operating costs and selecting sites which allow for operating and investment costs to be in the range, to achieve an EBIDTA of 35-40 per cent which will give a payback of 3 years.

SD2: Size & Space

These are very crucial in India. In metros, this is because of high rentals. In Tier II-III towns, the affluent are used to living in large homes unlike in metros, where we are used to cramped spaces. Therefore, the expectations or needs may be different according to the region.

SD3: Affordability does not mean lower value

India wants high value delivered at low cost and for this to happen, the fitness centre model needs to be re-designed for higher value, but lower investment and lower operating costs. This is possible by identifying and cutting down on areas of investment, which don’t add value and adding or enhancing those areas which will add value.

There are some key assumptions that concern the size and business of a fitness centre. The first one is that the maximum capacity for a health club is calculated @ 35-40 members per 100 sq ft. Another key assumption is that the above mentioned EBIDTA of 35 per cent payback of 3 years is possible (which is in most cases). The third Key Assumption is that a 2,500-3,000 sq. ft gym can be priced at Rs 10,000-12,000 per annum to reach 800 -1000 members, thus, it can reach Rs 1 crore.

To manage the operating cost, the key is to cap rentals at Rs 1.5-2 lakh per month, which means per sq ft rental of Rs 50 -70 maximum. All the other costs like electricity etc will more or less fall in line.

The other way to look at it is to keep rentals at a maximum of 10-12 per cent of revenue. If it’s 8 per cent, then you are going to be very profitable, at least in the first 2 years before the maintenance and upkeep cost and newness of the offering fades off. Therefore, check your numbers very closely.

If you are choosing a franchise which is positioned on being premium, then of course, the whole metrics will change.

However, for anyone choosing a franchise in the fitness or gym industry, I will strongly discourage going for a franchise which is positioned as a premium offering, simply because the execution risks are so high that chances of failure increase manifold.

Always remember, the execution risk is one risk that cannot be mitigated by the franchisor while all the other risks can be.

Don’t forget that it all starts with the two big questions - Do you think that this franchise relationship will mitigate your risks by a large measure? Have you set your expectations right and are they in sync with what the franchisor has to offer?

This article is written by Vishal Rupani, Co-founder & CEO, Balance Nutrition, as per his personal research and experience. Backed with a strong hold of 15years in the health and fitness domain, Rupani has incubated healthtech company- www.balancenutrition.in and is set to launch on thinqFit.com.

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