Power World Nailed The Affordable Gym Model. It Is Now Taking It To India
It was late 2015, and the former Sri Lankan record holder for the shot-put and discus events Talavou Alailima had just three weeks to get his IPO finalized by the CSE. He had spent the past several months restructuring and preparing his company for just this moment, a last ditch effort to get financing, when he received a call from India.
A broker who had contacted him on occasion via LinkedIn told him that Talwalkars, the fitness industry market leader in India that recorded revenue of $36 million last year and has a market capitalization of $83.6 million, was interested in investing in Alailima’s Power World, Sri Lanka’s market leader. Three days later, a Talwalkars representative flew down and was given a tour of the facilities and finances; they wanted to deal.
“I knew these deals take at least three to four months and I was expecting CSE approval in three weeks,” recalls Alailima. So Talwalkars arranged to do it in two weeks, agreeing to a 49.5% stake in the business for an undisclosed sum that will fund 50 new gyms each in Colombo and its suburbs, and outstation within the next two to three years, with 10 new gyms already opened in the Greater Colombo area in March, as well as certain monies towards the payment of a significant portion of its debt that had been dragging Power World down since its beginnings. Alailima expects the expansion to cede 100% growth in year-on-year revenue.
Since 2011, Alailima, tall and still built like an athlete, had been working hard to find an investor to take his business forward. Power World had seven gyms – in Nugegoda, Dehiwela, Ward Place, Kalubowila, Maharagama and Longdon Place – and was stuck, despite its high EBITDA margin, dragged down by debt accumulated since inception. Alailima says that each and every one he pitched to in Sri Lanka turned him down. Four years passed before he decided to list the company in 2015, ready to relinquish even a controlling stake. His investment advisor Navara Capital, however, felt 20% would be adequate to raise the capital required for expansion, especially as Power World’s debts were now held under Alailima’s name to make it a more attractive offering in the stock market. “It was my private assets securing the debt,” he explains.
It is a model that has been sculpted and tested over a decade, delivering over 50% EBITDA consistently and annual revenue growth of about 35% over the last five years
Alailima’s Power World model is highly viable as an affordable gym that offers a value-for-money proposition to the middle-income class. It has no air conditioning or hot showers, and bringing your own personal trainer is not allowed, but has great equipment and certified personnel who can customize your routine to help achieve your fitness goals. (In comparison, Talwalkars caters to a higher income crowd, offering gyms, spas, aerobics and health counseling at ‘health centres’.) Each gym averages 4,000 sq feet of floor space and is designed to cater to a membership of over 1,000; Power World has already amassed a membership of over 12,000, with over 350 joining each new gym in the first two months alone. The big costs are rent and salaries, while depreciation hovers at 12.5% per annum on the initial expenditure. It is a model that has been sculpted and tested over a decade, delivering over 50% EBITDA consistently and annual revenue growth of about 35% over the last five years. Alailima is confident that it will work as a middle-class offering in any emerging market economy; Talwalkars is certainly convinced and not only because this is its first investment outside of India.
In April, Mumbai Stock Exchange-listed Talwalkars approached Alailima about incorporating Power World India in a 50:50 partnership with Power World Sri Lanka. Power World India will initially take Alailima’s affordable gym model to Bangalore and New Delhi, launching 20 gyms in each city by September. The Sri Lankan partner will provide the knowhow and run the operation, while Talwalkars pays for the expansion process until Power World India is stable and holds on to the assets until its subsidiary is in a position to get them released. The rising middle class and the lack of an organized presence in the particular market segment make India a ready market, and the partners are hungry to capitalize. They envision 1,000 gyms over the next three to five years, increasing market penetration from a mere 0.2%.
India, while being a huge opportunity, is however only the first country earmarked for expansion. “We are basically looking at a global impact. Start with the region, then Bangladesh, Indonesia, the Philippines, but also Africa and South America … everything is game for us.” The global fitness industry is still relatively young. Even the US, the most mature market in the world, has a paid-for gym membership market penetration of 16.6%, with Europe even lower. Although no official data exists, Alailima believes market penetration in Sri Lanka is only 0.5%. Nevertheless, Alailima predicts that the industry is on the cusp of a boom in emerging economies, with his affordable gym model perfectly suited to cater to the demand. “We have a 5-10 year window of opportunity when we can really capture these markets and be the market leader; the next five years is going to be about expansion.”
Taking a bank loan to finance Power World’s expansion was not an option for Alailima,having been badly bitten by banks early on and still paying for treatment — although he is quick to stress that he is grateful for having been granted loans at all when he started out as a 23-year-old undergraduate on a leave of absence from Franklin & Marshall College in Pennsylvania. When Alailima began Power World in October 1994, he had “no clue about business” and no money. But someone was kind enough to point out that a bank loan would fund 60% of the cost and he could get someone else to invest a certain percentage, and still retain control of the business.
In the mid-90s, the idea of a gym where the average person would pay and go to work out was unheard of in Sri Lanka. The only gyms that did exist, apart from the one run by the Sports Ministry, were found in hotels and reserved for in-house guests. The US had the only mature market, accounting for a three-decade-long history; the mainstream fitness industry had not even reached Europe yet. Alailima was insistent on catering to the middle-income class, although he could have done better financially by catering to higher income classes, and offering extra amenities, ambience and some pampering. Instead, single entity competitors jumped into the space to cater to this niche market, as did hotels. It was also a period when the civil war was in full swing and bombs could go off anywhere at any time, and working out at the gym to stay healthy was the last thing on the mind of an average person.
