© 2007 les mills international limited shifting the focus to value

© 2007 Les Mills International Limited

SHIFTING THE FOCUSTO VALUE


THE PROBLEM


THE WORST SCORE

Prices and costs are the highest driver for measuring valueBUTOur performance in this area is the worst- Financial score 5.7

(Fees 5.7, Other 5.5)- Non financial 7.2

(Hassle 7.3, Time 7.1, Training convenience 7.0)


AND YET ..

More than 75% of clubs and instructors see no or freestyle as competition Clubs still rate value as 25% above competition despite price and costs And price rates low as a decision maker (7th ) . Much more important are - contribution to membership- innovative and exciting- consistent quality - image and reputation - consumer demand


PRICING, WHATS HAPPENING?

© 2005 Les Mills International Limited© 2005 Les Mills International Limited

IN 2006 AND 2007 MOST AGENCIES MANAGED TO INCREASE THEIR AVERAGE PRICE DESPITE GROWTH IN AVERAGE NUMBER OF PROGRAMS PER CLUB

40

60

80

100

120

140

160

180

2002 2003 2004 2005 2006 Jan 2007

Average Price Per Program 2002–2007 (USD)(1)(2)

Australia (4.29)Germany (3.19)Japan (3.82)

United Kingdom (3.05)

Spain (2.33)

Netherlands (3.81)

France (3.14)Sweden (2.61)

Notes: (1) Constant exchange rates as at 31 January 2007; (2) Numbers in brackets shows average number of programs per club

Sweden (2.07)

France (2.18)

Japan (2.00)

United Kingdom (1.83)Netherlands (2.73)

Spain (1.62)Germany (2.34)

Australia (3.11)

Brazil (2.44)Brazil (3.49)


ALTHOUGH IT MIGHT NOT BE POSSIBLE TO INCREASE PRICING ON EXISTING CONTRACTS TO CURRENT LEVELS, INCREASING AT THE RATE OF INFLATION IS LEADING TO ADDITIONAL REVENUE

83.51

151.14

88.24

116.97122.07

103.97

156.87

111.90

54.37

84.59

159.05

101.18

120.88

144.15

112.74

168.26

120.5

61.03

Australia France Germany Netherlands North America Spain Sweden United Kingdom Brazil

Actual average priceExpected average price at current pricingColumn 3

Expected Change in Average Prices from Applying Forecast CPI Increases(1) — 2007 to 2009 (USD) (2)

Additional revenue achievable by 2009if CPI increases applied (US$000’s)

29 18 14 17 25 7 13 37 37

Notes: (1) Source: Economist; (2) Assumes constant exchange rates as at 31 January 2007; (3) Assumes forecast 2007 inflation continues to 2009

(3)


ALTHOUGH AVERAGE PRICE PER PROGRAM HAS TYPICALLY INCREASED THE AVERAGE PRICE PER PROGRAM THAT COULD BE ACHIEVED IF ALL CLUBS WERE CHARGED ACCORDING TO CURRENT PRICING RATES IS SUBSTANTIALLY HIGHER

83.51

151.14

88.24

116.97 122.07

103.97

156.87

120.25

44.20

139.44

169.40

200.41189.08

219.16

120.91

184.10

159.96

80.79

Australia France Germany Netherlands North America Spain Sweden United Kingdom Brazil

Actual average price Expected average price at current pricing rates

Comparison of Actual Average Price versus Potential Average Price Given Current Pricing Arrangements (USD) (1)

Additional monthly revenue given programpenetration (US$000’s)

265 46 270 223 263 15 40 289 951

While it is not realistic to expect that prices to all clubs could be increased to the current pricing rates, this analysis does indicate the size of the gap that opens up if the price clubs pay is not regularly increased to reflect market value

Notes: (1) LMI program statistics, Conversa Global analysis; (2) At 31 January 2007 exchange rate


FOCUSING ON VALUE NOT

PRICE


The ability to increase fees to existing clubs is a key way to grow revenuesAlthough a relatively small proportion of the costs of operating a club, increasing fees to existing clubs is difficultA key reason club owners use Les Mills programs is because they expect to be able to increase their profit by doing soAs an ingoing hypothesis any licence fee increase which decreases club profitability is going to be difficult to implement and cause club cancellations

How can LM agents increase their prices to clubs while minimising club cancellations?

Situation

INCREASING LICENCE FEES FOR CURRENT CLUBS REPRESENTS AN OPPORTUNITY FOR LM TO INCREASE REVENUE BUT MUST BE CAREFULLY MANAGED TO AVOID CLUB CANCELLATIONS

Issue to be Resolved



Options to increase fees without impacting club

profitability

Increase licence fee in conjunction with

increasing group fitness numbers

Increase licence fees in line with membership fee increases from the club

Increase licence fees while removing cost

elsewhere in the clubs operation

IN ORDER TO INCREASE CLUB LICENCE FEES WITHOUT IMPACTING CLUB PROFITABILITY THERE ARE THREE MAIN OPTIONS

This is the subject of the rest of this presentation

In many countries clubs traditionally have a CPI increaseBy timing the licence fee increase to coincide club profitability is maintained

Examples of this could be through electronic downloads of release materials if the club purchase this for their instructors


