ISSN: 2470-7899

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Case: BL0007 Versi0n: 26/12/2018

Case The Domestic and Foreign Expansion of SMART FIT Challenges to the Sustainability of an Innovative Model in the Fitness Industry

After experiences in managing a clothing business and a family-run sugar mill, Edgard Corona (hereinafter “Corona”) had a skiing accident that wound up changing his life. He founded Smart Fit – a fitness center based on a value-oriented model that has achieved remarkable growth in a short period. By the end of 2017, the company, established in Brazil in 2009, had more than 1.5 million members in six Latin American markets and ranked as the absolute industry leader in the continent and the fourth largest gym chain in the world. Smart Fit’s mission was to provide ever- yone with access to high-level physical activity – “to democratize high-end fitness”. Consequent- ly, since the model seemed easy to copy,Smart Fit management decided to develop a package of

This case was prepared by Professor Jorge Carneiro from Fundacao Gertulio Vargas Escola de Administracao de Empresas de Sao Paulo and Raffaela Sauerbronn, Angela Pontes, Vagner Andrade and Danielle Paoliello from Pontifícia Universidade Ca- tólica do Rio de Janeiro – IAG Business School. This case is presented by BALAS and was the best case in the BALAS’s conference 2017. Teaching cases are developed solely as the basis for class discussion and are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. To order copies or request permission to reproduce materials, contact coleccion.cladea@ gmail.com.

Copyright © 2020 The Business Association of Latin American Studies - BALAS. No part of this publication may be reproduced, sto- red in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means --electronic, mechanical, photocopying, recording, or otherwise-- without the permission of the copyright holder.

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customer features and to expand rapidly. In addition, Smart Fit faced new competing business models, for example, a new smartphone platform that gave users entry to clubs located in Latin America, Europe and United States. Corona feared that intense and rapid expansion might risk customer satisfaction. Indeed, overseas expansion strained the company’s financial and mana- gerial resources. However, the question remained: Should Smart Fit devote continued efforts to sustain its high-growth path in Brazil and abroad?

1. PUMPING UP HIS OWN WAY

Sao Paulo, Monday, 8:00 a.m. Corona began his day by visiting recently opened Smart Fit fit- ness centers in various Sao Paulo neighborhoods. His long professional history, however, had not always been related to the fitness business.

Corona’s first job was in a material analysis laboratory, as a chemical engineer. For him, what was important about being a chemical engineer was dealing with transformations. “People pic- ked elements and transformed them into other elements. I took petroleum and transformed its derivatives into plastic. I took sugarcane and produced sugar and ethanol.” However, that job did not engage him enough for time to pursue it as a career. “I wasn’t very happy in that kind of work, so I decided to sell my car (so I didn’t need to depend on my father) and to enter the clo- thing business with two friends,” he contended.

The three partners opened two clothes stores in Sao Paulo, both of them in well-known shopping malls. This was Corona’s first experience in leading a business focused on customer service. In the 1980s, he left this business to manage his family’s sugar mill. He proudly stated,

“That was the first journey of my life – leaving my partners and the stores to run my fa- mily’s sugar mill in the countryside of Sao Paulo. I learned how to plant, harvest, trans- port, and mill sugar. I learned to produce steam and electric energy, sugar, ethanol, and to sell these products in the market. I stayed there for 16 years, and the business grew. I learned a lot from that experience!”

By 1995, the mill was the third largest in Brazil’s sugar and ethanol industry. Nonetheless, the family’s third generation joined the business and subsequently some conflicts arose, exacerbated by the financial crises that Brazil was going through. Although Corona may have aspired to beco- me the CEO of the family business someday, his plans were frustrated when the company board decided to professionalize the management strucuture, driving the family to relinquish control. Corona decided to leave the company. “I am too hot-headed a horse to sit and fight for power,” he grumbled (Soares, 2016). He used that moment of change to take some time off to recover from the preceding years’ pressures.

So, Corona, who had been a top water polo athlete (back in the 70s), went skiing in order to re- lax. After a few days, he had an accident and injured his knee. During the surgery recovery, he decided to revive his hobby in the form of an entrepreneurial venture and thus entered the fit-

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ness business. He took an old swimming school project, drafted with some friends at the beach, and established, in 1996, his first health club: Bio Ritmo (meaning Bio Rhythm). However, he was careful to point out that, “if you have a hobby, be careful about turning it into a business – you might come to hate your hobby.”

The business model was to offer water activities, but gradually Corona transformed it into a broader fitness center. He remembered that, in the beginning, he paid the price for inexperience: “It was all so wrong that there weren’t even individual showers in the men’s bathroom.”

Before entering the fitness industry, Corona had almost gone out of business several times and had overcome many obstacles. In 1997, low membership drained the company’s cash and for- ced the founder to borrow BR$ 50,000 (approximately US$ 50,000 at the exchange rate then) to put up seven billboards around Sao Paulo. He was desperate, but the strategy worked and the company started to grow. Then, in 2007, the business faced another blow, when a glitch in ma- nagement software almost sank the company.

While running the business and restructuring it with the support of consultants, Corona noticed that the location of a fitness center made a significant difference in the success or failure of this kind of business venture and was more important than the efforts in structural or service im- provements. This belief led him to envision the possibility of opening a fitness club on Avenida Paulista, the financial district of Sao Paulo. Adopting an open floor plan with high-end concept and focusing on ambiance and on a wide range of gym facilities, the Bio Ritmo chain targeted high-income clienteles. This new concept quickly became a success and this was a turning point in the company’s history.

