Location Is King for Club Operators

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Sports and golf club memberships tend to be sticky in nature, which is evidenced by the high retention rates (above 80%) and long average membership tenures (exceeding two years) touted by these organizations. However, not all club operators are equally good investment candidates as high recurring-revenue businesses. The big boys like Life Time Fitness , ClubCorp , Town Sports  take the lion's share of industry revenues by virtue of their scale and networks of conveniently-located clubs.

Clustering strategy
The U.S.'s third-largest owner-operator of fitness clubs with key presences in the Northeast and Mid-Atlantic, Town Sports appreciates the strategic importance of location to its success. Town Sports aptly calls its club location strategy "where you live, where you work." By clustering its clubs around current and potential customers' homes and offices, Town Sports is able to improve both customer retention and operating efficiencies.

In 2012, more than one-third of Town Sports' club usage was attributed to members visiting clubs other than their home clubs.  This serves as a strong indication that members value the ability to enjoy club services at multiple locations, as and when they desire. New entrants and smaller competitors will find it challenging to replicate Town Sports' network of club locations to challenge its market position.

In addition, Town Sports' clustering strategy also allows significant cost savings through economies of scale. One aspect is advertising and promotion, or A&P, where Town Sports can spread fixed A&P spending over a larger revenue base in its dominant region of operations.  

Playing both defense and offense
Like its peer Town Sports, fitness center operator Life Time Fitness benefits from a network of more than 100 centers across the country. For example, when the lease on its fitness center in in St. Paul, Minnesota expired in 2010, Life Time Fitness did not have to fear losing its existing members to competitors. It could easily reassign its affected members to other fitness centers in the vicinity.

Life Time Fitness sought to reinforce this competitive advantage with the acquisition of nine centers in Indiana, North Carolina, and Ohio from its peer Lifestyle Family Fitness in December 2011. These acquired centers were located in or near Life Time Fitness' existing markets, which allowed it to strengthen the network effect created by multiple locations within its core markets so it could better serve customer needs.

Own, not lease
While well-located clubs and centers are great for business, it is not impossible for competitors to replicate this strategy. New entrants and existing competitors can bid for existing locations occupied by incumbents when their leases are up for renewal. Even if no one puts in a competing bid upon lease expiry, landlords can jack up rents to the dismay of incumbent club operators.

The listed club operators have adopted different strategies when it comes to the choice between ownership and leasing. Town Sports leases most of its sports club locations, with the leases for 57 locations up for renewal from 2013 to 2017. In contrast, Life Time Fitness owns 76 of the 108 centers it operates, which lowers the risks associated with lease renewals.

Like Life Time Fitness, the country's largest golf club operator, Clubcorp, is inclined toward asset ownership. It owns the underlying real estate for more than three quarters of its golf and country clubs, giving it control over prime locations. Moreover, in the case of golf clubs, which require more space (relative to sports clubs) and need to be located close to affluent populations, the barriers to securing suitable locations are even much higher for new entrants. ClubCorp's edge over rivals is reflected in its stable membership retention rates which ranged from 82% and 86% from 2003 to 2012.

Club hopping
Club operators understand that customers prefer to sign up with sports club and golf club operators that have multiple locations, all other things being equal. As a result, a network of well-located clubs is a key competitive advantage for an operator. However, this can be easily undermined by landlords and competitors, unless operators have strategic control over their locations. As a result, I prefer club operators Life Time Fitness and ClubCorp over their peer Town Sports, because they own a higher percentage of their locations.

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The article Location Is King for Club Operators originally appeared on Fool.com.

Mark Lin has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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