The sudden closure of the chain’s 12 outlets revealed the sales tactics being adopted by big chain gym operators to attract and retain members as they responded to the pressure of sky-high rents in prime areas and increasing competition from smaller rivals with nimble business models.

In the case of California Fitness, the cracks began to show in April when it was named by the Consumer Council for deploying intimidation and misleading sales practices to press consumers into purchasing memberships and high-priced private lessons.

As complaints flooded in from disgruntled members, branches began to close and details emerged of the crippling debts beleaguering the company.

The chain, owned by JV Fitness, closed all 12 California Fitness, mYoga and Leap branches across town in July amid mounting debts and legal action.

While the issue of businesses having to balance the cost burden of expensive property prices against their bottom line is not unique to Hong Kong, many have struggled to keep pace with the rapid increases in rents locally, industry insiders say.

The demand from the retail sector as it boomed on the back of the influx of tourists from the mainland has taken its toll on big fitness centres which require sizeable premises.

Rental costs in central locations – where large chain fitness clubs are currently located – have soared with operators facing double-digit rent hikes without benefitting from the tourist spending.

The result has rendered the business model of many traditional gyms, especially those with a floor space above 10,000 sq ft, as unsustainable.

California Fitness reportedly had a monthly rental bill of about HK$19 million for its 12 outlets, while its monthly revenue was only HK$40 million.

Terence Chau, chief executive officer at Asian Academy for Sports and Fitness Professionals (AASFP), a fitness education and training institute, said even with strong membership numbers, membership fees only cover daily operating costs.

“Large gyms need personal training courses to earn money,” he said.

He said that 30 to 50 per cent of members at large commercial gyms had personal trainers, which had become the main source of revenue for many gyms.

He said the dependence of large chain operators on selling personal training packages to meet their operating costs had led many into adopting aggressive sales tactics.

Chau said the hard sell tactic was not unique to Hong Kong gyms, but the exceptionally high rental costs in the city had intensified the practice.

“The high rent would be the element that ultimately kills local gyms,” Chau said.

Helen Mak, head of retail services at property consultant Knight Frank, said the tourism boom had helped fill the coffers of the city’s retailers, but had squeezed the profits of large gym operaters.

“A rent increase is not a big deal for jewellers as their revenue growth has been proportionate with the rent hikes,” she said.

“But gyms were not able to benefit from the tourists.”

According to the Rating and Valuation Department, the rental costs for retail shops rose by about 49 per cent to HK$1,612 per square metre per month in Hong Kong Island last year compared with 2009 – when the tourism industry started taking off.

But while some bigger operators have taken a battering lately, business has been booming for smaller fitness studios in the city.

The number of fitness clubs increased overall by 6.4 per cent annually to 648 in 2015, yet the number of independent studios jumped 18.3 per cent to 142, according to the AAFSP 2015 Fitness Industry Report.

The robustness of this sector of the market has been attributed to having a more flexible business model and being able to operate out of smaller premises.

Professor Chung Pak-kwong, head of the physical education department at Baptist University, said Hong Kong gyms would inevitably become smaller, as the business model adopted by large chains was not sustainable.

He said those gyms used pre-paid fees from members to open more clubs, so that they could continue to gain new customers. As their financial burden accumulated, they had to sell more programmes at a lower rate to keep up cash flow, causing an overall diminishing profitability.

“It’s a vicious circle,” Chung said.

Vincent Tang Ying-kit, a former Fitness First personal trainer, opened his own training studio in Causeway Bay six years ago.

Located on the 22nd floor of a office building in Leighton Road, Tang said his 1,800 sq ft studio could generate more than HK$1 million revenue a month in good times. It currently has more than 60 members.

Unlike traditional gyms, Tang’s studio offers only personal training courses and does not have monthly membership fees.

The small scale allows him to keep costs low – he has only two full-time employees and his trainers work on a freelance basis. He also offsets his rental costs by subletting some of his space to other coaches to use for their clients, which also made a substantial contribution to his revenue.

He said rent accounted for about 40 per cent of the studio’s operating costs per month.

“I have more freedom now,” said Tang, adding he was able to teach trainees in more flexible way, as opposed to meeting sales target as he was required to do in his old job.

