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24 Hour Fitness Sets Sights on Bulking Up

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Times Staff Writer

It’s lunch hour, and the gymnasium-size room for stair-climbers at the 24 Hour Fitness Worldwide Inc. club here is packed. Lined up in several rows like a marching band, about 60 patrons furiously climb up and down on machines that take them nowhere, their eyes staring at big-screen TVs hung from the ceiling.

Looking on is Mark Mastrov, who wouldn’t be mistaken for one of 24 Hour Fitness’ personal trainers. Carrying an average build on his 6-foot frame and dressed in a nondescript brown suit, the clean-cut Mastrov looks like an accountant who walked through the wrong door.

But Mastrov, 45, is founder, chairman and chief executive of 24 Hour Fitness, and he likes what he sees -- lots of sweaty dues-paying bodies. Mastrov has more of them than just about anyone, thanks to a steady expansion that has nearly doubled the chain’s size in the last six years.

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24 Hour Fitness, with headquarters a few blocks from the San Ramon club, claims it’s now the nation’s largest fitness chain in terms of annual revenue, which will hit $1.15 billion this year. Because it’s privately owned, 24 Hour Fitness’ financial details aren’t made public. Close behind is Bally Total Fitness Holding Corp., which is publicly held and had $968 million in revenue last year.

Mastrov’s chain -- which he started 20 years ago with a $15,000 loan from his grandmother -- also is one of the largest private companies based in California in terms of revenue. It has 3 million members and 23,000 employees at 330 clubs in 16 states, including 155 in California, and in Asia and Germany.

24 Hour Fitness pumped up with a formula that includes spacious clubs, lots of gear, good service, affordable prices and ease of use. More than 80% of its clubs are open all the time.

Most importantly, 24 Hour Fitness and the rest of the $13-billion fitness club industry dovetail with the nation’s growing concern about rising obesity rates and Americans’ lack of exercise. Last year, U.S. membership in fitness clubs climbed 7.5%, to a record 36.3 million people, according to the International Health, Racquet & Sportsclub Assn., the industry’s trade group.

24 Hour Fitness sees itself as best at exploiting the trend. Mastrov pitches health, not vanity, to garner more customers.

“It’s not all about hard bodies,” he said in an interview. “It’s about just getting some movement in the body and committing to it. We really focus on what it feels like to be in good shape.”

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Mastrov uses himself as Exhibit A. He works out several times a week, but doesn’t have rippling biceps. He weighs about 180 pounds, and says he’s bulged to as much as 210.

“I can’t look like someone with 5% body fat, a Brad Pitt-style person, it’s not possible,” he said. “But I’ve got my target heart rate. I’m in good enough shape that I can eat what I want when I want.”

To be sure, that’s a refrain heard from nearly every company involved with fitness clubs, exercise equipment and even diet pills peddled on infomercials. But Bob Hellman, one of 24 Hour Fitness’ directors, said the chain’s growing size validates Mastrov’s ability to ride “the movement of health and wellness in this country.”

“The company is focused on making fitness part of people’s lives, and its financial success has been an outcome of that,” said Hellman, who is also managing director of investment firm McCown DeLeeuw & Co. in Menlo Park, Calif. The firm has invested nearly $150 million in 24 Hour Fitness over the last decade to help finance its expansion and owns about 35% of the company.

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Economic Weight

Tempering the fitness trend is the weak U.S. economy and consumers’ cautious spending. Mastrov asserted that 24 Hour Fitness is “recession-resistant,” in large part because the chain does not require a long-term financial commitment, but rather lets members pay month-to-month.

“Working out for $30 a month is not something you’re going to give up because you feel the economy is tightening,” he said.

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Analysts aren’t so sure. “There’s no question that industry revenue growth has slowed” this year because of the sluggish economy, said Burke Koonce, who covers the fitness industry for Merrill Lynch & Co.

That not only makes it tougher to sign new members, but also exacerbates the industry’s constant struggle with retention. 24 Hour Fitness, for instance, loses 2% to 3% of its members each month because they move, change clubs, stop exercising or don’t want to spend the money.

Nonetheless, Mastrov is pressing ahead with plans to keep buffing up his chain.

“I think we can have 10% to 15% unit growth.... We can probably add 30 to 40 stores a year,” he said.

“The United States is still heavily under-clubbed,” Mastrov added. Nationwide “only 13% of the population exercises regularly ... 87% of the people aren’t even touching us,” he said.

Analysts agree that, despite the economy, the potential market remains huge.