Customer satisfaction was their focus not only to attract but also to retain customers, as Corona liked to explain:

“Before, instructors would run physical evaluations that were a study on how to mis- treat customers at the first opportunity. They would take a woman, who was overwei- ght, and ask her to take off her shirt, and she would be left with only her bra and shorts on… it was terrorism, no… torture…, to pinch, pinch 25 times. That wasn’t enough: they would ask her to flex her arm, and her stomach, and then tell her she was fat and out of shape.”

It was necessary to change the customer perception from day one. Bio Ritmo units offered a broad portfolio of group classes, specialized training, and the most modern equipment in the fitness industry. The business would expand quickly and, as of mid-2017, had 29 fitness centers spread out across Brazil.

Corona, age 60, has always exercised regularly. He described himself as a restless mind: “I am always looking for new opportunities and am willing to start over. I always think that what I am doing is not enough.”

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2. FROM HIGH END TO VALUE-PRICED

In 2009, Corona noticed that the Sao Paulo market had become saturated with luxury fitness clubs and that 70% of their members were only interested in “pumping iron” and cardio exerci- ses to burn calories using equipment such as bikes and treadmills. People did not want to pay for other activities and equipment that they did not use. “In the US, the classes are separated from the fitness clubs. You have yoga and Pilates studios in the city, but not within the club, so they are cheaper,” he said (Carvalho, 2014).

As a result, Corona identified a business opportunity inspired by the innovative “low cost, low price” model from the USA and parts of Europe. He thus decided to invest in the affordable heal- th-club market (which generally had lower fixed costs and lower unit margins) in order to attract a large number of customers and ensure profitability. At that time, the market for value-priced health clubs in Brazil was underexploited and potential competitors were only neighborhood clubs with limited resources and simple decor and equipment. Thus, Corona devised the Smart Fit model. That same year, Corona launched four Smart Fit centers in Sao Paulo, emphasizing the unique advantages of the experience and providing a superior price-benefit ratio for mem- bers. While Bio Ritmo and other high-end brands, such as Bodytech and Cia Athletica, had plans starting at around US$ 100 per month, Smart Fit offered plans from around US$ 15. These cen- ters had good infrastructure and equipment, as well as contemporary architecture and decor, in upscale Sao Paulo neighborhoods, which up until then were dominated by more expensive fitness centers, including Bio Ritmo itself.

Smart Fit’s mission was to democratize physical activity, reaching the most diverse target au- dience and making the habit of exercising as easy as possible, in order for customers to develop an active and healthier lifestyle. All of this was offered through an intelligent model that com- bined high-end equipment (of the same caliber as that found in the Bio Ritmo clubs), extended operation hours, 7-days a week service, and affordable prices. In fact, this mix of sophisticated gear and modern decor (see Figures 1 through 4) coupled with lower prices attracted a large number of customers. The lower fixed costs were a function of the need for fewer employees, the use of automated processes (e.g., web-based registration of new members), and no extra activities (i.e., no yoga classes or martial arts classes). Although there were comments in the market that, if Smart Fit proved successful, it would cannibalize customers away from Bio Rit- mo, Corona, with his blunt style, said, “If someone is going to kick my a[...], let it be me my- self” (Soares, 2016).

In 2010, with 10 newly-opened clubs and seven new locations under construction, Corona ran out of money. He sold almost all of his possessions in order to continue the expansion, but it was not enough: “I sold [part of my own] real estate, I sold everything, but I had no more credit and it was impossible to keep opening clubs.”

At that moment, the investment fund Patria arrived with the necessary fuel for the business, and they established a partnership that made it possible to overcome the monetary obstacle. Patria in-

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jected financial resources and technology and became a 50% partner of the Bio Ritmo group (Car- valho, 2014), and in particular in the expansion of the Smart Fit business. This infusion of capital accelerated the expansion process and enabled the company to implement a winning marketing strategy. Although Patria, as a private equity fund, played a key role in developing and carrying out corporate strategy, the partnership required alignment between the partners with regard to the decision-making process, otherwise it could generate a managerial problem. (Later, in 2016, GIC, a Singaporean sovereign wealth fund, bought a minority stake in the company, by acquiring shares of the founder, cf. Valor, 2016.)

After enjoying success for some time, Corona reached a point where he could no longer sustain the heavy work load. That was when he experienced the “metanoia” (i.e. a change of thought and direction) – a process that sought to create “more humane” leaders and companies with a “pur- pose.” Corona found that his company, which was at that time already the largest fitness chain in Latin America, could only continue to build a path of successful growth if he managed to stimu- late “chemistry” among people. Corona said, “[…] one of the company’s skills is its adaptability: to be able to make a mistake and quickly correct and implement [a solution], because the world runs 24 hours a day.”

3. CONSUMER BEHAVIOR IN THE FITNESS INDUSTRY

By any measure, modern lifestyles have led people to be pressed for time, stressed out and over- ly sedentary. But awareness for the need to cultivate overall well-being have stimulated people to engage in physical exercise. Yet, even though people may have access to information and be aware of the dangers of an unhealthy lifestyle, a large proportion of the population has tended not to practice physical activities. It has been common for people to prioritize work, study and family to the detriment of health. But when they become sick or need to engage in some kind of aerobic activity, like climbing stairs or walking for an extended period, they have tended to feel the need to be fit and have a good diet.

