Since the beginning of recorded history, humans have had the desire to improve their physical capabilities and appearance. As technology advanced people created increasingly complicated tools and machines to help in this endeavor. The machines became prohibitively diverse and expensive for each person to buy on their own, so they would be placed in public areas for the benefit of the local community. Today, there are more than 50,000 gyms in the Us alone.

Own Almost anyone can gain access to hundreds of thousands of dollars worth of equipment for as little as $10 per month. Operating a gym isn't rocket science, you just need to rent a large space in a location with decent traffic, buy a bunch of equipment, and hire a few employees. There are millions of Fitness enthusiasts whose dream is to open their own gym, keeping competition Fierce and profit margins paper thin. But everything started to change in the late 2000s with the emergence of Planet Fitness which quickly became the largest gym chain in the United States.

They expanded rapidly, opening hundreds of new locations, and spending heavily on National advertising, which was previously unheard of in the industry. It's main selling point is its low membership cost of just $10 per month, which is a fraction of what most independent gyms charge. Despite the low price point, the company has inexplicably been extremely profitable with operating margins consistently in excess of 20% By bringing corporate marketing and standardization, Planet Fitness came to dominate an industry previously made up by thousands of disparate small businesses. Wall Street Fell in love with the stock with the share price quadrupling in its first 5 years as a public company.

However, in 2023, crack started to appear. A short selling publication called the Bear Cave published a scathing report calling Planet Fitness an illegal billing operation with gyms on the side. In September Longtime CEO Chris Rondo Who is credited with building the company into the Behemoth it is today. Was fired with almost no explanation.

The stock price has lost 40% of its value since its recent highs. as investors are now starting to to question what was previously one of Wall Street's favorite growth stories. In this video, we'll look at the rise of America's largest gym chain and its recent controversies. To understand how the gym industry works, we first have to understand the customers.

Especially in today's age of social media. Everybody wants to maximize their physical appearance. But for most people, the sedentary nature of their jobs and The Lure of high calorie food options means that their physical fitness is less than ideal. According to the center of Disease Control 74% of American adults are overweight, while 42% are obese.

Most of these people want to lose weight, and they know that going to a gym is one of the best ways to improve their health. In terms of consumer psychology, there are two main obstacles to getting a gym membership. Firstly, physical exercise is unpleasant. most people don't enjoy it.

Secondly, it's expensive, The cost of the equipment in real estate is very high, and you need staff to clean the equipment and force gym etiquette and make sure nobody injures themselves. Let's say that we were to create our own independent gym. According to Exercise.com the typical cost of renting a 4,000 ft location in a mid-tier city would cost you about $24,000 per year. You'd have to spend about $100,000 renovating the space and purchasing equipment.

For a gym of this size, you would need two full-time employees and some part-time employees, which could cost you about $100,000 per year. You'll also spend about $20,000 per year on maintenance, insurance and miscellaneous expenses. So Allin you're looking at around $160,000 per year of expenses assuming that your equipment has a 5-year estimate. A useful life.

Here's an example of a floor plan for a 4,000 ft gym posted on Roomsketcher Tocom. There's room for about 15 weight machines of various types and 25 cardio machines. If every single machine was being used, it could support 40 people at a time. Of course, that's not realistic because people often switch between different machines.

So let's reduce the reasonable Max capacity to 20 people so that half the machines are being used at a time. Most people come to the gym after work, so on weekdays the busy hours will be between 600 and 11:00 p.m. Giving 5 hours of heavy usage per weekday. During weekends, let's assume there are 10 hours of heavy usage, so that's 45 hours per week.

Multiply that by the max capacity of 20 and we get 900 member hours per week. If an active gymgo attends the gym three times a week, and at 1 hour per session, that's 3 hours per week. With 900 member hours available, Able, our gym could support a maximum capacity of 300 active members. To cover our $160,000 per year of operating costs, we would need to charge each member $45 per month.

So let's charge $50 per month and make a tiny profit. $50 per month is a significant commitment and it is a major barrier for entry for people who are not Fitness enthusiasts. In large part because of these high costs, it's estimated that 80% of Americans do not have a gym membership. Then comes Planet Fitness Planet Fitness has two key differentiators over our hypothetical independent gym.

Firstly, they charge a much lower price of just $10 per month. Secondly, they spend 9 cents of every dollar they bring in on Advertising Their advertising specifically targets people who don't go to the gym and possibly have never been to a gym in their life. Beginner lifters may feel intimidated if they see a bunch of bodybuilders lifting far more weight than they can. Planet Fitness even has a word for this gymtimidation.

To prevent gymtimidation, they enforce a few rules. First, First, ly: They do not allow overly revealing clothing like tank tops. They do allow excessively large water bottles. They do not allow deadlifts or excessive grunting when lifting heavy weights.

If somebody violates the rules. Planet Fitness Employees will activate the Lunk Alarm a siren, which is meant to shame people into following the etiquette. The Lunk alarm has become something of a meme with many Tik tokers going into Planet Fitness and intentionally trying to set it off. In reality, the Lunk alarm is rarely set off based on the way Planet Fitness is marketed.

There's a strong selection by it is the type of people who sign up are typically beginners and wouldn't want to do anything that would set off the lung alarm anyway. The entire strategy is to help people with relatively low levels of physical fitness feel comfortable going to the gym for the first time. The combination of the affordable price point of $10 per month as well as their massive advertising campaign has been a huge success. Pretty much everybody has heard of Planet Fitness making it the default choice for beginners.

