Description

Executive summary

We believe Basic Fit is the best positioned player in continental Western Europe to capitalize on two trends taking place – increasing fitness penetration and transition to value-for-money operators. The market on the contrary does not ascribe the business the value it deserves. The prevailing narrative is Basic Fit’s model exhibits diminishing incremental returns amid site cannibalization, high member churn and price elasticity, and the market talk also remains sceptical on its last expansion into Germany.

Investment Highlights

Growing Fitness Penetration – The percentage of people who are members of a fitness club – a.k.a. fitness penetration rate – is still relatively low in most European countries. This is also the case in all the markets Basic Fit operates – Belgium, France, Spain, and Germany – except for the Netherlands, which is ahead of the long term-trend with a denser club network. Yet still the Netherlands is still way behind the 22% fitness penetration rate in the US.

Strong pipeline in 3 countries – France, Spain and Germany will be the main drivers so the company might deliver on its promise of 3,000 to 3,500 clubs by 2030 from the current 1,402 base (by November 2023 Capital Markets Day, without therefore including McFit acquisition in Spain in December 2023).

Attractive site economics – A club matures after 2 years, exhibits less than 3-year payback on an EBITDA basis and reaches profitability typically in the fifth month from opening. Mature clubs exhibit 45%+ EBITDA margin and 30%+ ROIC.

Strong competitive position – Except for Germany (entered in 2022), Basic Fit exhibits the largest scale and the highest brand awareness on its main countries. In fact Basic Fit is the largest operator in continental Europe, representing the lowest cost fitness option in these countries. Basic Fit is ~2x the size of the next larger operator in each the Netherlands, France, and Spain by number of sites and ~6x the next largest peer in Belgium.

Best in class management – Rene Moos is the founder and remains CEO, owning ~14%[1] of the shares outstanding and having most of his net worth tied to Basic Fit. He proved great vision as he pivoted from operating tennis courts first to mid-priced gyms to eventually go all into the low-cost concept in 2006.

Compelling Valuation – Basic Fit is currently selling for 7x 2024 EV / cash EBIT and 6x 2024 “fully ramped” EV / cash EBIT (assuming sites were all mature).

Business Description  

Basic Fit is the largest European operator of low-cost gyms, with 1,402 sites as of November 9^th 2023 (Capital Markets Day) distributed amongst the Netherlands (238), Belgium (222), Luxembourg (10), France (780), Spain (140) and Germany (12), so France now comprises over half of the estate although Benelux was its first expansion area.

Basic Fit operates under a low-cost no-frills model, standardizing site format, functional areas, and product offering (you won’t find squash areas, saunas and/or swimming pools). A typical gym averages 1,300 sqm yet size varies depending on location – city sites are larger than rural ones – offers 7 areas covering essentials – cardio, strength, free weights, stretch, virtual cycling and group classes (this last area for a limited number of gyms) and has around 3,250 members after 2 years (when a site typically matures). Gym equipment offering is simple yet spans a wide spectrum to exercise, with Technogym and Matrix as equipment providers, which are top-notch in the industry – however as opposed to price and location, equipment’s brand does not affect much the decision to join a gym.

The gyms are self-serve and virtually automated, with just 1-2 staff at a time (two shifts for 2-3 FTEs), surveillance systems (security cameras, in-house monitoring teams, etc) and with a revolving door to get out and get in (see picture below). Basic’s Fit App is central to this model as it makes it possible to reduce staff – i.e. access relies on a QR code within the App and members can digitally learn different workouts for each equipment, which we deem key especially for beginners – and to optimize cross-selling services – external personal trainers, e-commerce of nutritional products, etc.

While operating in different verticals and with some stark differences, we find Basic Fit’s model shares some similarities with Ryanair’s in the sense of offsetting the lack of human touch (as the model requires to cut operational costs to the bone) with a superb digital experience (where the economics work better as tech is mostly a fixed cost investment).

Basic Fit offers two 4-week main plans - a €25 Comfort Membership (€20 registration fee on top and members can access all the clubs in the country) and a €30 Premium Membership which adds amongst other minor features access to all European clubs, the possibility to bring a friend to work out and no subscription fee. To be competitive as a newcomer in Germany a Basic Membership for €20 instead of Comfort grants members access to one gym on top of the €20 registration fee.

