Capstone 1 Case Flashcards
Original concerns
Cap 1 Case
Declining members, revenue and profits starting in 2018
Number of locations & size
Cap 1 case
40 locations - in BC, AB and MB
10,000 to 13,000 square feet each
Share structure
Cap 1 case
5 shareholders with equal equity value
Philip’s shares are multi voting shares giving him 60% voting power.
4 remaining shareholders have 10% voting power each
Shareholders
Cap 1 case
Phillip Rogers (founder) Sandra MacCarthy Brian Mitchel Frank Chang Rosa van der Schuren
Phillip & Sandra are the only Shareholders that still visit gyms in BC on regular basis
Others only visit facilities once a month.
Annual growth rate
Cap 1 case
4.6% - expected until 2025
Industry in growth cycle due to healthy lifestyle benefits being publicized by government and corporate programs
Industry revenue segments
Cap 1 case
Page 2 to 3
Membership fees - 69.4% - generally monthly. High turnover & shorter membership periods are driving operators to generate revenue from other sources
Personal training - 10.9% - increasing segment
Amusement & recreational services - 5.9% - not common in the industry so those that provide these services have little competition
Fitness & recreation admission- 3.3% - one time fees for special events (competitions)
Food & beverages - 2.7%
Athletic instruction - 3% - coaching and training for specific sports
Spa services - 2.3%
Other - 2.5% - apparel & accessories, late fees & penalties
Customer segments (gender)
Cap 1 case
Page 3 to 4
Women - 40% and increasing
Customer segments by age
Cap 1 case
Page 3 to 4
55+ = 35%
40 - 54 = 20%
20 - 39 = 27.9%
19 and younger = 17.1% - growing segment, parents looking for fitness alternatives as schools cut back on Phys Ed and obesity in kids increases
Two oldest segments tend to be more health conscious & have more disposable income
Factors for choosing a fitness facility
Cap 1 case
Cost Member profile Equipment and programs Busyness of facility Extra features (daycare, massage/spa, tanning, food, etc) Accessibility (location of facility) Cleanliness Maintenance Hours of operation Personal training Membership privileges
Key success factors
Cap 1 case
Page 8
Customer service and skilled/trained employees
Clean Facilities
Good quality equipment
Types of services offered (range of services)
Locations (ease of access to clients)
Effective promotion of products (brand recognition)
Membership retention
Innovation to meet ever-changing member demands
% of fitness establishments with less than 10 staff
Cap 1 case
80%
Industry Demand drivers
Cap 1 case
Disposable income Consumer confidence Available leisure time Weather/seasonality Attitudes toward healthy living Obesity rates Ability and desire to participate in sports Cost and availability of services
Fitness industry trends
Cap 1 case
Page 8 to 11
Individualized service
Employers & insurers covering health facility costs
Wearable fitness trackers
Fitness apps with video/audio prompts for exercise routines
Streaming options for exercise classes
Outdoor obstacle races and inter-facility competitions
Flexible membership terms
Using data analytics
Hybrid establishments: Cafe/restaurant at facility
Creating sense of community at gym
Apps that allow access to multiple facilities without paying membership fees
Using technology
Environmentalism
Churn rate is close to 50%
Fitness industry risks
Cap 1 case
Page 11 to 12
Products and services risk - to retain members and attract new ones
Location risk - must be in close proximity to target market
Health and safety risk - member could be injured
Compliance risk - regulations related to health and safety
Reputational risk
Technology risk - safeguarding members data
Human resources risk - shortage of skilled & experienced fitness instructors
Phillip’s original goals when opening CFL
Cap 1 case
Fitness facility to appeal to all types of people.
Provide a wide variety of classes & equipment
Environment for member to feel comfortable & not judged on appearance or fitness level
CFL hours of operation
Cap 1 case
24 hours a day
365 days a year
Unstaffed between 9pm and 6am
CFL revenue streams
Cap 1 case
Memberships and personal training
CFL membership inclusions
Cap 1 case
Use of facility, all classes and towel service
CFL vision
Cap 1 case
Page 14
Approved in 2017
To provide the means to motivate and help adults to achieve their goals.
CFL mission
Cap 1 case
Page 15
Approved in 2017
Company dedicated to educating & motivating adults to embrace fit & healthy lifestyle in friendly & nonjudgemental atmosphere, providing state-of-the-art equipment & innovative, fun, & challenging group classes. Also strive to further develop health & wellness in local communities.
CFL core values
Cap 1 case
Page 15
Approved in 2017
- Employees are caring and understanding of members and work as part of a team to meet corporate goals and mission. Members, guests, and staff are treated with honesty, dignity & respect.
