Interview: Gym Group boss limbers up for growth

John Treharne, the founder of The Gym Group, certainly has a competitive streak. A former squash player who represented England at the European championships 33 years ago, Treharne’s budget gym business is credited with shaking up Britain’s fitness industry by spearheading the low-cost model in the UK, snatching market share from incumbents such as Fitness First along the way.

From its first club in Hounslow, south-west London, which opened in 2008, the private equity-backed business has expanded and is this week poised to launch its 60th site in Bedford.

The company is the culmination of Treharne’s three decades spent in the leisure industry. It is a career path he traces all the way back to his days playing squash as a schoolboy at Hurstpierpoint College in Hassocks, West Sussex. “I used to play at school, I used to play with my father, who was a county squash player,” he says. “I’m an accountant as well, but that’s ultimately what led me into leisure.”

Like Pure Gym, one of The Gym Group’s main competitors, the Guildford-based business has enjoyed high-octane growth.

It is approaching 350,000 members and opened 15 sites last year. Revenues surged 27pc to £45.9m in 2014, with earnings before interest, taxes, depreciation and amortisation also up 25pc to £19m.

There are no plans to slow down, either, with Treharne aiming to have 80 gyms open by the end of this year. The business would have been bigger still if its planned tie-up with Pure Gym had not been scuppered by competition regulators.

In February last year, the two companies announced a £300m merger that would have seen The Gym Group chief executive reunited with Peter Roberts, the Pure Gym boss who was chairman of Treharne’s first leisure business, Dragons Health Clubs. “Clearly Pure Gym and us are very similar types of business and merging them together made a lot of commercial sense,” he says.

But the deal was scrapped in July when the Competition and Markets Authority decided to launch a full-blown investigation into the tie-up.

Given the companies were growing rapidly, a drawn-out inquiry “could have been quite disruptive for both businesses” without any assurances over the end result, Treharne says, and the decision was taken to pull the plug.

However, his first venture, Dragons, did end with a deal. After working at Coral Leisure’s commercial squash division and training as an accountant, Treharne, who studied economics at University College London, headed off on his own in 1990, when he bought his first health club in Hove.

“There was a real business opportunity, a little bit like the low-cost situation today.

“Most activities at that time tended to be in single sport activities – squash clubs, tennis clubs and local authority centres,” he says, adding that “squash clubs didn’t work, partly because they were predominantly male-orientated.”

They also “had quite limited hours of usage, so you tended to get a lot of activity at lunchtime, early evenings and weekends, but it certainly wasn’t all day.

“So what we started developing was the concept of everything under one roof, so we kept some element of the squash, but introduced a gym, swimming pool – things that are commonplace today but at the time were unusual.”

He funded the Hove purchase partly by re-mortgaging his house and then grew the business with venture capital backing.

When Dragons floated on the junior Aim market in 1997, it had four health clubs. By the time the business was sold to Jeff Chapman’s Crown Sports in 2001 for £31m it had expanded to 20 sites. Treharne stayed with Crown for two years, before moving on and helping private equity group Duke Street integrate tennis, health and fitness clubs Esporta and Invicta.

It was in 2007 that he founded The Gym Group. Observing how Planet Fitness in the US and McFit in Germany had both successfully grown the budget gym model, Treharne spotted a gap in the UK market. The gym market had “plateaued” by 2006-7 and was “particularly expensive”, he says.

However, despite spotting an opportunity, because of the erupting financial crisis it was another matter securing the money to exploit it. “Even though I had a very strong track record in private equity and venture capital markets it was very difficult to get somebody to fund a start-up.”

It was after he was introduced to Bridges Ventures, the social venture capital fund set up by Sir Ronald Cohen, that he secured the backing to launch The Gym Group. Luckily, Bridges had also been examining the concept of no-frills gyms.

“The Gym Group is a very good example of the sort of business [Bridges] likes to be invested in. Because of our charging pattern, we appeal to a much wider cross section of people. Over 30pc of our members have never been in a health club or gym before.”

Membership costs from as little as £10.99 a month – an introductory price – to £20.99 a month in London, and there are no contracts. Because the gyms are open 24/7, they attract people who work “non-standard hours”, from nurses and taxi drivers to corporate lawyers.

The Gym Group also prides itself on being energy efficient and doesn’t use paper, with all of its processes, including membership registration, carried out online. Having built up a database of gym users, the company is also now targeting related products and services. Its gyms already have vending machines selling water and towels, but its website is being overhauled and there are plans to expand the products it sells online.

Because the company records data on members and their exercise regimes, a tie-up with private healthcare “is something we’re definitely looking at”, Treharne adds.

Expansion into Europe is also on the cards and is “unlikely, but possible” this year, he says. The company has looked at opportunities mainly in northern Europe, although its focus remains the UK. If Treharne does decide to grow the business abroad, it would be through “an acquisition of a small group that we can then expand from”.

In Britain, budget gyms remain popular even though the economy is enjoying a recovery from the recession and consumers have more money in their pockets.

“People have moved a long way towards low-cost, largely because it’s not bad value, it’s about a no-frills offering.

“It’s a little bit like Lidl and Aldi. There’s no stigma involved in shopping in those sort of stores.”

As a result, mid-market chains have come under pressure. Fitness First has responded by transforming itself into an upmarket offering. LA Fitness, under pressure from the no-frills operators, has been put up for sale by the banks that control it and both Fitness First and Pure Gym are suitors for the chain. Has The Gym Group taken a look? “We actively look at anything that makes commercial sense,” Treharne says, but adds that the “big focus is on organic growth. Fundamentally, it doesn’t fit with our plans”.

While the mid-market firms are attempting to adapt to low-cost growth, The Gym Growth also faces stiffening competition. Retailer Sports Direct has launched its own gym offering after buying 30 sites from LA Fitness last year and plans to open 200. Is Treharne concerned about the burgeoning threat?

“There’s nothing they do that frightens me as long as we’ve got the best locations.”

He claims that The Gym Group has rejected more than 5,000 sites, because they are either the wrong size or location or their demographic profile and competitive environment are unattractive. The company favours buildings with a generous ceiling height and plenty of natural light. Treharne also says he’s not ready to sell out. In 2013, the company underwent a refinancing that saw Phoenix Equity Partners purchase a majority stake in in a deal that valued The Gym Group at about £90m. Bridges, which by that point had invested £17.5m and had an 85pc stake, now has a 25pc holding, while management, including Treharne, have 24pc.

“We were rolling out faster and faster,” he says. “Clearly we needed more capital.”

A trade sale, flotation or a further round of private equity investment are potential options for the company, but unlikely so soon after the Phoenix deal, Treharne says. What would he do if an unsolicited offer was made? “Clearly, if someone came along and made an offer we’d consider it the same way we’d consider sites that come across our desk every day,” he says, adding “it’s not something we’re thinking about doing in the short-term.

“I’d be very reluctant because I have a lot of fun doing what we do.”