Gym 5 Forces Porter\'s Five

Gym 5 Forces

Porter's Five Forces model can be used to outline the relative favorability of an industry. The five forces are the power of buyers, power of suppliers, intensity of rivalry, threat of new entrants and threat of substitutes. Each of these conditions can be analyzed for its favorability, and this will give an overall picture of the industry's favorability.

The power of suppliers in the gym industry is moderate. Supplier is concentration is relatively high, which gives them an edge over gyms in that the gyms cannot shop around much. Volume is important to suppliers, so they will have much less pricing power over a gym chain compared to an individual gym. The inputs -- equipment and weights primarily -- lack differentiation. There are some higher-end pieces of equipment that have some differentiation, but the equipment in most gyms is fairly standardized with regards to function and quality. Switching costs can be high for gyms. It can cost over one hundred thousand dollars to outfit a gym, and the equipment once used can only be resold at a steep discount. Thus, switching to new equipment can be an expensive process. There is little threat of forward integration in the industry, lending addition power to the suppliers.

Put together, these factors show that power of suppliers to the gym industry have moderate power. The gym owner faces high costs for equipment, in part because there are few suppliers and there is a strong need for quality. Chain gyms can leverage their volume to gain price advantages on equipment, but by and large individual gym owners are price takers. The only thing that keeps prices reasonable for them is that equipment is relatively standardized, and the industry players must actively compete against one another.

The power of buyers is low. Buyers have very little bargaining leverage. They only buy for one person, perhaps a spouse as well, so no individual buyer can deliver the volume needed to compel a gym to offer a steep discount. Buyers often have high information, though, and visit several gyms before making a purchase decision. They are not sensitive to brand, but can be sensitive to price, particularly if the gyms in their area are not well differentiated.

Buyers do exhibit the threat of backward integration -- there are many do-it-yourself fitness options, including the purchase of home equipment. For the most part, gyms are not differentiated. They offer the same range of equipment and the same range of services. Buyers use a number of different selection criteria such as location, price, service and the general standard of the facilities to make their purchase decision. There are usually substitutes and competitors available. Buyers are often wooed by incentives, such as promotional offers on new memberships.

Many of the industry factors points to high buyer power. However, the fees charged by most gyms are very high in relation to where they were a decade or two ago. What this indicates is that there are other factors at work. Most gyms have high fixed costs, and use high prices to match those costs. Buyers become price takers because competition is based on services, equipment and other non-price factors. However, that buyers are willing to take prices essentially means that they have low buyer power.

Barriers to entry are low. The cost of equipment for a new gym is not high, and even the most high-end fitness facilities only cost a few million dollars to put together. There is a low learning curve, and there is an ample supply of individuals with knowledge to run a gym well. There are no economies of scale -- larger gyms can drive larger customer bases, but they need to in order to cover the additional costs incurred. Brand identity is not important. There are numerous gym chains but the industry remains highly fragmented. A new gym can expect to face only minor retaliation -- price promotions and other competitive tactics. This is because the industry is rapidly growing -- 8% per year since 1983 (Berkeley, 2008).

The threat of substitutes is high. What a gym sells, at its basis, is fitness. This can be accomplished in a wide variety of ways, many of which do not involve a gym. There are low switching costs as many forms of exercise are free. Even expensive forms of exercise are competitively priced compared to modern gyms. Buyers have a high inclination to substitute, as a multitude of fitness options is not only desirable but is healthy. The price-performance trade-off of substitutes is high, since some can be very inexpensive. The gym is a premium fitness experience that must deliver premium results in order to have value. It is worth noting that the available substitutes for consumers are not mutually exclusive. In many states where the winter weather is poor, gyms and their substitutes are viewed as complementary products. Thus, while the threat of substitutes is high, those substitutes will not necessarily do significant damage to the gym industry as they will not necessarily take business away from the industry.

The degree of rivalry is relatively low. This is because of the industry's high growth rate. Exit barriers are relatively low, aside from the cost of liquidation. The industry is fragmented, rather than concentrated. There is seldom overcapacity in the industry. Product differences are low, but can be at least somewhat differentiated. There is low diversity of rivals, but also low corporate stakes. Some of these factors promote a higher degree of rivalry, but most of the factors promote a lower degree. It is also worth noting that the industry's sustained strong growth rate has meant that players in the gym industry have never needed to engage in intense competition, as there are always new customers to be had. When firms do not need to steal customers away from their competitors, or when it is easy to do so, they do not engage in intense competition.