There is also an “upgraded” €50 Premium Membership which includes a Basic Fit -branded smart stationary bike rental (a cheaper alternative to Peloton bikes) and access to special workout videos. This upgraded version is residual and unsuccessful insofar (less than 1% of members) and we believe Basic Fit might either discontinue it or do it through partners.

These subscription plans account for 95%+ of Basic Fit’s revenues, the rest comprising fees from external personal trainers offering their services in Basic Fit clubs, food and beverage vending machines, day passes for the clubs, digital advertising sales (3P brands advertising on TV panels within the clubs) and e-commerce (mostly via sales Basic Fit’s own nutritional brand Next).

Brief History and Founder

Rene Moos is Basic Fit’s founder and CEO. Regarded as a terrific operator amongst its peers and a former professional tennis player, upon retirement in 1984 he managed and invested in tennis parks. Rene soon realized however tennis courts were a poor business so added fitness facilities, eventually co-founding and running in 2004 HealthCity, a mid-market fitness club operator which at its peak in 2011 owned 198 clubs.

Then he realized the low-cost model would win in the future and introduced that concept through Basic Fit, which he acquired in 2011 with 28 clubs back then, demerging afterwards Basic Fit from Health City in 2013, year when the private equity 3i joined the shareholder base to finance the transformation (still a shareholder today).  

Pivoting not once but twice successfully speaks highly about Rene’s vision and execution. We give special credit to his transition to low cost given mid-market gyms were cash cows back then and were not still share donors as the low-cost industry was a nascent concept. Basic Fit listed in 2016 and is now Europe´s largest fitness chain, with 1,402 gyms, operations in 6 countries, and market leader in all of them but the recently entered Germany. Rene also shows shareholder alignment with most of his net worth tied to Basic Fit fortunes and owning ~14% of shares.

Market info and goodness of fitness

Younger generations show rising awareness on health and wellness. A Berenberg’s study found that respondents in their teens and early 20s were drinking over 20% less per capita than millennials did at the same age, mainly because of health and hangover reasons[2]. Social media and influencers also contributed to penetration by spreading the message with fitness content and user desire of a toned body for their pics (comparison effect).

Fitness penetration in BFIT countries is lower than in the US and the Nordics, which has a lot to do with the availability of value for money fitness. As happened in the airline industry, low-cost players have expanded the market for the past years, allowing younger people, casual gym goers, and lower income population to have a gym subscription previously too expensive to keep.

The value-for-money concept expansion has driven most of the fitness category membership growth. This phenomenon is remarkable in both Europe and the US as value gyms respectively contributed 91% and 87% of membership growth from 2011 to 2019 especially thanks to Basic Fit and Planet Fitness.

Owned vs. Franchise model

Basic Fit operates its own sites. A franchise model like Planet Fitness’s makes more sense in the US to dominate the market as speed of expansion is paramount given the country is vast and less dense than Europe. But when it comes to Europe we believe ownership[3] is a superior model vs. franchise for the following reasons.

- Pricing flexibility – BFIT is able to lower prices and/or run marketing campaigns at the corporate level - e.g. founding member campaigns where pre-opening joiners get a perpetual discounted subscription. Pricing and marketing decisions from the corporate in a franchise model might find a lot of pushbacks from franchisees – which are companies on their own right themselves.

- Operational simplicity – There´s no need of keeping dozens of franchisees happy, and incur in costly and time-consuming franchisee training, opening, and financing negotiations.  

-  Why giving away most of the economics when returns are attractive and capital for the initial outlay is available? Planet Fitness’s EBITDA per site for the few gyms it owns is ~5x the EBITDA per site of its franchised sites. For the reasons we exposed franchising makes sense in the US and less so in Europe, so BFIT does well by having all corporate sites.

- Location flexibility – There are no zoning restrictions (as typically franchisees compete with each other to some extent) and therefore BFIT is able to run a cluster strategy - opening a few gyms close to each other within an area - as gyms become too crowded and/or want to defend the area from competitors. Although cluster gyms typically achieve relatively similar economics despite some potential cannibalization, BFIT could run them at a loss if it decided to do so in order to squeeze competitors.  

