Bally Fitness

1322 Words3 Pages

OVERVIEW

Obesity is a serious problem in America where, as of 2004, two out of every three adults were classified as obese (Wells, 2006). In response to this alarming fact, the US Surgeon General’s office has voiced its concern about the effects of obesity. With such a highly publicized campaign against obesity, Americans have become increasingly-health conscious, driving growth in a variety of industries including the health club industry. During the ten year period from 1995 and including 2004, the health club industry saw an increase of 113% in the number of clubs, and in 2004 alone, industry-wide revenues totaled $ 14.1 billion (Wells 2006). Another key factor that has led to this growth in this industry is the increase in members under the age of 18, which doubled between 1993 and 2003, and the increase in members over the age of 55, which increased 273% over the same period (Wells, 2006).

BASIC ECONOMICS

From industry data (Wells, 2006), it can be deduced that since 2000, the demand for health clubs is increasing on average at 6.3% and the supply of health clubs is increasing on average at 11.8%. This sizable increase in the number of health clubs is due to the fact that new competitors can easily enter the market. The threat of new entrants is high because although supply side economies of scale do exist, there are mechanisms in place that provide a new entrant means to overcome the advantage. One example is that larger firms would require more equipment to fill their larger facilities, thereby incurring a greater cost, but be able to spread that cost over a greater number of patrons. However, smaller firms can overcome the issue by leasing smaller spaces with few amenities and, instead of making large capital ex...

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...l trainers. All of these have contributed to the growing number of customer memberships, 138% between 1987 and 2004 (Wells, 2006).

To provide this value, health clubs need to have the right location, have the right equipment, advertise toward their specific market, and hire the right personnel. This results in expenses for rent, equipment purchase, depreciation and maintenance costs, advertising, and salaries and wages. Most of these costs are fixed. The discrepancy between high fixed costs and low marginal costs is another contributing factor to the competitiveness in the business. Until the club reaches full capacity, the fixed costs of the club remain unaltered regardless of the change in the number of customers. Once it reaches the maximum capacity, another club will have to be created to accommodate the increase in operation, in cases where this is possible.

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