INSTRUCTOR

CLASS PARTICIPANT

provides classes

conducts class

pays membership fees

trains and accredits Instructor & provides materials

Licenses club

Pays licence fee

pays Instructor fee

Australian Example

THE KEY TO IDENTIFYING HOW LICENCE FEES CAN BE INCREASED IS TO UNDERSTAND THE GROUP FITNESS VALUE CHAIN

LMAP

CLUB


THERE ARE SOME KEY ASSUMPTIONS BEHIND THIS VALUE CHAIN ANALYSIS

LMAP licence (independent club - seven programs) AUD 1340 per month

Number of LM classes offered (independent club – seven programs) 250 per month*

Fee paid to instructor AUD 40 per class

Club membership fee AUD 65 per month**

Number of GFP classes attended by participant 13 per month

Effective cost per class for participant AUD 5 per class

Number of participants in a class 30

* Ten per day. Monday to Friday, five each on Saturday and Sunday** Fitness First, Deakin, ACT Australia


OF THE $5 PER CLASS PER PARTICIPANT THAT IS SHARED IN THE GROUP FITNESS VALUE CHAIN THE MAJORITY GOES TO THE CLUB

Value Chain Element

Value/ Head($AUD)

Share(%)

Rationale(Based on Total Value Available Being $5)

Club 3.50 70.0 Membership fee spread over number of classes attended less LMAP and Instructor’s shares(65/13) - (0.17 + 1.33) = 3.50

Instructor 1.33 26.6 Class fee spread over number of participants(40/30 = 1.33)

LMAP 0.17 3.4 Costs of licence spread over number of classes spread over number of participants(900/250/30 = 0.12)

Base Case

Club Profit per Class

$104.64

GIVEN THE SHARE OF GROUP FITNESS GROSS PROFIT THAT IS CAPTURED BY THE CLUB RELATIVE TO THE AMOUNT PAID TO LM AS A LICENCE FEE A SMALL INCREASE IN MEMBERS DUE TO GROUP FITNESS OFFSETS A LARGE INCREASE IN LICENCE FEES Base Case

+10% Growth in Class Numbers


$119.64

Base Case

+ 10% Increase in Licence Fees


$104.64

14.3% increase in gross profit

0.5% decrease in gross profit

Therefore for any percentage increase in membership number, the impact on gross profit is 30 times the impact from the same percentage decrease in fees



THIS ANALYSIS ONLY WORKS WHERE IMPROVING THE NUMBERS IN GROUP FITNESS CLASSES INCREASES MEMBERS ACQUISITION AND / OR RETENTION WHICH RESEARCH SUGGESTS DOES HAPPEN

Note: (1) Source: “Winning the Retention Battle”, Fitness Industry Association UK

The more often members visit the greater the retention rate

(1)

Les Mills Research in the United States showed that 75% of members would consider changing clubs if the club stopped running Les Mills programs


(1)


1,906 55 1,961

Expected membersretained for 12

months

Increase inmembers retained

for 12 months

Expected membersretained for 12months with

improved GroupF itness class

numbers

At $AUD65 per month the value of these members is

$43k


USING RESEARCH CONDUCTED BY LES MILLS INTERNATIONAL IN NORTH AMERICAN IT IS POSSIBLE TO CALCULATE IN OUR HYPOTHETICAL EXAMPLE THAT INCREASING AVERAGE CLASS SIZE FROM 30 TO 36 WOULD IMPROVE A CLUBS GROSS MARGIN BY $43K PER ANNUM, THROUGH ENCOURAGING MORE VISIT PER WEEK BY THOSE VISITING LESS THAN THREE TIMES

300 300

450

788

1,420

On

ce a

mo

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Tw

ice

a m

onth

On

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Tw

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Th

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Number of Unique Visitors to Group Fitness Average Class Size Change in Expected Retention Through Improving Class Size

1,838 members attending Group Fitness do so less

than twice weekly

Given 250 classes averaging 30 members and assuming the

percentage attendance is as per the US research there are a total of

3,258 unique visitors of whom 1,838 visit less than three times a week …

30.0

35.8

Current visit level Increased visit level

If these 1,838 members can be enticed to come to Group Fitness one

more time per week average class size grows to 35.8 …

… and based of the UK research annual retention rate improves by

3% meaning 55 more members are retained


A KEY STRATEGY THEREFORE IN INCREASING LICENCE FEES IS FOR LM TO PROVIDE TOOLS OR ASSISTANCE TO INCREASE GROUP FITNESS IN CONJUNCTION WITH A LICENCE FEE INCREASE

LM could increase licence fees but provide additional marketing resources

The caveat on this is that is cannot erode revenue streams that already come from selling marketing resources or GFM by Les Mills or its agents

LM could increase licence fees but include “free” attendance at GFM sessions

LM could increase licence fees but provide “free” consulting services on how Group

Fitness members can be increased

Examples of Assistance LM Could Provide

Provide GFM Modules Provide Marketing Resources

Provide Adhoc Consulting

© 2007 les mills international limited shifting the focus to value

Documents

price slide

club average price

value slide

mills programs

potential average price

average prices

price clubs pay

average price despite