The clustering approach confers three main benefits. First, operational acumen.  Staff can switch between clubs and cluster managers spend less time travelling from one site to another. On top of that, Bfit might offer live classes in one gym but not the others within that cluster to get costs under control yet largely keeping a compelling the value proposition for members in that catchment area. Second, marketing efficiencies. By concentrating clubs in an area billboards and other local marketing tools work better. Last, higher barriers to entry. Through targeted marketing and larger catchment areas, clusters make life hard for potential entrants and “steal” members from sub-scale local competitors.

Competitive Positioning

BFIT is the largest pan European operator by # of sites with 2.5x the scale of the next peer in Europe (Pure Gym) and approximately the size of the second, third and fourth peers combined (Pure Gym + Clever Fit + L ’Orange Bleue).

Country by country Basic also beats the nearest competitor by # of sites in each of its markets by a wide margin except in Germany as it just entered the country in 2022 – 2x the size in France and the Netherlands, 6x in Belgium and 1.6x in Spain.

Basic also grows sites faster than peers. In 2022 it added 182 net sites to its footprint vs. 103 for the next 29 competitors together, adding also more clubs in each country of operation (except for Spain and Germany). There is no official data for 2023, but this dynamic likely holds true. Moreover in Spain 2023 (unlike 2022) net additions top all the competition together – more so after McFit’s acquisition in the country.

Spain

Most gym chains belong to Private Equity firms and other financial investors and aren’t doing well, with the exception of Viva Gym – yet Viva has only added 6 sites in 2023. Synergym grows fast but at the expense of the quality of its sites (wrong locations, look and feel, etc) – based on expert calls it is not reaching targets in terms of membership.

Our research indicates peers bear a scale disadvantage and will be unable to catch up, finding themselves in a challenging scenario as (1) none has a leadership position to command either premium valuation multiples and/or access to cheap funding, (2) most chains did not recover their pre-covid membership base and economics yet – e.g. Viva Gym expects ending 2023 with 90% of pre-covid members per gym, (3) they might become forced sellers at low prices as their Private Equity owners’ funds approach the end of life.

This market concentration dynamic might accelerate after BFIT acquired in December 2023 the 47 clubs the RSG Group (McFit corporate owner) operates in Spain – we think this deal is highly accretive as purchase price + renovations costs sit around the €1.25m per site BFIT pays for its organic sites, without bearing the ramp-up risk and the initial loss-making months.

France

France is more competitive but most chains are franchise-focused, therefore at a disadvantage vs. BFIT’s ownership model. Comparing BFIT to Fitness Park, a mid-market player, we find Fitness’s capex per site is higher (€1.6 - 2m on last years), it’s more class-oriented and operates with more employees, losing the contest vs. BFIT in both EBITDA margins (high 30s% vs. ~50% for Bfit) and returns on capital employed.

We found out however Fitness’s proposition has market fit, growing nicely and planning to accelerate openings – with ultimate designs for the gyms appealing to some BFIT members who moved to Fitness. The other players are weaker, it’s really all about Bfit and Fitness Park. The independent small chains are struggling and L ‘Orange Bleue, a large operator, is not really growing. We track however Fitness’s evolution as BFIT resumed its basic membership tier in which we see an indication of some competitive pressures – which we somehow attribute to Fitness Park.

Benelux

BFIT is the undisputable leader in the three countries, although as opposed to the Netherlands and Luxembourg, Belgium shows low fitness penetration (8% vs. 17% for the Netherlands) – which we believe is likely to remain as Belgians live more spread out (so they need to move longer distances to exercise) and the country has relatively few retail parks (gyms sitting within retail parks improve penetration as people motivation to visit the area is not only exercising but also shopping, so people can make good use of time).

Germany

BFIT entered the country in September 2022 and has 12 clubs insofar – aiming for 650 to 900 clubs long term. The German market is large (84m people), established yet underpenetrated for its high population density (12% penetration), highly fragmented (~9,000 clubs with the top 8 chains comprising only ~15% of them) and inferior customer proposition from incumbents (10.3m current gymgoers pay on average ~45€/month). The market essentially comprises 8 national scaled incumbents and a long-tail of regional players offering sometimes aggressive promotions (6 months for 1€!) in the places BFIT opens - a strategy we deem unsustainable and provoking only short-term impact.

