SBMT TEAM // CASE SOLUTION // Peaktime
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PeakGym's financial performance declined in recent years due to opening a new club increasing expenses. A strategy of franchising 11 clubs within 5 years is projected to increase annual sales to $7.5 million and net profit to $1.56 million from additional royalty income. Expenses will rise with franchise expansion but profit margins of 16-20% are estimated. The strategy aims to strengthen the brand and generate income without large capital investment in new assets.
SBMT TEAM // CASE SOLUTION // Peaktime
- 1. 2012 SBMT TEAM selection round case study KOZIK ANDREW MACOKIN NIKITA NESTSIARCHUK VALERIA FEDASEVICH EVGENIA
- 2. Strategy Strategy 1: City expansion Strategy 2: Country expansion The main advantage of this strategy is strengthening Spreading PeakGym chain throughout the the position of PeakGym in Maywell. In this case, the country. Aim is to open new gyms in major cities service covers all the market segments (mass-market, Sunhall and Berryhill using borrowed funds. upper class, low-cost ). Maintenance of the same Opening of new clubs is New markets of Obstacles to quality control service level in each club costly earnings and influence doesn’t require much labor Increase in reputation Adaptation to foreign markets Monopolystic price setting Limited in size market Good groundwork for further Certain difficulties with Economy of scale enlargment gaining a substantial part of in procurement Significant increase in liabilities Centralized management market share Centralized due to purchase of new assets management Strategy 3: Franchising Dealership is a powerful business maneuvering that combines benefits of both strategies mentioned above. Moreover, drawback points are minimal. Easy adaptation to market Royalty payment Quality control management system demands considerable effort Expansion without Economies of scale Start up cost investment in assets in procurement SBMT TEAM 2
- 3. Franchising (1) Review of chosen strategy We need a strategy that could increase brand awareness, raise revenue and maintain the high quality of service, without considerable investment in assets. Franchising successfully copes with these tasks. Franchisees are exempted from entrance fees , however, they are to pay 8% royalty from their turnover. With these conditions, additional 700K of revenue is projected within 5 years. Marketing and promotions Sales channels Additional services • Clients of our opponents get a discount • Hairdressers (maintain the current tactics) • Facebook, Twitter and mobile app support • Packed in carton box gift coupons, that are • Events: competitions, marathons sold in sport shops. • Fruit bar, socks, clean blankets etc. • Magazines promotion codes • Discount in partner sport shops • Building a community of sport-lovers • Groupon service Other HR • Finance: Liquidate current loans and use Creation of special department, that Franchisees support long term liabilities will control the quality of service at •Available week training for staff • Segmentation: PeakGym and PeakGym clubs of our franchisee. This group of •Newsletter, meetings and people consist of 1 Director, 2 IT seminars, toll-free phone line, Youth specialist, 2 Marketers. • HR: reduce the amount of cashiers and regional advertising, create the new “franchise-control” Also we reduce the amount of cashiers •Marketing campaign & vendor department in several clubs. program • Price: Changes in price SBMT TEAM 3
- 4. Franchising (2) Essence of strategy Prognostic calculation of receipt of royal payments is presented below. Planned royalty payment is 8% of gross profit. No growth issales per club per Therefore, we need a strategy that could increase brand Expected average stagnation. Financial achievements in 5 year perspective awareness, raise revenue and maintain the hight quality of service, without considerable year 850 000 Year 1 investment in assets. Franchising successfully cope with these tasks. Franchisees are 3 5 Royalty rate 8% Number of partner exemptedclub for the 1st year of fees , however, they are to pay 8% royalty from their turnover. from entrance Capacity of a 1 5 11 clubs On these conditions, in 5 years