“Participation in various fitness sports has remained steady or increased,” said Nick Weiser, sales director at Leisure Trends Group, a Boulder, Colo., firm that tracks the industry.

One reason: What Weiser calls “time poverty.”

“They’re trying to get a lot out of a 45-minute workout, rather than spending two hours on the tennis court,” he said.

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They have many choices too. The fitness club industry is very fragmented, with most of the nation’s 20,250 clubs belonging to small owners.

The only other major player is Gold’s Gym International Inc., with 650 clubs and 3 million members. But privately held Gold’s, based in Venice, is mostly a franchise operation. 24 Hour Fitness and Bally Total Fitness mostly own and operate their clubs.

24 Hour Fitness emerged as a powerhouse with relatively little fanfare.

Although the chain advertises on television, mails discount coupons and has its share of celebrity endorsers, Mastrov spends most of his time tending to the chain’s operations rather than making headlines.

He gives only a few media interviews a year. Because 24 Hour Fitness is private, there are no conference calls with Wall Street analysts. The company’s headquarters is just another tenant in an office park; its name doesn’t appear on the outside of its building.

That could change. Five years ago, 24 Hour Fitness filed for an initial public stock offering to raise $75 million, but later pulled it because the stock market soured. But Mastrov said “if and when an opportunity presents itself” to try an IPO again, “I don’t think we’ll be too shy about taking a look at it.”

Mastrov tries to set 24 Hour Fitness apart on several fronts. For Branden Powell, 19, who works out at the San Ramon club, one appeal is being able to exercise at any hour. “It’s also inexpensive, and I get a very diverse workout,” he said.

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24 Hour Fitness also charges a relatively modest sign-up fee (averaging $150 but often discounted for promotions), and a monthly membership fee that’s typically $28 to $32.

Bally’s memberships, by contrast, typically require a three-year commitment that costs between $650 to $2,125, depending on the features customers choose, and many of those members borrow the money from Bally at 16% to 18% interest. They also pay monthly dues of $6 to $25 a month.

“People who sell three-year contracts, then give them a low monthly [payment] after that, that isn’t really consumer-friendly,” Mastrov said. “We moved to month-to-month a long time ago. The onus is on us, as a service company, to make them stay.”

Chicago-based Bally, with about 400 clubs and 4 million members, declined to comment. Bally’s membership growth, profit and stock price are slumping in the soft economy, and the company is beginning to peddle more month-to-month memberships itself, analysts said.

‘Very Profitable’

Though its financial results and the size of its debt aren’t made public, 24 Hour Fitness is “very profitable,” Mastrov said. If the chain is at least as profitable as Bally -- which earned about 6 cents per dollar of revenue last year, before one-time charges -- then 24 Hour Fitness earned at least $63 million on revenue of $1.05 billion last year.

What mostly sets 24 Hour Fitness apart is its service, said Steve Kass, chief executive of American Leisure Corp., a New City, N.Y.-based concern that builds fitness facilities for hotels and other clients.

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“Despite all the promotions and all the money spent on [equipment] gizmos, at the end of the day customer satisfaction prevails. And that’s what 24 Hour Fitness provides,” Kass said.

Mastrov doesn’t flaunt his success, associates said. A likely multimillionaire, he does enjoy front-row seats at professional basketball games, and recently bought a house valued in excess of $4 million. But Mastrov is satisfied to drive a 7-year-old Porsche and considers a good time playing a pickup basketball game with employees at 24 Hour Fitness clubs he’s constantly visiting.

An Oakland native who grew up in nearby Castro Valley, Mastrov mostly wanted to play basketball. He damaged a knee while playing on his junior college team, and began working out at a small fitness club in San Leandro.

Soon he was working there while getting his bachelor’s degree in business from Cal State Hayward, and the owner later offered him part-ownership, which he bought with his grandmother’s loan in 1983.

He quickly noticed that other members were usually waiting outside the door when the club opened and were reluctant to leave when it closed. “I thought, ‘Why don’t I just keep it open all night?’ ” he recalled. The idea for a 24-hour club was born.

Now the question is how much Mastrov can further tap into the public’s urge to get in better shape, while fattening 24 Hour Fitness’ earnings. If the company falls short, Mastrov said 24 Hour Fitness has only itself to blame.

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“The demand is there,” he said. “We are seeing a lot of people coming in saying ‘I’m here to lose weight, I’ve tried everything out there, and I’ve got to exercise.’ Our No. 1 competition is the sedentary lifestyle.”

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