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16-1
CASE 16
TOWN SPORTS INTERNATIONAL HOLDINGS, INC: UNSQUASHABLE
I. CASE ABSTRACT
Town Sports International (TSI) operates fitness centers in New York,
Boston, and Philadelphia. TSI’s struggle to retain members and expand its
club base resulted in deteriorating financial results in recent years.
Turning to off-balance sheet financing to fund a special cash dividend to pay
out to investors, TSI focused its attention on maximizing shareholder wealth.
As economic conditions improved following the economic downturn, a predicted
turnaround in the fitness club industry should lead to positive growth rates
in operating results for TSI.
Fitness will continue to grow as a priority for the American
population, across all demographics. This will mean increased business
opportunities as well as competition for established firms and newcomers
alike. TSI is operating in an industry that will continue to evolve and
challenge the status quo of what constitutes a positive fitness experience.
As a powerful regional player in the fitness game, the company’s success is
directly tied to the health of the economy as well as customer loyalty and
satisfaction. Projected increases in consumer discretionary spending signal a
bright future for the company over the short term. Going forward, TSI must
Decision Date: 2014 FY Sales: $470 million
FY Net Income: $12.3 million
II. CASE SUBJECTS AND ISSUES
Corporate Governance Fitness Industry
Strategy Formulation Competitive Advantage
Strategy Implementation Competitive Strategy
Core Competencies Diversification
Membership Turnover Growth and Acquisitions
III. STEPS COVERED IN STRATEGIC DECISION-MAKING PROCESS
CASE 16
TOWN SPORTS INTERNATIONAL HOLDINGS, INC: UNSQUASHABLE
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IV. CASE OBJECTIVES
1. To discuss Town Sports International’s core competencies.
2. To discuss TSI’s ’’business level strategy.
V. SUGGESTED CLASSROOM APPROACHES TO THE CASE
1. This is an excellent case for instructor-led discussion.
VI. DISCUSSION QUESTIONS
1. How was the fitness industry adjusting to new low-priced entrants?
2. What was TSI’s business level strategy?
CASE 16
TOWN SPORTS INTERNATIONAL HOLDINGS, INC: UNSQUASHABLE
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6. How can TSI sell more ancillary fee-based services to current
members?
VII. CASE AUTHOR’S TEACHING NOTE—Not Available
VIII. STUDENT STRATEGIC AUDIT
1. Current Situation
• Performance
i. History
a. Henry Saint founded St. John Squash Racquet Inc.
(1973).
b. Changed name to Town Sports International in mid-
1980’s.
($13.24) to 2013 ($14.76).
b. Revenues dropped—7.20 percent from 2008 ($506.7
million) to 2013 ($470.2 million).
• Strategic Posture
i. Mission
a. Develop and run the premier health club in each
of the metropolitan regions served.
ii. Objectives
a. Derive profits from operations.
iii. Strategies
a. Management: aggressive and experienced.
b. Growth of locations in a clustered manner.
a. Open locations in central urban markets and
branch out into suburban and neighboring
communities to follow the population.
c. Expansion via mergers and acquisitions.
CASE 16
TOWN SPORTS INTERNATIONAL HOLDINGS, INC: UNSQUASHABLE
a. Acquire clubs to leverage established
customer bases and locations.
d. Club formats
a. Open space for cardiovascular and strength-
f. Sales and Marketing
a. Focus on regional culture and current
events to drive efforts.
iv. Policies
a. Cluster approach allows for focused marketing and
sales efforts.
a. Marketing effort impacts multiple clubs
within cluster market.
2. Corporate Governance
• Board of Directors
i. Twelve members as of March 2014—one internal and
eleven external
a. Current state as of 10/02/2015—seven members
a. two internal, five external directors
ii. Directors own 2,204,905 shares outstanding (8.9
percent) as of March, 2014.
a. Current state as of 10/02/2015—Directors own 1.67
percent of the shares outstanding
a. Internal directors own 206,894 shares
CASE 16
TOWN SPORTS INTERNATIONAL HOLDINGS, INC: UNSQUASHABLE
16-5
iv. Current board members have diverse experience in
various service industries across the Northeast and
Mid-Atlantic regions.
