The price is right: leisure markets and inflation

There has been much debate in 2007 about the need to keep a grip on inflation. Energy prices, in particular, have increased and while the media focus is usually on household bills, higher energy costs have a big impact on leisure industries (the costs, for example, of heating and lighting swimming pools, football stadiums, hotels).

But the big story on prices must still be the extraordinary historic change in the UK economy since the early 1990s: the movement to an economy with seemingly permanent low inflation (i.e. under 5% a year), accompanied by low unemployment and other general indicators of prosperity.

Apart from the economic benefits of low inflation, there are psychological effects. Anyone under the age of 20 can only have been aware, in their lives so far, of living under a Blair-style New Labour government (just as there was a Thatcher Generation), and the memory of a high-inflation economy is a distant one (for the over-30s). But the psychology of pricing is a complex matter and it is human nature to feel that ‘things are getting expensive’, even in an era of low inflation.

To put this in context, a look back at the past is worthwhile.

1960s prosperity and stability: RPI +3.5%

Taking the general, long-running Retail Price Index (RPI) as the measure of inflation, the annual average in the 1960s was +3.5% although the highest rate of the decade was +5.4% in 1969, heralding the decade of oil-price inflation and general economic crisis.

1970s oil crises: RPI +12.6%

Average inflation in the 1970s was +12.6% a year, which seems extraordinary enough to today’s RPI-watchers, but the annual peak for the decade of +24.2% in 1975 alone seems almost bizarre from the standpoint of 2007’s ‘worrying’ increase to over +3%.

1980s recession and Thatcherism: RPI +7.5%

The 1980s had an annual rate of +7.5% although this average was influenced by the +18% rate for the first year of the decade. Thatcherite economics brought the rate down to a low of 3.4% by 1986, at the expense of high unemployment, but the RPI crept up again to reach an unsustainable +9.5% in 1990.

1990s stability under Labour: RPI +3.7%

Apart from 1990, the 1990s were a decade of modest inflation - and economic stability - for which both outgoing Conservative and incoming Labour governments can take some of the credit.

Leisure prices in the 2000s

Inflation has averaged at just over +3% so far in the 2000s (2000-2007) but prices are polarising. The averaged-out RPI (+20% in that period) is now a hotch-potch of varying price trends across sectors of the economy. At one extreme, energy prices for the household were up 73%, whereas clothing and footwear prices actually declined by 17%. (Within clothing, Women's Outerwear is cheaper in 2007 than it was 20 years ago, thanks to globalised sourcing and an ultra-competitive High Street.)

Leisure goods is another official category that has suffered deflation, not inflation, since 2000: a 20% decline in prices averaged across items such as toys and electronic equipment. Leisure services, on the other hand, are 33% more expensive than in 2000. In the leisure market, this means it has become much cheaper to stay home than to go out for leisure activities, exacerbating the underlying social trend towards ‘cocooning’ in the home.

There is no better example of this than the beer market, where the 2000-2007 period saw a 6% decrease in take-home (or ‘off-trade’) prices, whereas a pint in a typical pub or bar costs 24% more. Hence the argument that it is supermarkets, not pubs, that have fuelled binge drinking. The pubs have had to charge higher prices for beer to pay for improvements to their premises, including the provisions for disabled access, stricter health and safety and smoking bans that have affected all leisure premises.

Beer is by no means the only market affected by the in-home option for leisure being cheaper than ‘going out’. Cinema prices have increased steadily – partly to pay for more attractive multiplexes – but there are now so many options for watching a movie cheaply at home (maybe on a home cinema set-up, helping recreate the cinema experience). Eating out is more popular than ever, but the option of entertaining in the home around a table stocked with home-delivered food or supermarket ready-meals is also enticing more consumers, and once again the pricing balance is in favour of the home, with household food prices up 15% since 2000, but restaurant meals up 23%.

Health clubs - how healthy a market?

The health club business would make a good choice for a business-degree thesis on how markets are born, grow and reach maturity. There have been three phases so far:

PHASE ONE: In the beginning was the sweaty urban gym, transformed in the 1990s into a new leisure destination: a hybrid of the local leisure centres and the best of the pumping-iron gyms. City money flooded in as company after company floated on the Stock Exchange, an entirely natural phenomenon because sharply dressed dealers and analysts were among the most to cough up for a subscription to an exclusive health club. (Like so many leisure sectors, private equity has since stepped in at most of the major club companies.)

PHASE TWO: Market maturity came quickly, and by the early 2000s there were plenty of clubs (5,000+, according to the Fitness Industry Association) serving all the UK's cities and large towns. Most were standalone, but hotel clubs and semi-private gyms within leisure centres added to the wide choice. Several UK companies, fearing saturation, started to expand abroad, into Europe, Australia or South Africa.

