Craig Benson: Well, what we’re doing is we’ve gone from grace periods to cure periods. The grace periods were sold somewhat ambiguous as far as when you need to cure it by. The cure period is less. But the cure period gives you six months from the date you’re supposed to deliver something to fix it. And so that does push a number of different obligations perhaps out of 2024 if you’re using it that way. But the cure period is a cure period and it needs to be cured in that period of time. So, there may be something there. But I’ll add the following. If I see a good location, this is me speaking for me, I am not going to pass on it, because I mentioned earlier, 98% of retail space is leased, you can’t find space anywhere easily anymore.
And it’s become quite an exercise to try and find those good retail locations to be able to occupy and that’s in spite of some hard times for a few different brands. But as you know, we are one of the three biggest consumers of space in the retail industry. So, we need [indiscernible] to make it work and if it’s hard to find that does slow the ship down. In addition, what used to take six to nine months to develop a new club is now 12 to 14 months, so that pushes it as well. And so there is a lot of dynamics going on in the marketing of our clubs and the building of our clubs and what have you, and we’re having to adjust to some of that. But I think the cure periods will be very helpful, especially in the longer term to having tighter time lines to be able to develop boxes in different territories.
Tom Fitzgerald: And Max, I would add one thing. We ask franchisees to opt in or opt out by the end of 2023 to the new plan. And as we’ve said, essentially all stores, but two one-store operators have – did not. And I would say that was full depth detail. We then had to follow-up with contracts and they have to work through it, and that’s going to take a couple of months to finalize all that. So, that’s more like ocean depth detail if that makes sense. So, what happened by the end of the year was just the beginning of it. We had to do some more work with the contracts that they’re now getting exposed to and to Craig’s point about the lead times. So, we feel really good about what we’ve done. The reception has been beyond what we expected.
It’s just a matter of at all playing through, but it’s not an increased level of ambiguity. It’s not like we’re lessening, and it’s also true that most people were on or ahead of their schedule. So, they’re not – there is no makeup period here that they are sort of accelerating through. Hope that makes sense.
Max Rakhlenko: No, that’s great. And then just quick last one to Craig’s point on real estate. I guess, why shouldn’t we think that the real estate issue is only going to potentially get worse as time goes on? A lot of the growth retail is sort of in that same size box that you guys are looking for 98% of the real estate is accounted for as Craig said earlier. So I guess, how should we think about that ahead? And why would the headwind potentially ease at some point in the future?
Tom Fitzgerald: Hi Max, I’ll start that one. So I think the combination – and you’ve seen all the stuff, whether it’s CBRE, JLL, all the folks are saying the same thing, I think CoStar. I think the building of new real estate was definitely at sort of record lows through 2020 through 2023, new strip centers, the stuff that’s available, we’re not really interested in. We don’t do a lot of malls unless they are getting blown up and created more to look like a lifestyle center. We also don’t do a lot of office stuff buildings. That’s just not – where there’s a lot of that available. So, it’s really what are we after now. So, we think as rates lower as demand continues to grow from folks like us and others, TJX and other people are looking for similar sites that will ultimately improve.
It’s just going to take some time. And I would say the other part is the interest rates. As the interest rates lower, whether that’s four moves, three moves, whatever, but over the next couple of years, we anticipate lower interest rates. So, all that will be a tailwind. The other thing is there are some folks who are walking away from their boxes and some of those work for us and some of those don’t. We’ve talked about Bed Bath & Beyond. We’ve got some of those, so – in our Corporate segment, some of our franchisees do too. Rite Aid recently announcing some of those spaces work for us, parking fields have to be big enough, there is a lot of stuff to work through. But as some of that happens, that also help. It’s just we’re still taking down a lot of real estate, it’s just in a tightening environment.
And we think law of supply and demand will ultimately recalibrate to maybe look like what it was pre-COVID. It’s just going to take some time. These are not – these are ocean liners sort of changes, not cigarette boat.