perspective we will get additional 700K of revenue. No functioning 80% Royalty paid per year 54400 312800 707200 growth is stagnation. Therefore, we need a strategy that could increase brand Royalty from a full functioning club 68000 awareness, raise revenue and maintain the hight quality of service, without considerable 1 year 2year 3 year 4 year 5 year investment in assets.club Royalty from a newly opened 54400 Franchising successfully cope with these tasks. Franchisees are exempted fromyear from fees , however, they are to pay 8% royalty from100% turnover. Royalty payment per clubs: entrance 1 club 80% 100% 100% their 100% On these conditions, in 5 years perspective we will get additional 700K of100% 2011(+ 1 new club) 54400 2-3 clubs 80% 100% revenue.100% 2012 (1 + 2) 176800 3-5 clubs 80% 100% 100% 2013 (3 + 2) 312800 5-8 clubs 80% 100% 2014 (5 + 3) 503200 8-11 clubs 80% 2015 (8 + 3) 707200 Level of franchisee profitability relatively to the average profitability of our 1 club SBMT TEAM 4
- 5. Segmentation FitLife, our nb.1 competitor, utilizes a low-pricing strategy. In order not to lose our clients, we need to reconsider our prices. Based on target analysis, we highlighted 2 priority groups: middle-aged and youth. Middle-aged audience is relatively insensitive to price, therefore, we’ve decided to review pricing for youth. However, the aim is not move to a low-cost segment, but to maintain high quality service. Reviewed pricing is presented on this slide. Peak Gym pricing table Review pricing will be carried out in club nb.1 Type Time Full Pool only Gym only Trainings ticket only* only, therefore, the name will be changed into Full time 6 months 07:00 - 23:00 999 430 380 490 Peak Gym Youth. The new university will be (10% discount) opened soon, so more new students are Full time 07:00- 23:00 192 80 70 90 Morning 07:00- 12:00 115 48 42 54 expected to join us. Evening 18:00- 23:00 115 48 42 54 Students (morning – 09:00- 16:00 134 56 49 63 Peak Gym Youth is not available for franchise. noon) Weekends only 07:00- 23:00 58 24 21 27 Peak Gym Youth pricing Type Time Full ticket Pool only Gym only Trainings only* Other New memberships in Full time 6 months 07:00 - 23:00 918 378 357 459 Upper Class 2011 Full time 07:00- 23:00 170 70 66 85 Middle-age Morning 07:00- 12:00 105 43 38 49 Youth Evening 18:00- 23:00 105 43 38 49 Muscle Weekends only 07:00- 23:00 53 22 19 23 group of 5 140 60 55 70 0 500 1000 1500 2000 2500 SBMT TEAM 5
- 6. Marketing Strategy of competition Fit life provides the same range of services, but it’s prices are about 15% lower than Peak Gym’s prices. To compete with Fit Life and be successful on the market a new marketing plan has been created. To implement it marketing costs are being increased by 60 000 USD. Actions are listed below. Advertising Promotion Sales channels New discount program will include 20% discount for a group Coupons in packages with purchase Billboards with our advertising of 5 students and 10% discount for those who have left of sport related goods in one of the (see appendix) near competitors and switched to Peak Gym. These measures partner sport shops; coupon codes in competitors’ gyms . will stimulate inflow of students, who prefer to attend gyms sports magazines (men’s health, etc.) Aim is to increase Peak Gym brand awareness and stimulate in groups. Hairdressers – entrepreneurs 30 000 competitors‘ clients to change coupons. their gym. With purchase of 6-month group full ticket, clients will receive a discount for partner sport shops of goods related Wrapped gift coupons will be Distribution of leaflets in to gym. distributed in sport shops. universities, in order to inform about the new Peak Gym Organization of Annual Peak Marathon in Maywell. +10% Growth - 14 000 USD Youth and new discount system for students. Annual competition between clients in different sports 5% Growth -10 000 USD (swimming, running, benching, etc) Peak Gym community on social networks (twitter, Facebook) +15% Growth - 36 000 USD SBMT TEAM 6 6