PHASE THREE: Saturation, consolidation and differentiation are the ugly but inevitable words to describe this market (2005-2008) as it reaches middle age:

Saturation: by 2006, there were too many names competing for the same customers.

Consolidation: late 2006 and early 2007 saw Virgin taking over Holmes Place, Bannatyne buying up the standalone LivingWell clubs and the merger of market leader David Lloyd Leisure with Next Generation. At mid-2007, with the possibility of more mergers still on the cards, the largest companies - all of which have at some point bought up a competitor - were David Lloyd, Fitness First, Virgin Active, LA Fitness, Esporta, Bannatyne and Cannons. They operate some 600 clubs across the UK with just over 2 millon members.

Differentiation: brands can be similar to each other in a growth phase, but now they need to start differentiating themselves. For adults or families (or women only)? Budget or premium? For sports or exercise? "Wellness" or traditional fitness and weight loss?

So, is the market heading for a Phase Four (decline) from the current plateau of Phase Three? Probably not. The enlarged (consolidated) club companies are still full of ideas to attract new customers, recent examples including Family Yoga at LA Fitness, a BUPA health check at Fitness First, evening classes at Esporta or open-air aerobics classes at Virgin Active.

And there is no immediate sign of the prices that clubs can charge falling off, which would be the first sign of market decline. Already, there is a wide choice of price brackets: eight different types of membership by price at Fitness First, for instance.

Underpinning the club market are some solidly favourable trends: the movement away from complicated, time-consuming team sports and towards simple fitness pursuits; the public-private initiatives at fighting obesity; and the way that larger clubs are filling a demand as family-friendly venues for healthy, safe activities under one roof.

Research Tips (3): Market size sources

Market size is both the starting point and the Holy Grail for assessing markets. Usually expressed in value of spending (sometimes in volume of goods), the market size description should contain something like this, at the bare minimum:

"The market for Product X was worth £150m at retail prices in 2006, having grown by 5% over 2005."

This statement is usually accompanied by a statistical table showing sales over the most recent 5-6 years. Usually 5-6 years, simply because that fits across the width of an A4 sheet! Also because a five-year period will give a guide to growth trends and will often include a boom or bust phase.

This may seem like a very basic analysis but many things stem from here:

• How much is £150m, relative to other markets, and the overall economy?

• Is 5% a reasonable rate of growth in the current economic climate, assuming it includes inflation (i.e. at current prices)?

• If we know Company A's turnover, we can give it a market share (by converting manufacturer or wholesaler prices into retail prices)

• From the total market size, we can then start the all-important segmentation analysis which will tell us where the gaps are in the market and which products are selling well

• The 5-6 year analysis also gives us a start on calculating the all-important future of the market. Without a projected trend of some sort, no rational business decisions can be taken.

So what are the sources for these market size figures? There are several:

• For many consumer products, the most widely quoted come from retail audits which should, in principle, give accurate data of actual sales. The problem is that this works fine for branded, fast-moving consumer goods sold through store chains - the type of market where market research originated - but audit-quality data are rare in services, leisure industries, B2B markets and industrial sectors. Audit data is also expensive and usually very confidential to the large companies that fund its collection. A further problem may be that the audit does not adequately cover all distribution channels - a growing problem in the e-commerce era.

• Government statistics include expenditure series which, with some qualification, can be used as commercial market sizes. Consumer Trends, for example, gives variable coverage of many consumer markets (products and services, often based on the official Expenditure & Food Survey of households). The Product Sales and Trade series has aggregate sales for larger companies in an industry and includes imports and exports.

• "Apparent consumption" is a calculation of national market size using domestic company sales ("production", or "output"), less exports, plus imports. This is rarely a precise method (often interfered with by re-exporting) but is useful for measuring an industry's export ratio (exports % output) and import penetration (imports % consumption). A domestic market might be tough to get into (high import penetration) but some segments of it might show potential for developing exports.

• The term "Trade estimates" is often seen as a source for market sizes. If the "traders" in question are not simply quoting retail audits or other data sources, it is usually a matter of major players in the market knowing (or estimating) their own market shares, thus letting them gross up their turnovers (and those of competitors) to a total market size.

• The grossing up of major companies' sales into a market size is also a method used for another source, the trade association survey of members. Association data based on member surveys varies from the skimpy or non-existent up to detailed documentation produced by associations like the Cinema Advertising Association or the Society of Motor Manufacturers & Trades (see also Research Tip 2: Trade associations ).

• Finally, market research in its narrow definition of field research to obtain data on consumer or B2B activities is another source for estimating markets. If we know how many consumers/businesses buy something, how often in the year, and the average prices in the market, we can come up with a market size, although this method is a long way from the accuracy of the retail audit.

Where possible, market sizes emanating from one of these sources should be checked against other data sources - does the given market size (and growth rate) stack up against major players' turnovers, import statistics, government retail statistics, statements from trade associations and so on.