Max Rakhlenko: Got it. That’s very helpful. Thanks a lot.
Tom Fitzgerald: Thanks, Max. Appreciate it.
Craig Benson: And Max, I’d just add one more thing. So, 14 million square feet of space came in retail space last year, which was half what was the projected demand. So, it’s a problem that we need to work through, but I agree with Tom. Supply and demand usually works itself out once the market understands that there is a need that’s not being upheld.
Operator: Your next question comes from Rahul Krotthapalli with JPMorgan. Please go ahead.
Rahul Krotthapalli: Good morning guys. Thanks for taking my question. Craig, you laid out some breadcrumbs at ICR talking more about the smaller format stores being a real possibility and you talked a little more about it today. You said previously that this will address the current real estate constraints, increased convenience and touch the trade areas, which were not addressed before. Can you help us think through the format and then also give us a little more insight on this infill strategy and what this could be a potential addition to the TAM? And I have a follow-up.
Craig Benson: Yes. Rahul, let’s – we are actively working on different format clubs. And Tom mentioned or maybe I did in the opening comments, for infill opportunities, but perhaps even more for smaller population areas that we, in the past couldn’t get into because we need a bigger population. And we are actively working with some of our franchisees to develop those clubs with them. We’re working right now with schemes to be able to do those clubs. And I am hopeful that we can add those as opportunities to our pipeline sooner rather than later. But we have to look at all opportunities. And again, this has nothing to do with the upsizing that we did the exercise for. That stands on its own those are the more traditional clubs that we did a survey on.
But these would be new opportunities and the huddle we had with the franchisees in mid-October, I talked about Beaver Dam, Wisconsin. Beaver Dam, Wisconsin has 20,000 population and a 40-minute drive time, and we couldn’t go in there in the past. So, to find a way to be able to enter Beaver Dam, Wisconsin and make it successful for the franchisee that has that club is one of the goals I have to enable us to be in places we couldn’t be in the past.
Rahul Krotthapalli: That’s helpful. And the follow-up is on international and M&A. Previously, it was contemplated if M&A can be a potential consideration to enter new markets even in Europe, given your brand equity possibly even buying an established operator and reformatting stores to Planet Fitness brand, did you take this strategy further at all or have any conversations post 2020? And if not, can you also talk more on leveraging the brand equity to organically compete against low-cost providers like Basic-Fit, which I think has like almost 200 clubs in Spain today and also AltaFit. So, I am just curious on your thoughts there.
Tom Fitzgerald: Yes, I will start that one, Rahul. So we have, as you can imagine, given our position in the industry, we’ve had in the U.S. and internationally, a whole bunch of brands come our way. As we’ve looked at it, what’s tricky about it is, pick your brand in Europe. If we buy it, we’re buying members who basically belong to gyms that are pretty aggressive in how they work out. They are definitely not our environment. Some of them have tire flipping areas, big weights, not a lot of cardio, a lot of strength, some even have boxing rings you’ve heard us talk about. So if we buy it, we’re buying the asset, we have to spend a fair amount of money to redo the box. If they have a pool, we got to take that out, there is a lot of dollars that get invested in that.
So we’ve paid to buy the company. We’re paying to reformat the stores and we’re likely going to lose a lot of the members. There’s not – we’re essentially buying the box itself and then spending a lot of money. We just think – plus we have to then change the brand and all that. So, as we’ve looked at it, we’ve tried to make it work. We haven’t yet found a case where it makes sense. So instead, what we’re doing in Spain is we’re taking a fresh start, where we’re going to build some stores, get it going and then refranchise them. We think it’s an attractive market. We think while Basic-Fit and others have and AltaFit, we’re familiar with all these folks, they have a presence. They just don’t do what we do. And so just like the U.S. had a bunch of people who do what they do and then we came along and disrupted the industry, we still haven’t found anybody who does what we do and appeals to the first time casual gym goer getting people off the couch.