Tang said more than 10 similar training studios had opened in Causeway Bay recently.

US chain Anytime Fitness has also found success with a smaller scale business model in the Hong Kong market, which it entered in 2014. It currently operates three gyms in the city with floor sizes ranging from 3,000 to 5,000 sq ft.

The foreign chain with 3,000 gyms globally, plans to open 70 to 80 gyms in the city in the coming years through local franchises, with a special focus on undeveloped residential areas.

Anytime Fitness regional director Maurice Levine said it took less than a year for its gyms to break even in the city, compared to the length of time it took for a “big bucks chain” to get into the black, which can be up to four or five years.

“What kills profitability of a gym are two things, high rents and high staff numbers,” Levine said.

“Because of the sizing flexibility, we can go to places ranging from 3,000 to 6,000 sq ft. Big bucks chains could not go to these areas. We are the only choice.”

Unlike traditional chains, Levine said Anytime Fitness are not interested in prime locations.

“It is very dangerous”, he said, as management would be “under immerse pressure to meet the huge obligation for staffers and rents”.

Levine said although the personal training courses generated handsome profits, personal trainers are not necessary for everyone. Only 20 per cent of members at its Kowloon gym have personal trainers, compared with 30 to 50 per cent of big gyms in the city.

He also said costs were kept down by being pragmatic about having facilities like a sauna, steam room and swimming pool which are commonly found in traditional gyms.

“These things were extremely expensive to run, yet only a very small portion of people actually used them,” he said.

He also cut expenses to hire group class teachers by using a projection system that connects to various kinds of online fitness courses.

“At the end of the day, it is about my profits, not about building a magnificent gym for my personal ego.”

Pure Group plays it simple to stay in the fitness game in Hong Kong

While the city’s high rental costs have put pressure on some traditional gyms, which need a large area to operate in, not all big chain operators are doomed to fail.

Co-founded by one of Hong Kong’s most famous tennis players Colin Grant and tycoon Bruce Rockowitz in 2002, the Pure Group runs eight fitness clubs and seven yoga studios in prime locations such as Central and Causeway Bay.

It has about 50,000 members overall and each gym has an average size of more than 25,000 sq ft.

Grant, the group chief executive officer, told the South China Morning Post that Pure’s 15 outlets used a very different business model to that of California Fitness.

First, Pure’s club members are charged about HK$1,000 on a monthly basis, compared with having to sign on for extended contracts.

Furthermore, Grant said that when it came to rent, Pure was able to manage the costs of large spaces by getting longer term leases and avoiding expensive ground floor space.

This meant that the fitness company could still maintain a presence in expensive business districts, opening a 33,000 sq ft club at ICBC Tower in Central in February and a 26,000 sq ft facility in Taikoo Place in March.

Avoiding tourism-driven retail space, especially on the ground floor, was part of Pure’s strategy. “Ground floor is for luxury retailers, not for us,” said Grant. “If there is a certain building where the rent comes down 30 per cent and we can afford it now, we still would not take it. Because when the rent [goes] back up, we can’t afford it. You need to make sure you can afford the rent in the normal market.”

Grant said the rental terms of Pure’s 15 outlets in Hong Kong were for at least 10 years, which allowed it to manage the rent, and invest more on the facilities of its existing clubs.

It costs at least US$4 million (HK$31 million) to build a fitness centre in Hong Kong and it takes four to five years to break even, he added.

“It is a heavy investment … we want to get it right.”

According to the chief executive officer, the rental cost for Pure’s clubs has risen steadily at a rate of 5 to 10 per cent every year, and accounts for less than 40 per cent of its total operating costs.

The percentage is lower than in most clubs in prime areas, whose rental costs account for 40 to 50 per cent of the total operational cost, according to the 2015 IHRSA Asia-Pacific Health Club Report.

Despite Pure’s aggressive expansion earlier this year, Grant said the group was “very careful” when it comes to future plans, due to the economic downturn.

“If someone opens a gym when [he doesn’t] have enough money, [he has] to sell a lot of pre-paid memberships at a discount rate,” he said.

“If it is too good to be true, it probably is.”