- 7. Improving quality of services Introduction of Fruit bar, Implementation of free mobile Workshops for trainers. free bottled water, application for Peak Gym group towels, shower gel and clients, which can store records, give advice about different kind of socks for clients. sports, show news and discounts in Peak Gyms. Price: 6 000 $ Price: 5 000 $ Price: 10 000 $ Introduction of Establishing a relax zone in Peak Classes for children waterproof mp3 players Gym club #4 (there are spare (whose parents are busy for swimmers. 200square meters available) with training) Price: 2 000 $ Price: 7 000 $ Price: 0 $ SBMT TEAM 7
- 8. Finance analysis and projection 2009 2010 2011 2012(+1club)* 2014 (+5clubs)* 2016 (+11clubs)* Last year’s financial performance of company SALES 3 438 583 4 017 396 4 959 681 6 314 890 6 946 379 7502089,035 1 TIME VISITS 113 584 138 277 159 018 was poor, e.g. operating income decreased by GYM RENT 64 536 67 469 74 216 190 822 74216 61.96% to 163.433USD against 429.71USD in MEMBERSHIPS 3 260 463 3 811 651 4 726 447 6 049 852 COGS 2 019 452 2 390 718 3 442 580 2010. According to our analysis, expense items 1 058 400 1 095 600 1 528 800 3 370 000 1 528 000 3 670 000 1 700 000 4 000 000 VARIABLE 1 910 000 raised significantly due to the opening of a new SALARIES 1 058 400 1 095 600 1 528 800 1 528 000 1 700 000 1 910 000 5th gym: Variable and Fixed GYM TRAINERS (17) 330 000 468 000 330 000 468 000 510 000 684 000 510 000 684 000 600 000 730 000 700 000 800 000 AEROBICS TRAINERS (19) salaries, Administrative expenses and YOGA TRAINERS (4) 74 400 111 600 148 800 148 000 170 000 200 000 rent/utilities went up, which led to dramatic SWIMMING TRAINERS (5) 186 000 961 052 186 000 1 295 118 186 000 1 913 780 186 000 1 842 000 200 000 1 970 000 210 000 FIXED 2 090 000 decline in profitability (Attachment 2). SALARIES 581 998 689 999 900 000 792 000 850000 890 000 CLUBS' MANAGERS (5) 221 998 221 999 270 000 270 000 310 000 300000 CASHIERS/ADMINISTRATO 198 000 270 000 360 000 252 000 270 000 280 000 *It is projected that in 5 years after RS (20) implementing our strategy of franchising TECH SUPPORT (15) 162 000 135 357 198 000 280 189 270 000 567 000 270 000 280 000 300 000 680 000 RENT 580 000 630 000 PeakGym will have sales at the level of WATTER 243 697 324 930 446 780 520 000 SUPPLIES/ELECTRICITY 7’502’089 USD and net profit increase to GROSS PROFIT 1 419 131 1 626 678 1 517 101 470 000 2 944 890 490 000 3 276 379 3 502 089 1’559’271 USD due to additional incomes GROSS PROFIT MARGIN 41,27% 40,49% 30,59% 47% 47% 47% ADMINISTRATION 337 704 492 477 540 345 728 000 848800 948 304 from franchisee. EXPENSES SALARIES (+5) 264 600 416 100 438 000 618 000 730000 820 000 OTHER ADMINISTRATIVE 73 104 76 377 102 345 110 000 118800 128304 EXPENSES MARKETING AND 60 000 57 000 75 000 135 000 168 750 210 938 ADVERTISING EXTERNAL COMMISSIONS 30 000 60 000 89 000 95000 140000 170 000 PAID DEPRECIATION AND 519 505 587 500 649 313 746709,95 858716,4425 987523,9089 AMORTIZATION OPERATING PROFIT 471 922 429 701 163 443 1 240 180 1 260 112 1 185 324 OPERATING MARGIN 13,72% 10,70% 3,30% 20% 18% 16% OTHER INCOME (ROYALTY) 54 400 312800 707200 FINANCIAL EXPENSES 178 258 153 659 146 063 146 063 150000 160 000 PROFIT BEFORE TAX 293 664 276 042 17 379 1 148 517 1 422 912 1 732 524 INCOME TAX 29 366 27 604 1 738 11485,1681 142291,2294 173252,3626 NET PROFIT 264 298 248 438 15 641 1 137 032 1 280 621 1 559 271 NET PROFIT MARGIN 7,69% 6,18% 0,32% 18% 18% 21% SBMT TEAM 8
- 9. Attachment 1: Peak Gym group structure SBMT TEAM 9
- 10. Attachment 2 Analysis of expenditures Royalty 2009 2010 2011 Growth , % 850 000 – average sales per club (R = 110.5) Salaries(33+12) 32072,73 33200,00 33973,33 2,33% Gym trainers (17) 19411,76 19411,76 30000,00 80% - 680 000 (R = 88.4) Aerobics trainers (19) 24631,58 24631,58 36000,00 13% = royalty Yoga trainers (4) 18600,00 27900,00 37200,00 1st year = 88.4 Swimming trainers (5) 37200,00 37200,00 37200,00 Clubs' managers (4+1) 55499,50 55499,75 54000,00 -2,70% 2nd year = 110.5 + 2*88.4 = 287.3 Cashiers/administrators 3rd year = 110.5*3 + 88.4*2 = 331.5 + 176.8 = 508.3 (15+5) 13200,00 18000,00 18000,00 0,00% 4th year = 110.5*5 + 88.4*3 = 552.5 + 265.2 = 817.7 Tech support (11+4) 14727,27 18000,00 18000,00 0,00% Rent(1200+450+1500) 82,03 169,81 180,00 6,00% 5th year = 110.5*8 + 2*88.4 = 884 + 176.8 =1060.8 Water supplies/electricity(1710+ 950+1200+450+1500) 56,54 75,39 76,90 2,00% SBMT TEAM 10