According to IHRSA (2017), an international association that brings together representatives from gyms, spas, sports centers and equipment manufacturers commented that in 2017 Brazil had a population of approximately 208.7 million (IBGE, 2017), but thatonly around 9.6 million were members of health clubs. This was less than 5% of the population,while in the USA the penetra- tion rate was 14%, and in New York alone it reached 33% (Carvalho, 2014).

The reasons that prompted an individual to frequent a health club could be the search for a be- tter quality of life, longevity, satisfaction, pleasure or physical beauty (Liz et al., 2010). “Vanity has always been a characteristic of Brazilians, and not without reason. The country is one of the largest beauty markets in the world, ranking first in plastic surgery and perfumes, second in hair care, and third in cosmetics. But body worship doesn’t stop there: In the last few years, Brazil has also been attracting attention because of the growth in businesses focused on fitness” (Luders, 2016).The average length of time a person spent time at the club was between 60 to 90 minutes,

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with an average frequency of three times a week. In general, the club tended to be selected based on location (Saba, 2001). Another important aspect to consider was the influence of peer groups; additionally, many preferred working out together with co-workers during lunch or with family. Being a member of the fitness world in many cases became a lifestyle – of habits involving sports, socialization, participation in events outside the clubs (such as marathons, tours, tournaments, festivals, parties, and trips), sharing information, and participation in social networks.

Fitness aficionados have driven the globalized market by acquiring clothes, shoes, healthy food, nutritional supplements, wearable healthcare gadgets, etc. The offer of products and services to meet this demand has also been extensive, ranging from nutritional and orthomolecular moni- toring to aesthetic treatments for both men and women.

4. THE BRAZILIAN FITNESS MARKET

IHRSA (2017) asserted that, in 2016, there were 200,000 health clubs in the world with 162 million members; in 18 Latin American countries, 20 million people had memberships in over 65,000 health clubs.

Brazil had 34,500 health clubs with 9.6 million members and was the country with the second highest number of health clubs (after only the USA), the fourth in number of health club mem- bers and the tenth in terms of revenues, worth US$ 2.1 billion (IHRSA, 2017). The report also highlighted that the 10 countries with the highest revenues accounted for 71% of total industry revenues. USA ranked first (see Tables 1 through 4).

According to Fitness Brasil (a firm specialized in training and networking related to the fitness industry), (i) the total revenue of the fitness industry in Brazil grew from US$ 1.1 billion in 2009 to US$ 2.4 billion in 2015, which represented 44% of the total industry revenue in Latin Ameri- ca; (ii) the number of health clubs jumped from 14,000 to almost 32,000 in the same period (i.e., 66% of health clubs in Latin America); and (iii) membership rose from 4.4 million to 8.0 million, accounting for 59% of the total membership in the continent (Fitness Brasil, 2016).

Health clubs could range, from high to low cost, be unisex or single-sex, be family-oriented, you- th-oriented, among other focuses. This diversity sought to cater to different demographic target customers, who could vary in terms of their preferences, values, culture and social groups, so- cial class, lifestyle, gender, age, needs and expectations. Most health club members were from the lower-middle and working classes, who have turned to paid physical exercise as a result of economic and social gains (a few years ago) in Brazil. This has led to significant changes in the diversity of sports practiced, which commonly include soccer, wrestling, swimming, water aero- bics, dance, martial arts, spinning, and indoor rowing (Arruda, 2015).

The luxury segment, targeting high-income customers, consisted of high-end and full-service clubs that focused on quality, exclusivity, tradition and personalized service. Bio Ritmo was born as a sophisticated alternative to bodybuilding gyms. Its first unit outlined the features that would be

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its competitive advantage, namely: the environment designed especially for the practice of phy- sical activity, modern equipment and with qualified instructors. In order to emphasize additional qualities that would set it apart from its competitors, a renowned architect was invited to design the Bio Ritmo units, which featured sophisticated lighting and scenography. Always in search of innovation, Bio Ritmo introduced the micro-gym concept — several gyms inside one — with high intensity workouts lasting up to 60 minutes. They offered five different types of workout: Race Bootcamp, Burn HIIT Zone, Squad Functional Area, Torq Cycle Experience, and Skill Mill. In terms of those attributes, Bio Ritmo’s competitors were Bodytech, Cia Athletica, Reebok Sports Club, Studio Velocity and Les Cinq Gym.

Unlike Bio Ritmo, Smart Fit was in the budget segment, and its obvious competitors were com- panies offering weightlifting and aerobic exercising at competitive prices, located in various ci- ties and neighborhoods. These included small and traditional fitness centers, as well as chains such as Curves and Contours, which offered 30 minute exercise programs tailored specifically to women. In 2010, the Bodytech group, one of two largest groups in Latin America’s fitness sector, launched “Formula” gym center, in response to the great demand for services that valued qua- lity of life and at the same time offered a good price-benefit balance. Formula offered high-end equipment, a wide variety of classes and qualified professionals; which meant competition in the Smart Fit segment.

Leonardo Cirino, Chief Marketing Officer (CMO) of the Bio Ritmo group in Brazil, said that less than 3% of the population attended health clubs, and concluded that the potential market was excellent. This view was also shared by the IHRSA (2016), which stated that such opportunities were particularly attractive in emerging markets such as Asia and Latin America.

In recent years, the Brazilian economy has suffered one of the worst recessions in its history, with gross domestic product declining for two consecutive years (2015 and 2016). The uncertain po- litical scenario in Brazil negatively affected the economy and the country faced high unemploy- ment rate, high (though declining) interest rate, and currency devaluation against the US dollar (see Table 5).