• Top Management
i. The person that is in top management in the company is
the CEO, his name is Richard Giardina.
ii. The top management consists of a Board of Directors
and Executive Officers for a total of twelve people.
The CEO is the only person on the Board of Directors
Paul L. W.
Barron
Chief Information Officer
Daniel
Gallagher
Chief Financial Officer
David M.
Kastin
Senior Vice President
General Counsel and Corporate Secretary
Terry G. Kew
Chief Operating Officer
Scott R.
Milford
Senior Vice President—Human Resources
a. These officers have backgrounds in hospitality,
manufacturing, fitness, consulting,
entertainment, and food industries.
CASE 16
TOWN SPORTS INTERNATIONAL HOLDINGS, INC: UNSQUASHABLE
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a. According to the Town Sports International
Holdings, Inc. 2013 Proxy Statement, it is
unclear whether or not top management was
b. They are using a clustering approach, which is
clustering their fitness centers in certain
areas, and this helps make marketing and
promotion efforts more directed toward their
target demographic.
management mission.
viii. As of 2013 each nonemployee director was required to
hold shares of common stock with a fair market value
percent of the total stock. Therefore, stock options
play a large role in executive compensation. This
3. External Environment
A. Societal Environment
CASE 16
TOWN SPORTS INTERNATIONAL HOLDINGS, INC: UNSQUASHABLE
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1. Economic
a. Recovery post-20’08 economic crisis, more
disposable income to spend with higher employment
2. Technological
a. Trend toward using the Internet with online
programs available (T).
3. Political-legal
a. High insurance rates encouraging companies to offer
health benefits (O).
i. Gym membership discounts
ii. Weight-loss programs
iii. Facilities in the company buildings
4. Sociocultural
a. High obesity rates in America (O).
i. Across all states as not one has a level below
20 percent.
b. As a result, we are starting to see trends toward
healthy eating and lifestyle supported by company
campaigns (O).
i. Coca-Cola commitment to fight obesity with
low-cal options.
These forces are likely to differ across other regions of
the world, while they are largely similar across the whole
CASE 16
TOWN SPORTS INTERNATIONAL HOLDINGS, INC: UNSQUASHABLE
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B. Task Environment Task Environment (Industry)
The forces that drive industry competition, again, are
likely to vary somewhat globally, but this case focused on
the United States market.
a. Threat of new entrants: Low
i. Number of establishments to be opened growing 2.9
percent a year.
ii. Cost to enter is high, with expensive equipment and
real estate.
b. Bargaining power of buyers: High
i. The consumer demand has sparked the need for
various services offered, with varying membership
structures, and incentives.
ii. Online and computer-based systems have high
accessibility and with so many offerings, each club
c. Threat of substitute products or services: High
i. Gyms and fitness clubs make up 65 percent of the
industry segmentation.
ii. 35 percent captured by specialty centers or
‘other’.
iii. The ‘other’ segment takes 2nd place at 10 percent
d. Bargaining power of suppliers: Low
i. High cost to do business, not likely to decrease.
1. Real estate
2. Equipment
3. Instructors
4. Insurance
e. Rivalry among competing firms: Low
CASE 16
TOWN SPORTS INTERNATIONAL HOLDINGS, INC: UNSQUASHABLE
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i. So much competition, not one company holding more
than 5 percent of market share.
ii. Acquisition opportunities (Fitcorp in 2014).
iii. Coverage across the U.S. with 162 clubs in four
major regions: New York, Boston, Philadelphia, and
Washington.