Source: Basic Fit Presentation Capital Markets Day November 2023

Some data so you can understand the opportunity in Germany. With 48 sites BFIT is the undisputable leader in Belgian Brussels, a 1.2m people city. Let’s compare it with Hamburg in Germany. Hamburg has 1.9m inhabitants yet major and regional chains just comprise 26 low-cost sites (McFit is the largest operator with only 8 clubs), and including independent operators there are only 38 sites charging less than 30€/month out of a total of 115 fitness sites in the city. Management estimates Hamburg might absorb 63 BFIT sites.

The same dynamics apply to other German cities in terms of under penetration of national and regional brands and market fragmentation, with the leading player in each region just operating a few sites. In Berlin (3.8m people), non-independent low-cost players account for 60 sites and McFit is largest player in the area with 18 clubs.  Munich (1.5m people) sees 26 low-cost sites and the leader CleverFit just accounts for 6 clubs. In Cologne (1.1m people, so similar to Brussels) these numbers are 23 value operators with McFit leading the game with only 6 sites. Smaller cities like Frankfurt (770K people) and Stuttgart (630K people) show just 8 value players each and McFit just operates 3 sites in each.

Competitor growth in Germany remains limited and unlike BFIT no operator exhibits organic growth – growth since 2019 comes from the acquisitions listed below.

Source: Basic Fit Presentation and 2023 European Health & Fitness Market Reports (Deloitte/Europe)

Source: Basic Fit Presentation and 2023 European Health & Fitness Market Reports (Deloitte/Europe)

By leveraging lower pricing sustainably, clustering, and multisiting, BFIT should be the natural choice for urban gymgoers in the same fashion it happened in Benelux, France, and Spain. As almost 50% of Germans live in cities below 30K inhabitants, BFIT’s proposition (digital experience through the app, state of the art equipment, low pricing) should also beat weak independent competitors in suburban and rural areas.

Competitive advantages

Basic Fit advantages mostly come from scale now, yet it reached this size because the low-cost model is superior as (1) confers superior unit economics and better market fit than mid-price gyms (40€+ per month) and (2) attracted new members who had never exercised on a gym before (50% of BFIT new members). Most mid-priced gyms offer amenities (pools, saunas, sport facilities, etc) which are expensive to run as they require higher capex, need people to operate them and are difficult to price as only a few members use these services consistently. When it comes to gyms most consumers prioritize price and location over service and selection, so it does not surprise us that low-cost chains taking share from mid-price gyms is not only an European but a worldwide phenomenon. 

Equipment – BFIT acquires equipment at a discount vs retail price and gets the cheapest prices in Europe – we estimate discounts might reach 60-70%. In other words gym suppliers might not be making much money on BFIT but it serves them to leverage capacity to cover fixed costs, making all the margin on smaller chains and mom-and-pop gyms, which gives an idea of BFIT cost advantage. BFIT relies on the top two equipment providers (Matrix as the main supplier and Technogym) so it’s not too entrenched into one vendor and can keep its negotiating leverage over both. BFIT recently indeed reached a deal with Matrix so it can refurbish the used equipment with Matrix parts rather than replacing the old equipment entirely – bringing €13K a year on maintenance capex savings (lowering from €75K to €62K a year) and widening the gap vs. peers.

Marketing – The cluster strategy confers local efficiencies on marketing as BFIT might advertise further in an area to drive penetration. Also BFIT’s scale allows for national advertising and branding. Last but not least important, BFIT´s free bags the company gifts joiners are seen everywhere in each city – what we deem a superb marketing initiative.  Anecdotal evidence or not we see it here in Madrid everyday everywhere[4].

Digital experience – BFIT is able to leverage its user base to develop its own app and create high value content in-house – e.g. digital classes as even large players such as Gym Group in the UK with 229 gyms outsource content creation. Some of the app features include hundreds of workouts available, tutorials (especially valuable for newbies), access to Basic Fit’s network of associated coaches and physios, and e-commerce integration with nutritional products – Nxt is Basic’s own brand.

The superior digital experience, lower pricing, and proximity to customer through clustering translate into higher user engagement and lower churn. In 2023 the average length of stay was 22-23 months vs IPO´s 18-19 months, also remarkably higher than comparable low-cost dominant players in other geographies as UK’s Pure Gym, with tenure of 16 months[5].

