Ad lineage is way down at newspapers. Glossies like Vanity Fair are far skinnier than they once were. Even local television stations are laying off staff.
But in the midst of the severe advertising downturn, there’s at least one ad firm doing well.
Health Club Media Network, a pioneer in gym advertising, has exploded in size since the former family business was sold to a private equity firm last year.
In the last four months, the Woodland Hills company has signed up two chains for its services: New York Health & Racquet Club, a chain with 11 locations, and Crunch, another New York-based chain with 20 gyms.
Even more noteworthy: The company in July acquired competitor Alloy Fitness Network, adding 700 clubs to its network, which now totals 4,000 clubs nationwide.
How has HCMN managed to do it? The answer is simple: professional management with access to capital takes advantage of a change in the marketplace.
In 2008, Parthenon Capital, a private equity firm with offices in San Francisco and Boston, bought a controlling share of the company and replaced the father and son owners with current Chief Executive Ken Williams, a former Hollywood executive whose resume includes a stint at Sony.
Parthenon, with about $2 billion under management, typically invests $20 million to $80 million in a company and grows them for four to six years before exiting, either by selling off the concern or through an initial public offering.
Williams had financing to upgrade the presentation of advertising inside the clubs with back-lit panel posters and digital video screens replacing static poster displays that hadn’t much changed since the company was founded nearly 15 years ago. The installations are both more attractive to advertisers and command a higher ad rate.
Williams then expanded the number of clubs that display HCMN advertising by signing up chains and using Parthenon’s money to buy key New York-based competitor Alloy.
More fundamentally, HCMN has been able to piggyback on a shift in the advertising industry as traditional media such as newspapers and TV have lost audience and advertisers look for new ways to reach consumers, including Web sites, mobile phones and video screens in stores. The idea is to integrate product ads into consumer’s regular routine, whether that includes trips to Starbucks, a doctor’s office waiting room, a bus shelter or a health club.
“Each club brings additional wall space and additional opportunities,” said Williams. “In addition, the dynamic change in the ad marketplace, the move away from traditional media, comes into play. Even in a down market, if money is shifting to your segment and you are increasing inventory, you can prosper.”
HCMN practically invented the business of putting advertisements in health clubs. Gene Lederer and son Michael started the company in 1995 by giving about 100 clubs in Southern California free bulletin boards with postcard-size ads around the edge.
The elder Lederer was an accountant and attorney for health club chains, while his son owned and managed apartment complexes. The two currently are on the company’s board and have been providing consulting services to Williams. (Neither could be reached for comment for this article.)
Top clients
The business model hasn’t changed much: Clubs receive a percentage of the ad revenue, and HCMN handles all equipment installation and maintenance costs. Among the major national brands using the network are consumer-goods giants such as Anheuser-Busch, Coca-Cola, Pfizer, Proctor & Gamble, McDonald’s, Starbucks and Target. Some of the larger chains in the network include Gold’s Gym, 24 Hour Fitness and World’s Gym, but most clubs are small regional or stand-alone businesses.
In addition to sharing national ad revenue with clubs, HCMN also gives them between 20 percent and 30 percent of the time on its video screens. Club managers can post schedules, promote a yoga class or sell the time to local advertisers.
The fact that the advertising represents a free source of revenue for club operators has given the service an opening at gyms, where membership has leveled off. Especially slow in the current economy is the sale of high-margin extras such as personal trainers and spas.
“It’s an incremental revenue source, but it’s very important to us because it’s the largest revenue growth opportunity that we see,” said Bryan Gauch, director of business development at Sport & Health Co. in McLean, Va., the owner of 23 clubs in the Washington, D.C., region.
Meanwhile, Richard Hirsch, HCMN’s chief marketing officer who has been with the company since its early days, said that the ad network has been able to win over advertisers because it targets a coveted demographic.”
Recession boost
“These active adults spend a large percentage of their discretionary time in these clubs,” he said, contending that the recession has actually helped the business.
“Traffic is actually up because these people have lost a job and they have more time to work out. Since we are interested in traffic, it has been almost countercyclical. We have more qualified eyeballs looking at advertising.”
Currently, HCMN’s network of 4,000 clubs is 10 times larger than the biggest health club chain in the United States. But with the Health, Racquet & Sports Club Association estimating there are 29,600 clubs in the United States, the company has plenty of growth potential.
John Atwood, principal in the Natick, Mass., club consultancy AtwoodConsultingGroup.com, compared HCMN to Google in its domination of the advertising market.
“It looks like a remarkably stable business model,” Atwood said.
One challenge that could derail the company’s long-term plans would be if someone managed to consolidate the fragmented health club sector and sell advertising directly. Until now, however, Atwood said that has not happened.
“There have been great efforts to put together a consolidation like Blockbuster in the video business, but they have never succeeded,” he said.
HCMN declined to release revenue or net income data, but a spokeswoman noted the club network has expanded by 30 percent in 15 months, while higher-margin digital installations have grown by 35 percent.
Jon Grad, a managing partner at Parthenon who is overseeing the acquisition, declined to speculate about how long the firm intends to keep HCMN in its portfolio or whether it intends to sell it or take it public.
“There are no hard and fast rules, but we are a long-term investor so we plan to stay with them several years,” he said. “It’s a great company that serves a very high-growth sector of the advertising market.”
Health Club Media Network
Headquarters: Woodland Hills
Founded: 1995
Core Business: Operates print and video advertising network inside health and fitness clubs
Employees: 40 (same as last year)
Goal: To install high-margin digital screens in more clubs
Numbers: The company has ads in 4,000 clubs nationwide, an increase of 30 percent in the last 15 months
