How Covid-19 pummelled Virgin Active

Fitness chain Virgin Active, with operations in southern Africa, the UK, Italy and Asia Pacific, has lost over 100 000 members globally since the beginning of this year. To say the Brait-owned business has been “significantly impacted” by Covid-19 lockdowns around the world would be an understatement.

So far, revenue is down 50% from last year and Ebitda (earnings before interest, tax, depreciation and amortisation) for the first nine months is negative – standing at -£8.4 million, versus £102.4 million for the prior period.

It will be lucky to break even (on an Ebitda basis) this year.

Nine months to Sep 30
	Revenue (constant currency)	Year-on-year change
South Africa	£83.9 million	-51%
Italy	£63.4 million	-33%
UK	£53.8 million	-58%
Australia	£17 million	-39%
Thailand	£10.4 million	-35%
Singapore	£7.6 million	-44%

Given how lockdowns were implemented across the territories in which it operates, there was a wave of reopenings, beginning in Italy in May, then Australia (and Thailand and Singapore) in June, the UK in July (“later than expected”) and finally South Africa in August.

Read: Virgin Active ‘disappointed’ by 50-person limit but plans Monday reopening (Aug 20)

The company says that as of September 30 (the current reporting period), all clubs had reopened apart from seven in London and three in Australia. These are all in central business districts and, given the absence of office workers, are unlikely to reopen until the situation returns to something resembling ‘normal’. The recent second round of lockdown measures implemented in Italy and the UK means gyms are currently closed in those countries.

The signs had been looking positive, with Brait saying “usage levels gradually improved across all territories as member engagement increased pre the second European coronavirus lockdown”.

There remains untold pressure on the number of members and active members, however. In August, Moneyweb suggested that “it is not inconceivable for Virgin Active to end 2020 with under one million members globally”. For context, it had 1.2 million members at the end of February. By end-September this number had fallen to 1.026 million, 11% lower than last year.

Read: How bulletproof is Brait’s crown jewel, Virgin Active?

But this tells only part of the membership story. No membership fees have been charged while clubs are closed and many members remain on ‘freeze’.

This means memberships are “retained without members having to make payment during the freeze period, resulting in no revenue generation for most territories”.

In South Africa, memberships could be frozen from reopening (in late August) until the end of October, but customers had to opt-in to this. It says “a high percentage of members chose to remain on freeze”, while the UK, particularly in London, “experienced higher than anticipated terminations and members on contract freeze, which has impacted yield and membership levels”.

As at the end of September, a quarter of the group’s members worldwide are not currently “active” (in other words, paying their gym memberships).

	Total members	Active (paying) members	Difference	On freeze as % of total
South Africa	685 000	482 000	203 000	30%
Italy	142 000	130 000	12 000	9%
UK	138 000	107 000	31 000	22%
Australia	32 000	27 000	5000	16%
Thailand	18 000	17 000	1000	6%
Singapore	10 000	8 000	2000	20%
	1 025 000	771 000	254 000

* Numbers rounded

In South Africa, a full 30% of the base has been on freeze. This translates to zero revenue from these members. The most recent usage number (as measured by entry card swipes per day versus last year) disclosed by the group is 57% (up from 35% in September).

Usage trends are scattered across its portfolio of clubs, with those near office nodes feeling the biggest impact of non-usage. Some have single-digit usage. The other trend playing out, anecdotally at least, is the flattening of peak times. This translates to more constant usage throughout the day. This is likely due to more flexible schedules in an environment where many are working from home.

In August, Moneyweb posited the bear case for the group thus: “To what extent have its members, especially its best members who pay full subscriptions but visit gym less often than the average, abandoned the idea of gym completely?”

These trends will be clearer as the world (likely) returns to normal in 2021.

Virgin Active (and Brait) management will be watching the number of terminations in the South African membership base very, very closely this month.

With October being the last month of the membership ‘freeze’, much hinges on how many people simply decide to cancel their memberships before the debit order run (or, indeed, in early December when they are reminded they still have a gym membership). The local operations were Ebitda-positive in September, on revenue of £13 million (versus a ‘normalised’ figure of £20 million in February).

It is certainly possible that half the people currently on freeze terminate their memberships.

This would mean a further knock to membership of 100 000; it has already lost roughly 50 000 members in SA this year.

How this plays out across its portfolio of clubs will be seen soon enough. A further two clubs in South Africa were closed in 2020, following the closure of four last year. This was the first time the group ended with a net fewer clubs in SA (any closures were offset by openings).

Read: Brait sees pandemic delaying Virgin Active sale (Jun 24)

Digital content

Key to the group’s immediate future is the development and rollout of digital content globally. It says this has been accelerated by the pandemic “in order to enable Virgin Active to retain contact with its membership base and remain relevant”.

A product called ‘Revolution’ – which streams Virgin Active content to subscribing members in their homes – was launched in Italy in October.

In six weeks, it has signed up 10 600 members, likely with far lower average revenue per user than a ‘typical’ member who trains at one of the group’s clubs.

Usefully, only about a quarter of Revolution’s customers are existing Virgin Active members.

This means that while there is some cannibalisation, it is unlikely to collapse the traditional member base. The gender split is also interesting, with women accounting for 80% of sales to date.

Big questions remain … will its digital efforts (or, worse, competing digital offerings) replace in-club training for its higher-end customers? When will life in London (it is heavily exposed to the city) return to normal? What would a rationalisation of clubs (both number and size) look like in South Africa? What impact would that have on an already bruised property sector?