Rent leverage – BFIT is the tenant of choice amongst landlords – in the end property owners prefer to sign long-term lease contracts with a third party likely to survive and thrive for the period, which facilitates the company securing the best locations at better terms vs. smaller chains and mom & pops.

Lower financing costs – Similarly to landlords giving favourable terms to BFIT, banks and capitals markets trust BFIT vs. smaller peers, conferring lower borrowing costs and better conditions amid Basic Fit’s payback history and lower risk of default.

Multisite – ~30% of members use 2+ gyms – local site density results in a step-function in the value proposition as it makes it possible for members to access one gym close to their homes and another one next to their workplace.

Brand name – BFIT is top of mind of consumers in its main markets, a byproduct of its advantageous locations, lower price, and marketing budget. Management guides for 5.5-6% marketing costs over revenues, so competitor can match by no means the 55+m€ the company spent on marketing in 2023 (~47K€ per gym) and the 75+m€ it will spend in 2024. On top of more dollars BFIT as we stated is savvy on marketing and again its backpack contributes into creating that brand awareness.

Unit economics

The average capex to open a gym in 2019 was €1.2m for a 1,300 sqm site and despite high inflation, management expects capex per site to be €1.25m (+4%) for the next 2-3 years  which we find impressive - result of the shift form cardio to strength (strength machines are cheaper), a higher share of regional gyms (smaller than the urban sites), improvements in site planning processes and attractive prices negotiated with contractors and building partners. Capex typically comprises ~€1m on site refurbishing (fixtures, walls, plumbing, etc) and IT (cameras, screens) and ~€250-280K on fitness equipment – which usually comprises 50% cardio and 50% strength yet strength gaining weight over time. Cardio equipment depreciates over 6-7 years and strength over 8 years, although BFIT has developed a cardio equipment refurbishing program to extend its useful life. Capex doesn’t vary much from country to country, so we used this average number for our projections.

The normalized maintenance capex in a full replacement cycle assuming an evenly distributed gym base should be ~€75k, yet management expects to lower it ~€62k as a result of the Matrix refurbishing program. However, due to the timing of replacements (6-8 years), it´s back ended, and depreciation outruns capex. That´s why BFIT has been spending and keeps expecting a medium term 55k € maintenance capex.

Clubs historically broke even at ~1,500 members after ~4-5 months and reach maturity after ~2 years at ~3,300 members in the past. Bfit sets a hurdle rate for a site of 30% underlying EBITDA[6] returns on invested capital. For the record, the average mature club in 2022 made €870K revenues and had €439K opex for a €431K underlying EBITDA, which makes for a 50% margin and 36% ROIC.

For the next 2-3 years management expects this numbers essentially to hold, with a slight decrease in mature members to 3,250 – a function of higher share of regional gyms, higher prices, and premium cannibalization – and lower underlying EBITDA margin to 46% – resulting from price increases and inflation. Management projects and increase to €1m revenues per gym amid conversion to premium and price increases and spending €540 in opex for €460K underlying EBITDA, translating into 37% ROIC.

Opex at the gym level splits ~35% rent, ~30% staff and 35% other costs (insurance, utilities, etc), whereas cost of sales at the group level are negligible and linked to physical items such as Yanga syrup, Home Bike, or NXT products (whey protein´s gross margin 35%). Not much beyond these products as BFIT outsources the rest – BFIT does not own its vending machines, just gets a rebate from the vendor, and payment processing costs are also de minimis as BFIT charges the subscriptions to its members through direct debt to the bank rather than credit/debit cards.

Source: Basic Fit Presentation

Balance sheet and debt levels

BFIT historically operated with ~2x Net Debt / EBITDA and borrowed at low single digit rates, making levered ROICs meaningfully higher. The target leverage is between 2-2.5x EBITDA vs. the current ~3x ´23E ND/EBITDA - although “run rate annualized” EBITDA will be higher and thus ND/EBITDA sitting at ~2.7x[7] as H2 2023 saw a significant part of new gyms ramping up. For 2024 we expect further delever to 2.4x. We think the debt levels and paydown scheduling are sensible and the business has still room for more leverage – yet we prefer not. To give some context on debt levels other players like Pure Gym operate at 5x ´23E ND/EBITDA and Planet Fitness bears 4.6x on top of franchisees leverage.