Understanding that a bank was unlikely to lend Rs10 million – the amount he required to start the business during a period when the US dollar was trading at around Rs40 – to a rookie at a time when billion-dollar valuations for startups run by newbies was not foreseen even by sci-fi writers, he filled the board of his company with his economist mother’s friends to lend credibility. The loan came through and his mother, in turn, gave him her Rs800,000 in savings; further funding was hard to come by. Despite being undercapitalized, he plunged headlong and the first Power World gym was opened in a rented space in Pamankada.
“I finally had this state-of-the art masterpiece on display. I had overspent and owed everybody. I had relied only on word of mouth. I had priced it at about Rs500 a month/Rs6,000 a year. I had no business experience, only a passion for fitness. On the first day, people came and looked, but no one joined.” His first two customers only joined at 8pm on the second day, but that set the ball rolling, and soon there were over 50 members.
By the third month, however, the UDA gave him notice to shut down the gym for having put up an unauthorized structure by extending the existing building. “I had no clue about building regulations so I had gone and extended the building across the driveway,” he chuckles. Not wanting to move so soon after launch, the young fitness upstart took the UDA to court instead, a battle he fought for three years before giving up, and more importantly, adding heavily to his costs.
In the meantime, the banks had got enthusiastic and encouraged him to open new gyms, offering 80% of the full cost. “I had no clue how it was going to come back to bite me later. Debt-to-equity ratios were not in my horizon at that time.” In 1995, he opened a second gym in Colpetty, again undercapitalized, and was looking to open a third with some equipment he had in excess. The ‘legacy headaches’, as he describes it, however would dog and drag down his every move for the next two decades.
Alailima was insistent on catering to the middle-income class, although he could have done better financially by catering to higher income classes, and offering extra amenities, ambience and some pampering
Desperation, they say, breeds innovation. Alailima was searching for ways to pay the bills heaped on his desk when he hit on ‘horizontally and vertically segmenting’ from a price perspective based on day,gender, age and time of day; this had not been done anywhere else in the world at the time. “I saw that the gym was empty during the day and figured I could give a better price for that time and fill it. I started segmenting very fast” – a practice that Power World continues to this day. Compounding his challenges, he also found that some of his employees were ripping him off, maintaining two membership books and siphoning off fees.
“It was a huge learning curve. I believed that there was a market and I was holding ground. I felt the idea was solid, but I couldn’t take advantage of it.” He worked on refining his gym model, experimenting and reevaluating everything from suppliers to floor space even as the banks leaned down heavily on him; luckily for him, no one bothered to move into this space, giving him sufficient time to carve out the working model to perfection. “Maybe they saw how much I was struggling and were dissuaded from getting in,” he jokes.
By early 2000, Alailima had sculpted the gym model that he was confident would translate in any emerging economy. He knew the floor space and the space required between machines for optimal traffic floor, the number of each machine required, and how much one should spend to create a highly viable middle-income offering. Banks were still baying at his doors and he was channeling profits to pay it off, describing himself at the time as the best employee of the banks, paying over interest ranging from 18-25%. From the outside, it was difficult to comprehend that Power World had become, in fact, highly profitable – “People outside only saw me not moving and probably thought we were not profitable. If it wasn’t, it would have sunk under the weight of the debt.”
Alailima believes his hard road to learning will make for a large advantage going into India. “I know each every step of the process intimately and in-depth.” But everything comes at a price. “Figuring out how to make this work was a very hands-on experience that took years. During this time, I lost my young adult life. Even now, my best friends are in their 70s because those were the people I had to spend time with at that time, they came with me to the banks, spoke on my behalf…”
A pioneering spirit, coupled with consistently being ahead of his time, is a space that Alailima is comfortable to occupy, while acknowledging the accompanying pain
Alailima’s pioneering spirit has not been confined to PowerWorld. By 2005, frustrated at the lack of affordable sports supplements in Sri Lanka, he began manufacturing high-performance sports nutrition supplements under the brand EDGE. Raw materials were imported from different countries, put together in a factory in Sri Lanka and sold at affordable prices. “I’d hear amazing stories, like the farmer’s son taking it before going to the wela,” he recalls. In 2008, he launched the Lion Warrior programme, using his expertise as a strength training and sports nutrition consultant, and former medal-winning sportsman, to transform national athletes into world-class athletes.
He also pioneered the Sports Unleashed programme, an algorithm he wrote for children aged 9-11 to identify the sport that they are best at so they don’t give up sports early. Ninety percent of school children drop sports by the age of 15, says Alailima, when the benefits of winning and losing matters as character development takes place — the agony of defeat, the ecstasy of winning, perseverance, determination, team playing and multitasking. Fifty percent of the top CEOs of the world have done sports at the highest level at high school, and if you can help a child discover their true capabilities, they are far more likely to continue beyond 15. Yet another first for the world, he has already conducted the test in a few schools and plans to give it for free “because people don’t understand what it does, and by the time you’ve answered all their questions, you’ve probably given it away anyway”.
A pioneering spirit, coupled with consistently being ahead of his time, is a space that Alailima is comfortable to occupy, while acknowledging the accompanying pain. “It’s difficult. People think you’re crazy,” he concedes, adding, “I think I’m very comfortable in that place. I always prefer figuring out things people haven’t figured out. Like going places where no one has gone before. That’s where the real opportunity is, where people think there is no opportunity. Today, I have capitalized quite a bit from being the first.”
Alailima is highly appreciative that it was a fitness company that chose to invest in Power World and describes his relationship with Talwalkars as excellent, not interfering or applying undue pressure. “When I said I want to put up 50 gyms, people said it took me 20 years to do seven, so to do two or three. There were reasons for my not being able to do it before: the economic downturn, the artificially depressed economy, the bombs that were always going off. If Sri Lanka had been booming, Power World would probably have had 100 gyms by now. But when I told Talwalkars I want to build 100 gyms, they believed in me. They said ‘You can do it because we did it’. I always knew what I was doing, but it was nice to be acknowledged at the end of the day.”