The financial health of the Smart Fit’s business depended on the company’s ability to continuously attract new customers as well as keep current ones. The slowdown in economic activity in Brazil led to a sharp drop in consumption patterns, increase in household indebtedness, unemployment and reduction in the supply of credit. Corona reckoned that the relatively low fee of the Smart Fit model attracted customers, but he acknowledged that paying for gym services was somewhat superfluous and that economic crises and associated unemployment posed risks to the business.

5. SMART FIT POSITIONING AND OPERATIONAL MODEL

Although the Bio Ritmo and Smart Fit clubs belonged to the same business group and had sy- nergies in support areas such as technology, legal counseling and procurement, the two brands

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operated with distinct structures and teams because their positioning and focus had, since its in- ception, always been very different.

The business model adopted by Smart Fit was based on a value-price concept, which offered consumers a leaner, practical and less complex service. The lean cost structure (see Tables 6 to 8) allowed Smart Fit to charge relatively low prices and present a good value-for-money offer, thus attracting client segments that were more price-sensitive and willing to accept less-complex services. However, Smart Fit managed to distinguish itself from its competitors by offering a hi- gh-end structure (see Figures 3 and 4), in contrast to the bare-bones health club models usually seen in the USA for this category.

According to Smart Fit’s founder, the greatest operational difference was in terms of the com- pany’s management engagement, which focused on an organic model and a strong corporate cul- ture (which valued innovation, non-conformism, and learning) that made it possible to respond to new demands with speed and flexibility. Thus, the adoption of a simplified and horizontal ma- nagement model, which provided meaning and empowerment to teams, with decision-making coming from the base (Corona, 2014), represented a key competitive advantage for the company. Every morning, the teams had a quick meeting and, according to Corona, by lunch time all the staff knew what was said. “The bosses do not come to the meeting and say what will be done. They ask everyone’s opinion about how to solve the problems and then the whole team works on the solution together,” he said. Smart Fit teams won bonuses linked to customer satisfaction. Corona explained that “satisfaction is a long-term result; if you only tie bonuses to the immediate results, there are people who will turn off the lights to save money.”

Consumers usually looked for a gym close to their home or work. To meet customer expecta- tions, Smart Fit developed a life style ecosystem, where the person exercised in a pleasurable way and could enjoy good equipment, architecture, illumination, sound, air conditioning, cus- tomer service, and locker rooms. Meeting (or even exceeding) customers’ expectations was very important to Smart Fit. The company ran a satisfaction survey based on the Net Promoted Score (NPS) methodology, which helped management to build a nationwide ranking of units. In addi- tion, Corona made it clear that the experience at each new Smart Fit center should be superior to that available in previous fitness centers. A 2015 study by O Globo newspaper in partnership with TroianoBranding found that Smart Fit was the fitness brand most-admired by cariocas (Rio de Janeiro residents) (Globo, 2016).

Focusing on people interested only in individual physical activities and who did not want to pay for a complete health-club structure, Smart Fit offered packages with just cross-training, tread- mills, ergonometric bicycles, or weight-lifting. With the slogan “Smart Fit - the intelligent gym,” they became the largest health club in Latin America, operating in six countries. As of 2017, Smart Fit had 296 outlets (Table 9) and more than 1.5 members; in Brazil, they had little more than one million members, of which 724 thousand in their wholly-owned units in the country. The clubs offered bodybuilding and weight training to members (minimum age 14), with experienced ins- tructors able to offer guidance and training in a safe, autonomous and comfortable environment.

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Members shared a vast array of equipment on a first-come-first-served basis, without fixed sche- dules. There were no personal trainers, but rather a small number of “shared” trainers. Business hours varied somewhat from one club to another, but the clubs were usually open Monday to Fri- day from 6:00 am to 11:00 pm, and on weekends and holidays with reduced hours.

The company had two kinds of plans, Smart and Black. A Smart plan member must pay a sign-up fee and could access one club; there was no cancellation penalty. The Black plan allowed members to use any Smart Fit center in Latin America and included massage chairs and five invitations per month to bring friends. Although there was no sign-up fee, the membership was based on a mi- nimum of a one-year commitment. While Bio Ritmo and other luxury brands such as Bodytech and Cia Athletica had plans starting at around US$ 100 per month, Smart Fit entered the mar- ket with plans starting at US$ 15, depending on the location and plan. The sign-up process was very simple and could be done either at a club or over the internet. Filling out a form with basic information and choosing a payment method (either debit or credit card) and payment date (the 5th, 10th, or 20th of the month) were the only information required. There was no cancellation fee, just the annual maintenance fee. Smart Fit’s revenue model depended highly on recurring payments. These long-term arrangements reduced churn and defaults, making it possible to ope- rate with more aggressive prices.

On their first day at a facility, a new member would look for an instructor (wearing a yellow shirt) to set up a program based on their objectives – for example, weight loss, cardio improvement, muscular definition, muscular mass gain or overall strength. The workout plan was designed ac- cording to the member’s availability to go to the gym (number of days per week and length of time). The instructor demonstrated each exercise in terms of how to use the equipment, the co- rrect posture and the number of repetitions. All machines had a button to call an instructor if necessary and all Smart Fit facilities included lockers for members to safeguard their belongings while working out.

Specialized gyms (also called, mini-centers) that offer only one or two types of exercise – such as crossfit, functional gym or yoga – had emerged and had challenged Smart Fit’s model, which focused on cardio and muscular gain. Smart Fit responded by redeploying part of its equipment space with rooms for stretching, dancing, and abdominal classes. Once again, the company’s founder chose to lead the way and dealt with new challenges by updating concepts and bringing in new ideas .