- Continuously update our equipment to ensure that is is leading edge and provide ever-changing group classes that stay up to date with current trends. Provide unmatched service by having uniquely qualified and passionate staff
- Staff are committed to their own fitness goals and healthy living & are able to motivate members to do the same
- Strive to build a community of friends in a safe and supportive environment and to be a driving and vocal force in the local community to promote fitness and healthy living
- Provide activities that are fun, challenging and designed to help individuals achieve their fitness goals
CFL Code of conduct & ethics
Cap 1 case
Implemented in 2016
All staff will act ethically
Employees may anonymously report violations and mgmt commits to investigating reports
CFL objectives
Cap 1 case
Page 15 of the case Goals Set March 2022 for 2025 - increase total revenues by 10% - increase EBITDA margin to 25% of revenues - increase total members by 15% - target new customer segment - Improve members’ level of overall satisfaction - reduce churn rate to less than 30%
Board structure and processes
Cap 1 case
Meets once per month
Members of board are all five shareholders
No formal committees
Shareholder agreement
Cap 1 case
Phillip has 5 votes on the board & all other directors have 1 vote each
Voting Clause: shareholders and board members given equal voting rights regardless of the multi-voting status of some shares. Invoked for change of control and other special shareholder resolutions
Exit provision: shareholder can offer a specific price per share to purchase the shares of other shareholders. Other shareholders are then required to either accept the buy-out offer or purchase the shareholder’s share at that price per share
Phillip Rogers
Cap 1 Case
Board Chair & CEO, founder
Owns 100% Class A shares (60% voting power)
- Previous world class cyclist
- Strong believer in visiting gyms & engaging with members
- believes rapid growth is needed through expansion
Sandra MacCarthy
Cap 1 Case
Director on board, VP of HR
Owns 25% of Class B common shares (10% voting power)
- Previous world class rower & Olympic competitor
- believes in visiting gyms & listening to customer & staff concerns
- believe rapid growth is needed through expansion
Brian Mitchell
Cap 1 Case
Director on the board, VP of Marketing & IT
owns 25% of class B common shares (10% voting power)
- Previous elite rock climber
- Believes researching & gathering trend data is vital before making decisions
- wants to see CFL focus on niche & local markets; move away from generic one-size-fits-all approach
Frank Chang
Cap 1 case
Director on board, VP of equipment & programs
Owns 25% of Class B common shares (10% voting power)
- Previous elite boxer
- wants CFL to focus on providing amenities & different types of equipment no older than 3-years
- Sees no value in group classes & wants reduction or elimination of general classes
Rosa Van Der Schuren
Cap 1 Case
Director on board, CFO
owns 25% of class B shares (10% voting power)
- previous world class skier
- Believes CFL should cut dividends & reduce shareholder salaries, which are significantly above market rate.
- believes significant changes are needed to avoid any closures & wants to see instructors paid more
Governance conflict
Cap 1 Case
Shareholders have conflicting viewpoints on achieving future growth
Phillip & Sandra want to expand while maintaining traditional & consistent gym format
Brian, Frank & Rosa want to differentiate & change with trends
Timeline
Cap 1 Case
2002: CFL established by Phillip
2002 - 2007: 10 locations opened in BC
2007: Sandra, Brian, Frank & Rosa join as shareholders
2009 to 2016: 25 new locations opened across Alberta & BC
2016: stopped supporting & hosting community events due to costs
2017: 5 new locations in Manitoba
2017: Stopped offering nutrition, behavior & fitness topic classes due to cost
2017: Mission & vision approved by the board
Vision
Cap 1 case
Page 14 & 15
To provide the means to motivate & help adults to achieve their goals.
Mission
Cap 1 case
Page 14 & 15
Industry benchmarks
Cap 1 case
page 39
Gym, Health & fitness facilities industry - External environment
Cap 1 case
- in growth cycle due to increased awareness & support for healthy lifestyles
- 4.6% annual growth rate projected to 2025
- competition is high & increasing
- revenue segments (pg 2-3)
- barriers to entry are low
- 80% of establishments are small boutique operations
Financial reporting requirements
Cap 1 case
ASPE
Dec 31 - year end
Gold Financial Bank - requires audited annual financial statements.
Current Financing
Cap 1 case
page 23
Line of Credit:
- Max limit of $1.5 million
- Interest at Prime plus 2% (2022 prime is 2.5%)
- Secured by a general security agreement
Mortgage payable:
- interest at 6%
- Matures on June 30, 2025
- repayable in annual principal payments of $2.5 million on July 1st
- Secured by PP&E
- 2 covenants:
- > Total-debt-to-EBITDA ratio below 4.2
- > EBITDA-to-interest ratio above 4.0
Both LOC and mortgage provided by Gold Financial Bank (GFB)
Alternative Sources of Financing
Cap 1 case
Page 40
Sale & lease bank of head office:
- offer of $8.5 Million, 10-year lease back beginning immediately
- $51,200 due at the beginning of the month, 6% lease interest rate
- CFL responsible for all R&M, insurance & property tax
Loan from JAG trust bank:
- 5 year loan of $3.5 million; interest at 6% payable monthly
- secured by second lien against furniture, fixtures & equipment
- personally guaranteed by shareholders
- not allow to pay dividends
Mighty Fitness Inc (MFI) acquisition
Cap 1 case
- puchase 50% of the shares of MFI for $12 Million & have 2 of 3 board seats
- owned by Gino Rossi & operates 35 trendy gyms throughout Ontario & Nova Scotia
- Uses state-of-the-art equipment, focuses on niche local needs & a vibrant, friendly atmosphere
- revenue sources include memberships, group class passes, personal training hours, admission to parties, competition training & merchandise
- difficulties in integrating with CFL: branding & target market differences
Indoor climbing wall facilities
Cap 1 Case
- Build climbing & bouldering walls in 8 low-performing facilities with adequate space
- cost is $700K per facility & $400K total start-up costs & salvage value in 9-years of $800K total
- revenue sources include memberships, day passes & special events
- requires significant changes including staffing qualifications, increased liability & temporary location closures
Distribution & video contract with Zenfit Equipment Co.
Cap 1 case
- Be exclusive distributor of Zenfit Equipment in western Canada (potential for Eastern Canada in the future)
- Host Zenfit livestream video classes in exchange for royalties on video streaming
- Purchase cardio equipment exclusively from Zenfit
- Zenfit manufacturers traditional cardio equipment& award winning, cutting-edge cross training equipment
PurCafes
Cap 1 case
Open PurCafes in 5 CFL locations; preparation is offsite & CFL not responsible for quality
- would sell premium healthy products including tea, coffee, smoothies & light foods
- CFL responsible for renovation, staffing, advertising & operating costs
