Gym business...does it make sense?

Mahendra Singh Dhoni has started a new venture – SportsFit World Private Limited – suggested the Economic Times copy of the last week. The company, which MSD has formed along with his business partner and manager Arun Pandey, would be opening a chain of fitness centers (or gyms) across India. The new partners plan to open 200 gyms across the country over the next five years. Options for going alone or through franchisees is still in the works. With this, MSD would join the league of Talwalkars, Gold's Gym, Fitness One and Snap Fitness.

I shall here try to explore the gym business for the readers of this blog.

For the sake of understanding, let’s assume that we have taken the franchise of Gold’s Gym on April 1 2012. Establishing a fully-loaded Gold’s gym can cost anything between Rs. 3 crores to Rs. 5 crores, assuming that the land/building is not owned but taken on lease. A reasonable size would be say 7,500 sq ft of area. Similar to most master franchisees, Gold’s Gym would require that we buy the fitness equipment from them or their subsidiaries. They would also have their say in the choice of interiors and related infrastructure. So, it’s better, we assume this to be a sunk cost with no options of saving even a penny.

Assuming that we already have a location in mind, it is generally said that the fitness center can be expected to kick-start operations in about three months. Taking into consideration that all goes well, our cash outflow till the date of inauguration – i.e. July 1 2012 – would stand at Rs. 5.37 crores (including Rs. 18.75 lacs as interest and Rs. 15.75 lacs as rent). I assume that the investment amount has been taken as loan from friends who seek 15% pa interest; while the rent is Rs. 70 per sq ft. In other words, we are down Rs. 5.35 crores on the date of opening.

Let’s focus now on the cash inflows for the year ending March 31, 2013. Say the membership fee to our gym costs Rs. 25,000 per annum (which are very much premium charges) and the total memberships sold averaged 600 for the first year of operations. This means that during the period July 1 2012 to March 31 2013, we generate cash inflows to the tune of Rs. 1.5 crores. After adjusting for the franchisee royalty of Rs. 11.25 lacs (i.e. 7.5% of revenue), we are left with net cash inflows of Rs. 1.39 crores.

Coming to the operational costs, we now focus on the rentals, staff salaries, electricity charges, and other administrative costs payable during the year. Rent payments of our gym come at Rs. 47.25 lacs (nine months only), staff salaries are Rs 20.0 lacs (Manager, Trainer, Junior Trainer, others), electricity charges are Rs. 9.0 lacs (Rs. 1 lac per month), while administrative costs are Rs. 2 lacs. All this adds up to Rs. 76 lacs and results in an Ebitda margin of 40%, which is very much the industry norm. Seems good until now, right!

Having paid the operational costs and royalties, we now need to pay Rs. 56.25 lacs as finance charges for the loan taken from friends for the nine months, as we have already added the interest for three months in sunk costs. Amortization of the pre-operative expenses of Rs. 35 lacs over the next ten years would mean a deduction of Rs 3.5 lacs from the P&L account this year. Taking these into consideration, we arrive at a profit before tax of just Rs. 1.75 lacs for the first year. Hold on, as we are yet to pay a corporate tax of 30% on this amounting to Rs. 52,500 to the government. At the end of March 31 2013, we end our first year with a net profit of 1.22 lacs.

Good luck MSD!