Smart Fit’s position was also challenged by new business models. In 2012, a group of entrepre- neurs founded a startup called Gympass, described as “a disruptive health and wellness platform that connects gyms, studios and health clubs to companies and their employees.” Without being tied in to a single sport or facility, employees of their corporate partners could work out anywhere in their network, whenever they want, paying less than half of the regular monthly fee. The idea behind Gympass was powerful as they aimed to please the three parties involved: (i) companies saw the plan as an extra benefit in an incentive package; (ii) employees realized value by paying D

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less; and (iii) gyms experienced an extra flow of customers in times of recession. The Gympass program was also available for individual membership.

Gympass’ system optimized the use of underutilized club resources by aggregating health clubs on their platform and enabling customers to access the network by offering day-pass or monthly plans. The platform was simple to use. The member opened the app, selected an activity, booked the class and checked in at the club just by showing the token on the cell phone. In Brazil, by 2017, Gympass had 14,000 associated clubs – half of all the fitness centers in the country – and was in 14 countries in Latin America and Europe, including Argentina, Chile, Mexico, France, Germany, Italy, the Netherlands and the United Kingdom. The next frontier was USA.

Although Gympass could be considered as an additional sales channel for Smart Fit, the com- pany’s financial health depended largely on customer loyalty. Just as Gympass could attract new customers, Smart Fit’s customers could be drawn to other gym centers, which could jeopardize the company’s budget.

The Bio Ritmo group had experienced financial difficulties in the past as mentioned before, but overall, the group had been very successful. Even without initially leaving the limits of Latin Ame- rica, the Bio Ritmo group was already the fourth largest in the world (IHRSA, 2017), after Dutch Basic-Fit (over 1.6 million members), and North American chains 24 Hour Fitness and LA Fit- ness (with over 4 million and 5 million enrollments, respectively). The Bio Ritmo group ranked 5th in terms of number of new units between 2011 and 2016 and in 3rd place in terms of revenues in the same period of time (IHRSA, 2016).

As a privately-held company, Bio Ritmo did not have the legal obligation to publish financial figu- res, but they announced that the group had revenues of BR$ 745.6 million and a net loss of BR$ 11.6 million (approximately, US$ 230 million and US$ 3.6 million, respectively) in 2017 (See Ta- ble 8). While the Bio Ritmo group already had registration for category “B” in B3 (the Brazilian stock exchange) – which allows the issuance of securities, but not shares (in fact, in 2017, the company issued two tranches of debentures, with a total amount of BR$ 540 million) – in 2017, the company moved to category “A”, which allows the company to issue and trade preferred (i.e., non-voting) shares in B3. As a matter of fact, the company had planned to raise funds via an IPO (initial public offering) back in 2015, but the initiative had been postponed due to the economic recession that hit Brazil at that time.

6. THE EXPANSION OF SMART FIT

The operational model adopted by Smart Fit, combined with the volume of financial resources provided by the Patria Fund, allowed rapid business expansion in Brazil and other Latin American countries. After starting with four locations in 2009, the company opened eight more in 2010, and another 17 the following year. The internationalization process began in 2012, when five locations were opened in Mexico (besides 25 more in Brazil). In 2013, 31 new locations were opened in Bra- zil and 10 in Mexico. In 2014, Smart Fit arrived in Chile, where they opened four locations, and

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opened another 64 in Brazil and 19 in Mexico. Another 70 locations were opened in 2015 – 51 in Brazil, 17 in Mexico, one in Chile and one in the Dominican Republic. In 2016, Smart Fit opened in Peru and Colombia. At the end of 2017, there were 296 Smart Fit centers in Brazil (Table 9), of which about one-fourth were franchises (Table 10). At that time, the company featured close to 1.5 million members; one Smart Fit center in Rio de Janeiro alone had over 12,000 members.

The Patria Fund partnership with Bio Ritmo group fueled the company’s success. The Smart Fit model had become known and attracted the interest of potential partners from other regions of the world. For the entrepreneur, the challenge would be to combine three key aspects: identifica- tion of an ideal partner, a favorable economic environment, and a growing market.

The company’s founder preferred to work with a local strategic partner with knowledge of the lo- cal market and culture in order to help accelerate the penetration process. Corona believed that the formation of a joint venture protected the company and offered competitive advantages in the local market. However, choosing a partner involved certain risks, such as poorly designed strate- gies, tactics or procedures, improper use of the brand, and poor business performance.

The first foreign experience happened casually, through a contact with a Mexican investor in the fitness market who was interested in introducing the Smart Fit model in his country. The result was a partnership with the local chain Sport City, the premium health club segment leader in Mexico. This company was owned by Grupo Marti and the first clubs were opened in early 2012. The rapid expansion made Smart Fit the largest chain in Mexico, with over 92 locations at the end of 2017. Each company held 50% of the joint venture.

The internationalization process in Mexico relied on the strength of the local partner, who was already planning to launch a low-cost gym model to exploit the market potential of mi- ddle class Mexicans. The complementary nature of the two partners’ interests resulted in the Mexican associate being charged with business expansion into Colombia and Guatema- la. Operations started in Colombia in 2016; but as of late 2017, Smart Fit had not yet expan- ded into Guatemala.