It's easy to see why Planet Fitness has become so popular with 2,400 locations, 17 million members as of the end of 2022? But how can they possibly be profitable charging just $10 per month? Remember that our hypothetical gym startup needed to charge $45 per month to break even and that didn't even include any marketing budget. With 17 million members and 2400 locations, the average Planet Fitness location has over 7,000 members. Remember that our hypothetical gym startup was 4,000 ft and had 300 members. The average Planet Fitness location is 20, ,000 ft, which is five times greater than our hypothetical gym, but it has 23 times the members.

The massive number of members per location allows them to be profitable despite the low price point. A key Assumption of our hypothetical gym startup was that all of our members would show up for three 1-hour sessions per week. After all, you'd have to be an active gym goer to justify paying $50 per month. The type of people who sign up for Planet Fitness are typically not enthusiastic athletes.

There are people who know they probably should be going to the gym and are willing to give Planet Fitness a try because the price is so cheap. They might go to a Planet Fitness a few times at the beginning, but then just stop going. They don't cancel their memberships either because they forget to or because they think they might start going back to the gym at some indefinite point in the future. It's hard to quantify this effect as gyms almost never publish data on what percentage of their members are inactive.

In 2016, USA Today published an article where they said 67% of gym memberships across the country go unused, although they don't provide any source for this and don't Define what they mean by unused. With that being said, it's almost certain that Planet Fitness has a higher than average percentage of inactive members due to their low price point and their strategy of targeting beginners, you're much more likely to forget about a $10 per month subscription than a $50 subscription. Shareholders didn't seem to care that many of Planet Fitness's members are probably inactive, as long as they keep paying their monthly fee. Revenue is revenue and the financial results spoke for themselves.

and every single year since the company went public, their revenue grew at double- digigit percentage rates. The Only Exception was 2020 when the pandemic forced them to temporarily close most of their locations after the pandemic. Revenue quickly recovered and by 2022 was well above pre-co levels. Planet Fitness has been able to grow so rapidly Because the vast majority of locations are not owned by Planet Fitness.

they are instead owned by independent franchisees who pay a royalty worth 7% of gross bookings to the parent company for the right to use the brand exclusive domain over their territory and the ability to buy equipment from the parent company. The franchisee pays for all the capital expens expenditures of setting up the new locations, as well as the complexity of day-to-day operations. This Capital Light franchise model has allowed Planet Fitness to grow very quickly and very profitably, becoming a darling on. Wall Street If you have potentially millions of people sitting at home, not even showing up to the gym, but they're still paying you $10 a month, that sounds like a great thing.

It's basically free money, but how sustainable is it? Eventually they could look through their monthly bills and finally decide to pull the plug in. January Of 2023, a short selling publication called The Beare Cave published a short report targeting Planet Fitness. They claim that they make it extremely difficult to cancel your membership, charge seemingly arbitrary termination fees, and sometimes continue to charge people even after they cancel. To be clear, this isn't unique to Planet Fitness for as long as standing orders have existed, making cancellation as difficult and painful as possible has been the modus operandi of pretty much every gym in the world.

While it does raise ethical questions, it makes perfect business sense. If you make it difficult to cancel, people will delude themselves into thinking they will start going to the gym at some point in the future. To avoid the hassle of cancelling, Planet Fitness builds your bank account on the 17th of every month. If you want to cancel, you must either go to the Planet Fitness location in person and fill out a cancellation form or send it to them VIA mail by the 10th of the month as it takes them up to 7 days to process the cancellation.

You cannot cancel the membership online or over the phone. If you sign up to their premium black card subscription which allows you to use their massage chairs as well as some other benefits, you're locked into a one-year contract. If you cancel before one year, you need to pay a $58 early cancellation fee. The fact that they make you come to the store in person to cancel may seem sketchy, but it's a normal practice in the industry.

Most gyms don't allow you to cancel online or by phone, and it's not that hard to cancel. Once you enter the gym, the whole process takes about 90 seconds. The Be Cave report alleges that in some cases members continue to be be charged even after canceling their memberships in person. If true, this would be illegal.

However, it's important to remember that Planet Fitness operates as a franchise model to the extent that individual Planet Fitness locations are fraudulently charging their members. These may be isolated incidents that happen without the consent or knowledge of the parent company. If you look at trust pilot reviews, Planet Fitness actually has the highest rating of any major US Gym Chain by far with 4.4 out of five stars. There are people who complain about the difficulty of cancelling their memberships, but but there are far more complaints of this nature at other gyms.

The Be Cave short report seems to be based on a lack of understanding of how the gym industry. Works Another concern is that in September of this year, Planet Fitness fired its long-term CEO Chris Rondo which sent the share price plummeting. Rondo Started working at the front desk at Planet Fitness First location 30 years ago and worked his way up to become CEO in 2013. During his decade long tenure as CEO, the company has expanded rapidly, executed a successful IPO and its stock price has far outpaced the S&P 500.

The company said the leadership change is not the result of any material or unexpected Financial events, but did not give any details beyond that. Rondo himself says that he was blindsided by this abrupt dismissal and has no idea why he was fired. The combination of the Barcade report and uncertainty around the CEO transition has caused the company's stock price to decline by almost 40% this year, despite posting strong financial results. Despite these recent controversies, it's still indisputable that Planet Fitness has created an Ionic brand and an extremely profitable business model.

People clown them for their lung alarm and other Antics, But the fact of the matter is that they have positioned themselves brilliantly to appeal to firsttime gym goers and the majority of their members are happy with their experience. As controversial as they might be, Planet Fitness is here to stay. All right guys. That wraps it up for this video.

What do you think about Planet Fitness Let us know in the comments section below. As always, thank you so much for watching and we'll see you in the next one! Wall Street Millennial signing out.