BoxxFitness Gyms

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Please see the video solution for a detailed explanation of how to create the structure. Here is the suggested process for structuring:

1. Step 1: Top-level (Level 1) framework with super-high-level reasons for a profit-margin decline
2. Step 2: High-level (Level 2) framework with high-level reasons for a profit-margin decline
3. Step 3: Hypotheses (Level 3) for the profit-margin decline

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• Revenue ‘could’ be declining
• Cost ‘could’ be increasing
• Either or both of the above

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A. Revenue ‘could’ be declining - the following could be happening:

• A.1 Volume - number of members could be declining
• A.2 Price - average revenue per member could be declining

B. Cost ‘could’ be increasing - the following could be happening:

• B.1 Member related costs could be increasing
• B.2 Gym related costs could be increasing
• B.3 Corporate costs could be increasing

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Step 3: Hypotheses (Level 3) for profit-margin decline - See Solution Below

A. Revenue ‘could’ be declining - the following could be happening:

A.1 Volume - number of members could be declining

• Perhaps fewer customers are preferring BoxxFitness’ premium plans
• Perhaps fewer customers are preferring to pay annually
• Perhaps there is another competitor that is attracting our existing and potential customers
• Perhaps only some locations are suffering from these issues due to changes in the gentrification of those locations

A.2 Price - average revenue per member could be declining

• Perhaps we are giving discounts to customers on membership fees which is bringing down the average revenue per member
• Perhaps members are purchasing fewer ancillary products & services such as nutrition advice, nutrition cafes, spa clinics etc. that bring us additional revenue per user

B. Cost ‘could’ be increasing - the following could be happening:

B.1 Member related costs could be increasing

• Perhaps the costs/compensation of personal trainers and dieticians has increased (salary, commission, bonus, etc.)
• Perhaps the costs of ancillary products for customers have increased - such as spa products, protein powders, cafe food etc.
• Perhaps the customers have started using lower margin services more

B.2 Gym related costs could be increasing

• Perhaps the costs of operating the gyms have increased (equipment repairs, gym repairs, equipment maintenance, cleaning, sanitization)
• Perhaps the costs of equipment have increased (expensive equipment upgrade, increase in equipment lease costs)
• Perhaps the costs of gym lease/rent/mortgage have increased

B.3 Corporate costs could be increasing

• Perhaps the costs of backend staff have increased (finance, HR, etc.)
• Perhaps the costs of operating the organization have increased (licensing, legal, compliance, fines, employee insurance, equipment insurance, etc.)
• Perhaps the costs of partnership, branding, and marketing have increased

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Sample of how to read, interpret, and elucidate the exhibit

Level 1: Observations

• The overall industry is growing by approx. 8% per year from 2026 to 2030
• Luxury segment growing fastest by doubling in 5 years from $2Bn to $4Bn
• The mainstream segment is growing by the most amount ($7Bn) in 5 years

Level 2: Inferences

• The premium segment (our client BoxxFitness) is growing slower than other segments at nearly 5% per year
• Premium segment share has shrunk from 23% to 20% due to this slower growth

Level 3: Implications

• Since the premium segment is growing slowly, there might be some adversarial pressure on our client, thus affecting the profit margin. We should investigate further how our client is performing within the segment to validate this hypothesis. DO WE HAVE ANY INFORMATION ON THIS?
• Faster growth rate of Luxury and Mainstream segments indicates evolving customer preferences. It seems that premium gym seekers are becoming increasingly divided and are either upgrading or downgrading. Perhaps our client would like to explore competing in these faster-growing segments

Sample of how to read, interpret, and elucidate the exhibit

Level 1: Observations

• There are 3 major players in premium gyms (75% market share) and 10+ smaller ones
• Our client is the 2nd largest player in the premium segment with 2Bn+ revenue

Level 2: Inferences

• Our client grew at 5%/yr annually in the last 5 years - same as the segment, hence there is no increase in its market share
• Our client’s 2 main competitors are growing at a faster rate (Premia Fit seems to be growing at 7-8% and Ultra Fitness is growing at 10%
• Other smaller players seem to have struggled to grow since their market share has shrunk from 25% to 20% and their revenue also shrank on absolute terms