The company recently refinanced its bank facilities and term loans, increasing the principal by €200m for a €650m total with 2027 maturity, extendable to 2029. On top of it, there´s a €150m revolving facility accordion, which was uncommitted until BFIT withdrew €110m in last December, partly to fund the RSG acquisition in Spain. The facilities cost 3m Euribor + margin depending on leverage, which we estimate to be 225 bps.

Size and funding costs is an advantage for BFIT, as both smaller competitors and their franchisees are struggling to get funding from banks. From expert calls we found out that in France for instance:

1. Banks were asking Fitness Park franchisees at least 20% cash upfront on top of the half million-euro FP requires. This is only to have the funding agreement approved, as FP interest rate was above 14% vs BFIT current 6.1%.
2. We also found out how Keep Cool had development in 2023 on hold, as the company needed to recover its pre-covid economics and arrange all fiscal statements to have bank support. The former deputy CEO, also talked about how the franchise system could be a bottleneck, as it typically needs each of the franchisees to get a loan and bank support, which in today´s environment is complicated to say the least.

BFIT´s scale and easy capital market access (capital raise during covid and €300m 7-year convertible bond at 1.5% interest) has proven paramount to move fast and gain outsize market share during the past 3 years.

Management and shareholders

Management is shareholder friendly as the founder and CEO Rene owns ~14%[8] of the company and has most of its wealth into this business. Redouane, the COO and the key actor for the successful expansion in France impressed us with his energy, ideas, and determination at the Capital Markets Day on last November. We also think highly of the CFO Hans, whose personality bodes well as a counterbalance to Rene and Redouane aggressive expansion plans. 

On top of Rene we also find amongst top shareholders some active smart long-term funds (we personally know the people at OLP and CAS) rather than passive and mega funds. Concerning 3i, it invested in 2013 – helping BFIT to fund the transition towards the value for money concept – and still keeps over 6% of the shares outstanding.

Shareholders holding more than 3%

Source: TIKR

Current Situation

The opportunity exists because there are some potentially good reasons to believe Bfit model and growth prospects are not as rosy as they seem. We think though these bearish points are wrong.

1. Market in France is mature and growth might only come at the expense of profitability

BFIT grew post COVID in France from 390 to 780 sites while competitors barely grew, most of them lacking funding and struggling to get pre-pandemic economics back. BFIT focus post pandemic increasingly in rural areas (~half of 2023 openings). While France opportunity is not as nascent as years ago, we believe there is still significant share to take. 

Amid its low-cost no-frills model BFIT can afford to open gyms where other chains are unable to make unit economics work. We saw this pattern in other verticals for low-cost models as Dollar General in the US and Dino Polska in Poland – competitors bear nearly perpetual competitive disadvantages stemming from a higher cost base.

In addition to inferior economics gyms chains typically expand first on large cities, so by prioritizing now these rural areas BFIT creates virtual monopolies in such towns, and catchment areas are too small to support an extra player where BFIT already operates.

While the newest post covid sites take longer to mature they are growing members and the company is taking measures to accelerate adoption. We are cautious yet still confident BFIT will continue to deliver in France.

- The company is testing tools to ramp up faster – i.e. it introduced the founding member option (discounted prices for members who join pre-opening) and reintroduced the basic tier on last December. We see these measures as both an indication of BFIT finding it harder to expand now the market is not as greenfield and also that BFIT quickly reacts to challenges. 

- France is still notably underpenetrated – 10% penetration vs. 22% for the US.

- Peers barely grew sites post covid but in 2024 they might resume growth. BFIT takes a step ahead and focuses now its openings on the smaller cities and rural areas – where data suggests potential penetration is comparably higher than the country average, maybe because of fewer alternatives to exercise. Rural gyms in particular might take longer to scale but mature economics should be similar to the group average – on the positive side these sites tend to be super defensible once mature as they become local monopolies.

- France accounted for ~2/3rds of organic openings in 2023 and will still be the main market by # of openings in 2024. We find it telling that despite Germany and Spain are underpenetrated and large (130m people together and 143 BFIT sites adding both countries), BFIT still pushes the pedal in France – it signals the opportunity ahead.

2. The company is too levered for its model and growth prospects

Upon last refinancing BFIT bears no debt maturities till 2027. With EBITDA improving and free-cash flow becoming positive in Q4 2023, BFIT remains in a great position to reduce leverage from the current ~3x Net Debt / EBITDA (including McFit cost). In a worst-case scenario Bfit could potentially get a new source of cash injection through a franchise model as Planet Fitness and other peers did in the US and Europe respectively.