And you’ve heard us talk about the penetration in the U.S. is among the highest. There is only one other small country that’s higher. So all these other countries have lower percent of the population participating, we think that’s because it’s intimidating and it’s expensive. And we break those barriers down. So we’re excited about it. We think Spain is a great opportunity. And our balance sheet allows us to put a little capital in play to accelerate where our presence would get to in a few years versus where a new franchisee would be able to get it to.
Rahul Krotthapalli: Thanks, Tom. That’s really helpful, and we’ll miss working with you by the end of this year.
Tom Fitzgerald: Thank you. I am still around for a little while, so you haven’t got ridden of me, but I appreciate that.
Operator: Your next question comes from Joe Altobello with Raymond James. Please go ahead.
Joe Altobello: Thanks. Hey guys good morning. The first question on the member base, as it continues to get younger, are you guys seeing any difference in average lifetime value between your younger and older member cohorts given the lower Black Card penetration rates? I’m not sure how the cancel rates might differ.
Tom Fitzgerald: Yes, I can start then and Craig may add. Joe, it’s still incredibly attractive for a Gen Z contract value for their membership. It is a little bit below where it is on average, only to your point, because when they’re younger, their Black Card mix tends to be lower. But you’ve heard us talk about as we look at the different ages within Gen Z, there are step function changes in their Black Card penetration as they age in. And once they get to their 20s, they look much more like the average of roughly 60% of them are Black Card members. So, we’ll take that trade all day long, because the contract value, even with a slightly lower Black Card mix is still many orders of magnitude above the cost of getting a new member.
Joe Altobello: Got it. Very helpful. And maybe just a follow-up, the 5% to 6% comp growth, and thanks for clarifying that, by the way, is the composition of that still expected to be roughly 75% to 80% member growth? And does it assume the $15 Classic Card pricing test becomes permanent this year’s?
Tom Fitzgerald: Yes, that’s a good question, Joe. It is still predominantly member growth driven and it assumes the current pricing that we have in the country does not assume we roll any new price test nationally.
Joe Altobello: Okay, great. Thank you.
Tom Fitzgerald: You bet.
Operator: Your next question comes from Sharon Zackfia with William Blair. Please go ahead.
Sharon Zackfia: Hi, good morning.
Craig Benson: Hi, Sharon.
Sharon Zackfia: I appreciate all the color on what’s going on. I am also interested at, though, in the partnership side of the equation, as you’ve expanded that. How pertinent have those partnerships been to getting new members or getting them to trade up to Black Card? And concurrently with that, have you explored any opportunities to kind of tap into what’s happening with GLP-1s and the need there to build muscle mass and it seems like as a convenient, low judgment club that you would be well poised to benefit if this does become a more prevalent trend.
Craig Benson: Yes. Let me start with the last question. So, the weight loss drugs that are now available, clearly present an opportunity for us to teach people how to maintain their muscle mass and in fact, enhance their weight loss journey by being healthier about it, but also speeding it up because, as you know, exercise helps burn off calories, too. So, we see that as an opportunity. We have some plans in place to develop a few things to augment what we offer in a club to those type of people. It’s still not a big portion of the population. I believe there’s only four million prescriptions right now, but it’s clearly gaining a lot of momentum. I’d also say that traditional weight loss drugs are fairly expensive for our members. So I’d say, on an average basis, our membership perhaps is lower users of that because of the affordability factor. I’m sort of [indiscernible].
Tom Fitzgerald: [Indiscernible]
Craig Benson: The perks continues to be a nice add-on to what we offer, our members. And in some ways, we hope that over time, it’s an anchor for them to maintain their membership. We’ve seen small takedowns on that and small additions to those using it to keeping their memberships for a longer period of time than the average. I still think we’ve got a lot of work to do in that area to make it as complete as it possibly can be for the lifestyle needs of our members. In the past, we’ve used products, but I believe there is also services we could augment whether it’s insurance or mortgages or what have you that people use on an all-the-time basis versus a onetime purchase thing.