C. Summary of External Factors—see EFAS table exhibit 1
4. Internal Assessment—Strengths and Weaknesses
• Corporate Structure
i. Centralized management (S)
a. Subsidiaries
b. Clubs in Switzerland, although they are still
managed centrally by TSI.
ii. Organized on a combination of geographical lines and
function (S).
iii. Geographic: marketing is geared towards regional
culture and current events.
a. NYSC (New York)
b. BSC (Boston)
iv. Functional: FitCorp is another separate division
headed by Gary Klencheski, who charged with managing
private fitness clubs.
a. Case implies Boutique Fitness Experience studio
• Corporate Culture
i. Values (S)
CASE 16
TOWN SPORTS INTERNATIONAL HOLDINGS, INC: UNSQUASHABLE
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a. Unconventional talent, i.e. both Saint and
Tascher originally being writers, but rising to
become leaders of TSI.
ii. Expectations (S/W)
a. Sales Driven Environment: each individual club
had two-to-three membership sales consultants
iii. Employee/individual club responsibilities: TSI
employees and culture of each club location played a
role in customer satisfaction and member retention.
iv. Adaptability to changing conditions: culture is to
acquire or launch new product or services to meet
increase membership. i.e. acquisition of Fitcorp,
• Corporate Resources
1. Marketing
a. Overview: east coast fitness franchise focused on
regional culture and current events.
i. Boston
ii. New York
iii. Philadelphia
iv. Washington
b. Customer centric mission: improving lives through
exercise.
c. Three advertising objectives
i. Grow membership base.
CASE 16
TOWN SPORTS INTERNATIONAL HOLDINGS, INC: UNSQUASHABLE
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f. Promotions
i. Contests with prizes.
ii. Trial memberships.
iii. Class specials
iv. Reduced fees
v. Corporate partnerships
g. Public Relations opportunities
i. Magazines like Shape, Self, Fitness.
h. Results
i. $6000 spent, but 13,000 members still lost
throughout course of year.
ii. Only 2,234 ‘likes’ on Facebook page and no
2. Finance
a. Revenue dropped—7.20 percent from 2008 ($506.7
million) to 2013 ($470.2 million).
b. Operating Income increased 23.71 percent from 2008
($32.7 million) to 2013 ($40.6 million).
c. Interest Expense decreased—5.38 percent from 2008 to
2013
Key
Ratios
2013
2012
2011
2010
2009
2008
Explanation
Current
Ratio
1.36
0.87
0.82
0.74
0.37
0.36
Current Ratio =
CA/CL
Growing CR shows
CASE 16
TOWN SPORTS INTERNATIONAL HOLDINGS, INC: UNSQUASHABLE
ROI
2.98%
2.96%
1.40%
0.06%
1.21%
0.46%
ROI—NP after
Taxes/Total Assets
2010.
ROE
28.3%
21.6%
1783.9%
4.2%
68.8%
302.7%
ROI—NP after
Taxes/Shareholder
Equity
Declining ROE in
2012-2013 highlights
special
distributions via
one-time cash
dividends.
3. Research & Development: TSI’s R&D is visible through their
acquisition and growth strategies, which play a role in how
they develop their product offerings.
a. Membership Options: developed different tiers of services
to attract different types of audiences (S).
i. Passport Membership
ii. Core Membership
d. Ancillary fee-based services: (S)
i. Group exercise programming
ii. Children’s programming
iii. Personal training
4. Operations and Logistics
a. Clustered locations (metropolitan)allowed for benefits
CASE 16
TOWN SPORTS INTERNATIONAL HOLDINGS, INC: UNSQUASHABLE
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ii. 162 fitness clubs in operation under the four
regional brand names (end of 2013).
1. Largest owner and operator in Manhattan with
thirty-seven locations and 108 more within
120-mile radius of NYC.
b. Club Formats—objective to cost effectively construct and
efficiently operate clubs.
i. Traditional health club model.
1. Fitness only clubs, approx. 21,000 square
feet.
2. Multi-recreational facilities (66 percent of
the clubs) 37,000 square feet.
a. These contained things like pools,
ii. Privately owned single and multi-club businesses
(50 clubs up until 2013).
iii. Pre-established clubs acquired
1. Fitcorp Clubs of Boston
a. Included private fitness centers for
companies like Raytheon.
2. West End Sports Club in NYC.
iv. Luxury studio
1. Boutique Fitness Experience (BFX) launched in
c. Costs
i. Capital intensive to start up with high costs for:
1. Equipment
2. Real estate
ii. Membership options
1. Month-to-month or commit (cancel anytime or
commit for a year).