3. BFIT’s model won’t work out in Germany

We already described in the competitive positioning section why we believe this is unlikely the case – the market is large, underpenetrated, and fragmented. So why is not BFIT already gaining real traction (only 12 sites) after almost one and a half years operating in the market when the market structure begs for it as average membership cost is ~45€/month for existing players?

It is because BFIT prioritizes capital allocation discipline in the sense that an opening in Germany “competes” with openings in Spain and France in the search for the better ROIC. Certainly 12 sites guarantee that there is all the “white space” available for BFIT to growth at great ROICs for many years in the country – compared to Spain and France where BFIT penetration is higher and exposed long-term to a higher risk of ROIC erosion for the sake of growth amid market saturation – but on the other hand BFIT has not reached the point of “efficient scale” to make unit economics work vs. France and Spain, places where the company has a large network of sites to lever the cost of incremental marketing campaigns.

We think nevertheless the German playbook should be no different to the ones in France and Spain. While up to date the operation is subscale, in 2024 BFIT plans to accelerate openings and in 2025 Germany will be the main growth contributor indeed. BFIT´s track record gives us examples of this pause to preserve capital allocation discipline. In 2013 BFIT operated just 17 sites in Spain for 187 now upon RSG acquisition and just 9! Heck 9! in France for 763 now – in Spain, BFIT did not step-up growth until Q3 2020 when unit economics seemed to get better, therefore waiting 7+ years to pull the growth levers as the comparable returns in its other geographies were more attractive.

This behavioural pattern makes us confident the company will not go crazy in Germany if economics do not justify the investment. In May 2022 the company told us it would probably build 10-12 gyms and up to 20 for the year– BFIT only operates 12 sites and is cautious as it is still to hit the nail on the head. We are tracking this evolution closely.

Risks

Dutch cultural overconfidence 

It is not by chance that despite a small country the Dutch once had a formidable navy and controlled numerous colonies and trading posts around the world. The Netherlands has a tradition for leaders/entrepreneurs “pushing forward” even under unfavourable circumstances. The flip coin of this is this type of personality might lead to overconfidence and resistance to change when the initial vision is wrong, competitive dynamics variate and/or there is a paradigm shift.

In BFIT’s case we think Rene has the kind of positive confident personality in the sense he also led dramatic changes when the conditions called for them – transitioning from tennis courts to gyms first and mid-price gyms to the low-cost concept later. On top of this Rene is not that keen on M&A (with few exceptions, like the last in Spain, yet small for Bfit’s size) and we think the risk of empire building – i.e. prioritizing growth at the cost of incremental returns on capital – is mostly off the table.

Other risks

We countered these risks in the current situation section – risk of market saturation in France, leverage, and market fit and execution in Germany.

Trends

We see in terms of awareness/interest BFIT is far ahead peers in the Netherlands, Belgium, and France (first three graphs), while in Spain 2023 saw BFIT pushing ahead of peers (4^th graph below), a dynamic the RSG’s acquisition will likely accelerate.

In the last two graphs we run a simple time-test to explain the slow motion in Germany. We picked Cologne, a city where BFIT operates 2 sites out of the 12 it runs in Germany. Cologne belongs to the North Rhine-Westphalia province so we chose it (Google trends does not specify for city but for province, yet awareness at the city level should be higher than at the province level for the case) and we can see that even with 2 sites and minimum marketing leverage interest for BFIT is slightly picking up. Just contrast the data with Spain back in time. BFIT started 2017 with 31 sites in Spain and zero awareness… you see scaling takes time and 12 sites say nothing about future prospects. If anything graphs look a bit better than Spain early days yet might be noise. The thing is BFIT cannot claim victory in Germany but it is not a disaster either insofar, as some market participants anticipate.

Valuation

Please find here the raw valuation and the normalized valuation – i.e. BFIT valuation if sites were mature and opex adjusted for management mid-term guidance. We believe there´s conservativeness baked in, with room for optionality in higher growth, franchise system outside Europe and other revenue streams such as Nxt & cross sell products.

Site maturation assumptions

Catalyst

Gym roll out