Level 3: Implications

• Since our client’s growth rate is slower than the major rivals, we need to investigate if the market pressure is leading to profitability issues. We should investigate the client’s P&L further to see if they have been over-spending or under-charging.
• The faster growth rate of Premia Fit and Ultra Fitness means that they are doing something better than our client. We should explore what they are doing differently. We should also try to investigate any changes in the consumer preferences for premium gyms

Sample of how to read, interpret, and elucidate the exhibit

Level 1: Observations

• There were 2 main membership models and 2 new ones were introduced in 2028
• Quarterly memberships saw the maximum growth from 2027-2030

Level 2: Inferences

• Overall membership grew by 5% from 2026 to 2027 but grew by ~10% per year since 2027
• Monthly membership growth was steady at 10 members per gym per year
• Quarterly membership grew much faster and helped overall membership growth to reach 10% per year

Level 3: Implications

• Growth in Quarterly memberships has cannibalized Annual memberships – clearly, some existing annual members chose to switch to quarterly membership
• [If the candidate has seen exhibit 2 already] Total members are growing 10% Y-o-Y, quarterlies are increasing, and quarterlies have a higher annual fee run rate. Still, BoxxFitness's overall revenue is growing by 5% Y-o-Y only. Clearly, we are giving away discounts on membership fees which is leading to lower overall revenue growth. Let's see if the costs are increasing disproportionately to the revenue.
• [If the candidate has not seen exhibit 2 yet] Total membership is growing 10% Y-o-Y. Let us see how the revenue and costs are growing. If there is disproportionate growth it could help us find the reason for profitability decline.

• Important note for the interviewer: Please tell the candidate that the decision to discount the memberships was not taken at a corporate level – but instead, gym managers were providing the discounts to meet their member-base targets.
• Note: 2030 is to be assumed as the current year. This is done to avoid any discussion around impact of COVID.

Sample of how to read, interpret, and elucidate the exhibit

Level 1: Observations

• Monthly memberships cost the highest on an annual run-rate basis

Level 2: Inferences

• Monthly memberships have been progressively discounted by BoxxFitness over the past few years
• Quarterly memberships cost lesser per annum than annual memberships

Level 3: Implications

• BoxxFitness has been discounting its Monthly and Quarterly memberships to grow its member base. While this has helped in achieving the member-growth of 10% Y-o-Y from 2027-2030, it has led to a slower 5% growth.
• The faster member growth and slower revenue growth (due to discounts) could have led to higher costs that scale with member count. Let us try to investigate the trends of various cost items for BoxxFitness to see where is the real problem.

• Note: 2030 is to be assumed as the current year. This is done to avoid any discussion around impact of COVID.

Sample of how to read, interpret, and elucidate the exhibit

Level 1: Observations

• Member-related costs are growing in share of total costs
• Profit-margin has declined from 20% to 15%

Level 2: Inferences

• Member-related costs are growing by 10% from 2027 onwards
• Other costs are growing only at 5% from 2027 onwards

Level 3: Implications

• Growth in member-related costs is faster than member-related revenue due to discounts. Hence profitability is declining. BoxxFitness should explore letting go of the discounts or try to optimize its member-related costs

Sample case conclusion

• Our client is BoxxFitness, a 1,500-outlet premium gym-chain in the US. They have been seeing declining profit-margin in the last 3 years and wanted our help to diagnose what could be the problem.
• We conducted a detailed analysis of the client and have been able to identify the problem. We learnt that BoxxFitness had introduced quarterly and lifetime memberships 3 years ago. In order to push these new memberships and grow the overall member-base, the gym-managers were selling quarterly memberships at a heavy discount.
• While this led to a healthy increase in the member-base, the revenue did not grow as proportionately, while the member-related costs kept on increasing. This has led to an overall decline in profit margin.
• Looking forward, BoxxFitness should take a deeper look at pricing across its portfolio and ensure that the pricing reflects the profit targets correctly
• The potential risk from this refactoring could be that we lose some members once prices are increased from the current levels.