The entry mode in Peru followed a similar pattern. The partnership established in 2016 enabled Smart Fit to penetrate in that market, where they had 10 locations as of late 2017. In the Do- minican Republic and in Chile the entry mode was different: a franchise system was adopted. Smart Fit opened in Chile in 2014 through a partnership between Bio Ritmo group and the Chi- lean group O2 Fit, with 10 locations open as of late 2017. In the Dominican Republic, the Bravo group became the exclusive representative, with 10 franchises opened by the end of 2017. The company’s objective was to become the market leader in all of its markets. Table 9 presents the figures of the international growth.

The rapid international expansion had transformed Smart Fit into one of the five largest buyers of fitness equipment in the world. According to Leonardo Cirino, the company’s CMO, one of the benefits of internationalization has been “to not be dependent on a single country, with the fluc-

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Case: BL0007

tuation of the economy and all of the other socio-political issues involved. The company’s product and service has been highly adaptable to any country in the world.” While most of the revenues and costs were denominated in local currencies, the purchase of equipment, which represented a significant part of the investment to open a new gym center (between 35% and 45%, depending on the location size), was usually calculated with reference to the US dollar. The appreciation of the US dollar against the currencies of the countries in which the company operates had meant a negative impact on its ability to grow.

In addition, it was necessary to observe certain peculiarities of each culture. For example, in Bra- zil, a Black plan member benefit was being able to enjoy a massage chair, while a member of the equivalent plan in Mexico had at his/her disposal a tanning chamber; something Mexicans va- lued more than massage chairs. In each country, the business model underwent adaptations to add value locally, while also taking into account socio-economic and cultural aspects. However, the CMO emphasized that the core product and service did not change.

Each country’s work team comprised of local employees, including the management. The com- pany encouraged a strong exchange of cultural experiences because they understood that it was a relevant factor for enhancing brand value. One particular exchange program between Brazilian and Mexican managers even involved hosting the foreign manager at a local home for a specific period of time. Regarding the return on foreign investment, Smart Fit’s management was surpri- sed to see that it was even higher and faster than in Brazil, even before the economic recession had hit Brazil. This was a function of the lower costs of importing equipment, and of construc- tion and labor. Overall, the cost of opening a foreign fitness center in Latin American countries was on average 35% lower than in Brazil.

According to Leonardo Cirino, in times of crisis, Smart Fit was an incredible option for consumers in terms of value. High member retention was a result of the experience in the clubs and also of the products that added value for the customer, such as isotonic drinks, the member advantage club (a loyalty program), and other new ideas that are underway.

7. THE MANAGERIAL DILEMMA

Smart Fit experienced substantial growth in revenues by opening new units in a short time frame (as a way to preempt copycats) and continuously attracting new customers, as well as keeping the existing one through sales and marketing initiatives. Access to financial resources provided by the funding partner helped fuel the necessary investments. In a short time, Smart Fit became the largest chain of fitness centers in Latin America.

However, slowdown of economic activity in Brazil led to a sharp drop in consumption patterns, an increase in household indebtedness, unemployment and a reduction in credit supply, sugges- ting that the company should look for other markets. The fitness center business requires little customization from one country to another, which makes it easier to replicate the model world- wide. On the downside, the business model is apparently also easy to copy.

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Case: BL0007

The push for Smart Fit’s internationalization process started as potential partners from other parts of the world became aware of the company’s efforts in Brazil and made the initial contact. Smart Fit has accumulated extensive experience in Latin American markets and has researched the size of the local economies, market potential and cultural diversity, in order to foster solid partnerships. In order to continue its aggressive expansion process, the company began studying new target countries, as well as new cities and locations in the countries where it already operated.

The first question that Smart Fit’s management had to address was whether the company would be able to sustain its business model – which had been somewhat successful in terms of the ra- pid expansion of fitness centers in Brazil, but, on the other hand, the company still had a small (though the largest) market share in the country and was not yet profitable – and protect itself from copycats and innovative new entrants. The second question was how to balance expansion in the domestic arena vs. in foreign markets.

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REFERENCES

≈ Arruda, A. (2015). “Fitness”, mais do que tendência, oportunidade para microempre- sa [Fitness, more than a trend, an opportunity for microenterprises]. Boletim Digital - Sebrae Pernambuco, 10(July). Retrieved from: http://www.sebrae.com.br/Sebrae/ Portal%20Sebrae/UFs/PE/Anexos/BOLETIM%20N%C2%BA%2010%20OBSERVA- TORIO%20SEBRAE%20Fitness%20Mais%20do%20que%20tend%C3%AAncia.pdf . Access on 28-Sept-2016.

≈ Azevedo, K. (2017). Franquia Smart Fit: como abrir e quanto custa [Smart Fit Franchise: how to open and how much it costs]. Guia Franquias de Sucesso [Success Franchises Guide], 07-Jul-2017. Retrieved from: https://guiafranquiasdesucesso.com/franquia- smart-fit-como-abrir-e-quanto-custa/ Access on 19-Aug-2018.

≈ BMF&BOVESPA (2018). SMARTFIT ESCOLA DE GINÁSTICA E DANÇA S.A. [SMAR- TFIT SCHOOL OF GYM AND DANCE INC.]. 19-Aug-2018. Retrievd from: http://bvmf. bmfbovespa.com.br/cias-listadas/empresas-listadas/ResumoEmpresaPrincipal.aspx?- codigoCvm=24260&idioma=pt-br Access on 19-Aug-2018.

