The Academy: Evaluating Growth Alternatives Case Solution
4.3 SWOT Analysis
Strengths
- The gym has high number of memberships, which enables it to generate higher sales i.e. it has currently 400 members.
- The gym has utilized full classes in order to grow its profitability levels.
- It is a greater gym with greater members in the vicinity as compared to other industry players.
Weaknesses
- The gym facility is not much larger and it requires additional investment in the equipment and renovation.
- The Academy’s profitability is somewhat less than the industry, which shows that despite being a larger player, it is not able to generate greater level of profits than its industry peers.
Opportunities
- The demand for cross fit gyms is expected to rise by 3.15% from 2017-2022, which presents and an opportunity for the business to attract more customers and enhance profitability levels.
- The alternatives available for The Academy gym is to open a new facility in a new location (East end of Kitchener) or to upgrade the existing facility.
Threats
- The threat of new entrants is high as the industry poses high growth chances and there are less entry barriers.
- There is a threat from the largest competitor as it has larger facilities and it is able to charge premium prices. The gym is under threat to upgrade the facility or to open a new facility so that it could pace with the competitors by marinating sufficient profitability levels and the market share.
4.4 Porter’s Five Force Analysis
Threat of New Entrants
The threat of new entrants explains the ability of the competitors to enter in the market. Due to health concerns related to obesity, the Canada’s GHFC (gym, health and fitness clubs) is expected to grow at a compounded annual rate 3.15% from 2017-2022. Due to increasing demand and increasing population, it is analyzed that the threat of new entrants is high as there are no as such entry barriers and the business is imitable.
Threat of Substitutes
The threat of substitutes is low as the demand for cross fit gyms hasarisen dramatically due to obesity concerns and increasing populations. Though there are substitutes to cross fit gym including exercise videos, TV shows, swimming, at-home exercising etc., but the threat from such substitutes is relatively low.
Existing Rivalry
The competitive rivalry in the Canada’s GHFC industry is medium as the majority competitors in the industry are small, only the larger competitor is Central Fitness Kitchener. The Academy has an advantageous position over small competitors but it is at a disadvantage with its large competitor. It is because Central Fitness Kitchener has a larger gym facility and it charges higher membership as compared to other players in the industry.
Bargaining Power of Buyers
The bargaining power of customers is high, as the entire revenue and earnings are dependent upon the customers. The customers are divided among three different segments i.e. beginners, casuals and the regulars.The customers are quality conscious andmost of the regular customers are competitive.
Bargaining Power of Suppliers
This force identifies the power, held by the suppliers, If the suppliers hold high power, they can bring the margins of the accompany players by increasing their cost of raw materials. The bargaining power of suppliers is low as the market is presented with different suppliers providing gym and fitness equipment at competitive prices.
5. Financial Analysis
5.1 Financial Ratio Analysis (Appendix 2)
The financial performance of the Academy has been analyzed using the financial ratio analysis. The profitability, liquidity, solvency and the growth ratios have calculated for 2016 and 2017. The current ratio of the Academy is similar to industry, but it is less than its key competitor (Planet Fitness) in 2017. Moreover, it takes 10.56 days for the Academy to convert its receivables into cash, which are quite lower than the competitor as well as the industry. It means that Academy is performing well in collecting its accounts receivables, but its current ratio needs to be similar or greater than its competitor.
The gross profit margin of The Academy is 63.24% in 2017, which is slightly lower than the gross profit margin of the competitor (69.9%). The net profit margin of the Academy is also greater than the competitor and the overall industry. The company has generated a return on assets of 34.68%, much greater than Planet Fitness (3%) and 3.7% of industry. In addition, the company’s return on equity is much higher than other industry players for the period 2016-2017.The profitability analysis shows the company’s profitability is sound and greater than the competitors.
The debt to total assets ratio show the percentage of assets financed by debt. The company’s debt position is lower than Planet Fitness however, the debt of 64.16% is greater than the industry’s debt to total assets ratio of 38.7%. The company’s ability to pay for interest expenses from its EBIT has improved from 2016 to 2017 i.e. from 3.24 to 11.99, but the TIE ratio is slightly less than Planet Fitness.
The growth ratios show that company’s sales has a growth rate of 20.49% in 2017, while Planet Fitness sales growth is 13.7% and the industry’ sales has a negative growth of -23.5%. The profit and is extremely higher than the competitors and the asset growth is also greater in the fiscal year 2017.
5.2 Cash Flow Statement (Appendix 3)
A cash flow statement has been prepared for The Academy in the fiscal year 2017. The company has generated a positive cash flow from operations of CA$58702, a negative cash flow from investing activities amounting to CA$4795 – due to investment in equipment and a negative cash flow from financing of CA$8000. The Academy has generated a net positive cash flow of $97498 for the fiscal year 2017. The major source of cash is from the operations of the company and the major uses of the cash included the payment due to shareholders and investment in the equipment.
5.3 Projections – Income Statements & Balance Sheet (Appendix 4, 5 & 6)
The Academy has two alternatives of increasing its profitability and competitiveness, which include the facility upgrade of classes1-4 and the expansion from 40% - to 80%. The incomes statements have been foretasted for all the four options. It is analyzed that The Academy is generating a net income of CA$71850 in 2018, if facility is upgraded with one class. While, the profit of the gym will reach to CA$80366.85, if the facility is upgraded with 4 classes each week. The second alternative of expansion with 40%, is foretasted to generate a net income of CA$13961, which is lower than the net income in 2017. In addition, the net generated through 80% expansion will generate a net income of CA$64427 in 2018........................
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