≈ Carvalho, P. (2014). Como a Smart Fit turbinou a receita do grupo Bio Ritmo [How Smart Fit boosted Bio Ritmo’s Group revenues]. Época Negócios, 10-Oct-2014. Retrieved from: http://epocanegocios.globo.com/Informacao/Resultados/noticia/2014/10/como-smart- fit-turbinou-receita-do-grupo-bio-ritmo.html . Access on 15-Oct-2016.

≈ Corona, E. (2014). A fórmula do empreendedorismo de sucesso [the formula of successful en- trepreneurship]. Published 03-Nov-2014. Retrieved from: https://endeavor.org.br/day1-for- mula-empreendedorismo-de-sucesso-Edgard-corona-bioritmo . Access on 01-July-2016.

≈ Fitness Brasil (2016). O Crescimento do Nosso Mercado [The growth of our market]. Re- trieved from: http://www.fitnessbrasil.com.br/a-empresa . Access 15-Oct-2016.

≈ Globo (2016). Marcas dos Cariocas [Cariocas’ Brands]. Retrieved from: http://infografi- cos.oglobo.globo.com/rio/as-marcas-dos-cariocas.html. Access on 20-Nov-2017.

≈ IBGE (Brazilian Institute of Geography and Statistics) (2016). Estimativas Populacionais [Population Estimates]. Retrieved from: http://saladeimprensa.ibge.gov.br/noticias.ht- ml?view=noticia&id=1&idnoticia=3244&busca=1&t=ibge-divulga-estimativas-popula- cionais-municipios-2016 . Access on 03-Oct-2016.

≈ IHRSA (International Health, Racquet & Sportsclub Association) (2016). The IHRSA global report 2016. Retrieved from: http://download.ihrsa.org/pubs/2016_IHRSA_Glo- bal_Report_Preview.pdf . Access on 07-Oct-2016.

≈ IHRSA (International Health, Racquet & Sportsclub Association) (2017). The IHRSA global report 2017. Retrieved from: http://www.healthclubmanagement.co.uk/heal- th-club-management-features/Findings-from-the-IHRSA-Global-Report-2017/31950. Access on 03-Aug-2017.

≈ Liz, C., Crocetta, T., Viana, M., Brandt, R., & Andrade, A. (2010). Aderência à prá- tica de exercícios físicos em academias de ginástica [Adherence to physical exer- cises in fitness centers]. Motriz, 16(10): 181-188, jan./mar. 2010. Retrieved from: http://www.periodicos.rc.biblioteca.unesp.br/index.php/motriz/article/viewFi- le/1980-6574.2010v16n1p181/2882 Access on 01-Oct-2016.

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≈ Luders, G. (2016). Brasil já é um dos maiores mercados “fitness” do mundo [Brazil al- ready is one of the largest fitness markets in the world]. Published on 26-May-2016. Retrieved from: http://exame.abril.com.br/revista-exame/edicoes/1114/noticias/bra- sil-ja-e-um-dos-maiores-mercados-fitness-do-mundo . Access on 2-Oct-2016.

≈ Saba, F. (2001). Aderência à prática do exercício físico em academias [Adherence at physical exercises in fitness centers]. Sao Paulo: Manole.

≈ Smart Fit (2018). Smartfit Escola de Ginástica e Dança S.A. e Controladas - Demons- trações Financeiras Individuais e Consolidadas Referentes ao Exercício Findo em 31 de Dezembro de 2017 [ Smartfit School of Gymnastics and Dance Inc. and Subsidiaries - Individual and Consolidated Financial Statements regarding Exercise Ending in De- cember 31, 2017].

≈ Soares, A.C. (2016). Como Edgard Corona criou a maior rede de academias da Amé- rica Latina [How Edgard Corona built the largest chain of fitness centers in Latin America]. Retrieved from: https://vejasp.abril.com.br/cidades/perfil-edgard-corona-aca- demia-smart-fit/ Access on 19-Feb-2018.

≈ Valor (2017). Rede de academias Smart Fit pede registro de companhia aberta [Smart Fit fitness center network requests registration as a publicly-held company]. Retrieved from: http://www.valor.com.br/empresas/5080710/rede-de-academias-smart-fit-pe- de-registro-de-companhia-aberta . Access on 28-Apr-2018.

≈ Valor (2016). Grupo Bio Ritmo recebe aporte de R$ 100 milhões [Bio Ritmo Group re- ceives a capital contribution of R$ 100 million]. Rerieved from: http://www.valor.com. br/empresas/4715207/grupo-bio-ritmo-recebe-aporte-de-r-100-milhoes. Access on 29- Apr-2018.

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Exhibits’ Section

Exhibit: Figures

Facade Design

Reception

Source: www.smartfit.com.br

Source: www.smartfit.com.br

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Exhibits’ Section

Typical layout/design

Source: www.smartfit.com.br

Equipment (treadmills) and design

Source: www.smartfit.com.br p. 17

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Exhibit: Tables

Exhibits’ Table 1 – Brazilian Fitness Market Section

Year Revenue Clubs Users US$

(billions) (millions)

2016 2.1 34,509 9.6 2015 2.4 31,809 7.9 2014 2.5 30,000 7.6 2013 2.4 23,000 7.2 2012 2.3 22,000 6.7 2011 2.0 18,000 5.4 2010 1.2 15,000 4.7

Source: The IHRSA Global Report 2017

Table 2 – Top 10 – Revenue 2016

Country US$ (billions)

1 USA 27.6 2 United Kingdom 6.1 3 Germany 5.8 4 Japan 5.1 5 France 2.7 6 Canada 2.5 7 Australia 2.5 8 Italy 2.4 9 Spain 2.4

10 Brazil 2.1 Source: The IHRSA Global Report 2017

Table 3 – Top 10 – Number of Clubs 2016

Country Clubs 1 USA 36,540 2 Brazil 34,509 3 Mexico 12,376 4 Germany 8,684 5 Argentina 7,910 6 Italy 7,500 7 South Korea 6,839 8 United Kingdom 6,728 9 Canada 6,156

10 Japan 5,979

Source: The IHRSA Global Report 2017

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Exhibits’ Section

Table 4 – Top 10 – Number of Users 2016

Country Users (millions)

1 USA 57.2 2 Germany 10.8 3 United Kingdom 9.7 4 Brazil 9.6 5 Canada 5.6 6 France 5.4 7 Italy 5.2 8 Spain 5.1 9 Japan 4.2

10 Mexico 4.0 Source: The IHRSA Global Report 2017

Table 5 – Brazil’s Economic Data

GDP annual 2013 3.0%

2014 0.5%

2015 -3.8%

2016 -3.6%

2017 1.0%

growth rate Average 5.4% 6.8% 8.5% 11.5% 12.7% unemployment rate USD/BRL average exchange rate

2.34 2.66 3.90 3.26 3.30

Interest rate (year end)

10.00% 11.75% 14.25% 13.75% 7.00%

Source: Instituto Brasileiro de Geografia e Estatística (IBGE) [Brazilian Institute of Geography and Statistics] and Banco Central do Brasil (BACEN) [Brazilian Central Bank]

Table 6 – Investment, Revenues and ROI for a Typical Smart Fit Club and Compa- rison with Competitor Model “Formula”

Smart Fit Formula Total Investment (BRL million) 2.8 to 4.0 1.8 to 5.2 Equipment costs* (BRL million) 1.0 to 1.8 N/A

Average Revenues (BRL) (per month)

200,000 120,000

ROI - Return on Investment (months)

36 36 to 60

*Included in total investment Source: Azevedo, 2017

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Exhibits’ Section

Table 7 – Investment, Revenues and Costs (in BRL) for a Typical Smart Fit Club in Brazil

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Note: as of mid-2018, 1 USD was approximately equal to 4 BRL a Average length of time for facilities refurbishing: 6 months b Average revenue per member increases because Smart Fit expects to convert customers from the basic to the black plan. c Includes cancellation of memberships, customers’ default on payments, and credit card fees. d Example: office supplies, cleaning materials, music copyright fees, shared advertising expenses, insurance, uniforms, tra- vel, administrative expenses. Depreciation expenses are not included.

Source: elaborated by the authors based on input provided by a Smart Fit franchiseep. 20

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Exhibits’ Section

Table 8 – Bio Ritmo’s Financial Information

(BRL millions) Dec/2017 Dec/2016 Dec/2015 Dec/2014 Net Equity 411.9 443.3 261.9 224.9 Total Assets 1,945.3 1,154.2 942.1 852.6 Net Revenue 745.6 641.2 535.7 408.2 Operating Profit 215.7 199.6 172.5 137.2 Net Profit / Loss -11.6 -21.6 -1.1 9.6 EBITDA 178.2 172.4 171.5 124.5 EBITDA margin 23.9% 26,9% 32.0% 30.5%

Source: BMF&BOVESPA (2018) and Smart Fit (2018)

Note #1: Brazil’s and Peru’s figures are consolidated in the balance sheet and the income statement (since the company has direct investments, without partners, in these countries); Colombia’s and Mexico’s figures are presented as equity equivalence (since the company has joint ventures there); Chile’s and Dominican Republic’s figures do not appear directly in the balance, but the corresponding royalty revenues (since they are franchises) show up in the income statement.

Note #2: Sales expenses (not including disbursement for the opening of new units) summed up to BR$ 58.1 million in 2017, corresponding to 7.8% of net revenues (an increase of 1.9% over 2016). Disbursements for the opening of new units increased by BR$ 4.5 million in 2017, mainly related to new wholly-owned centers in Brazil.

Note #3: General and administrative expenses summed BR$ 103.5 in 2017 (a rise of 30.1% over 2016); after exclusion of non-recurring expenses (such as restructuring of the Peruvian operations in preparation for further expansion (BR$ 4.7 million) and hiring of IT consulting services (BR$ 2.5 million)), the increase of general and administrative expenses was in line with the rise in revenues.

Note #4: As per the explanatory notes to financial statements, rise in depreciation expenses and in the selling, general and administrative expenses have negatively affected net income.

Table 9 – Smart Fit Expansion (new gym centers opened)

Country 2009 2010 2011 2012 2013 2014 2015 2016 2017 Total Brazil 4 8 17 25 31 64 51 34 62 296 Mexico 0 0 0 5 10 19 17 18 23 92 Chile 0 0 0 0 0 4 1 4 1 10 Dominican Republic 0 0 0 0 0 0 1 6 3 10 Peru 0 0 0 0 0 0 0 1 9 10 Colombia 0 0 0 0 0 0 0 12 16 28 Total 4 8 17 30 41 87 70 75 114 446

Source: BMF&BOVESPA (2018)

Table 10 –Smart Fit Internationalization Timeline

Country Entry Year Entry Mode Brazil 2009 Direct Investment and Franchise Mexico 2012 Joint Venture Chile 2014 Franchise Dominican Republic 2015 Franchise Peru 2016 Direct Investment Colombia 2016 Joint Venture

Source: BMF&BOVESPA (2018)

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