Rizap Group Inc. (“Rizap Group”) is a holding company with 72 consolidated subsidiaries (six of which are listed) as of March 2021. The group’s core company is Rizap Co., Ltd. (“Rizap Co.”; operates Rizap personal training gyms focused on weight loss).
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Executive summary
Business overview
Overview: Rizap Group Inc. (“Rizap Group”) is a holding company with 72 consolidated subsidiaries (six of which are listed) as of March 2021. The group’s core company is Rizap Co., Ltd. (“Rizap Co.”; operates Rizap personal training gyms focused on weight loss). The group has grown through acquisitions, mainly of companies in the self-improvement industry. The company interprets “self- improvement” broadly; subsidiaries’ businesses are diverse, ranging from the sale of shapewear (body-shaping underwear) to the operation of stores selling CDs/DVDs, apparel, and variety goods to the publication of free newspapers.
Started with diet foods, launched the Body Making business in 2012: Takeshi Seto, president, established the company in April 2003 at the age of 24. The company got its start selling supplements, but performance was lackluster. However, one of the items the company had previously given out for free, a soy milk-based cookie, began selling well as a weight-loss food. The hit product helped boost sales above JPY10.0bn in the company’s fourth year, but sales of the cookies waned as competition grew. Later, the company experienced boom-and-bust cycles for other products, such as a facial massager using periodically replenished consumables, and a clay-based soap. In 2012, the company launched its current core business, the Rizap Body Making business (operation of Rizap personal training gyms). The catchphrase “Commit to the result®” and television commercials highlighting celebrities’ weight loss using Rizap have boosted the company’s name recognition, driving performance.
Rizap Body Making business: Consolidated subsidiary Rizap Co. operates personal training gyms (129 locations as of March 2021, some of which are overseas). In FY03/18, Rizap Co. generated revenue of JPY25.5bn (21% of consolidated revenue) and pre-tax profit of JPY2.2bn (J-GAAP). Excluding gains on negative goodwill, this amounted to 70% of consolidated operating profit (IFRS). With the Rizap service, a personal trainer provides guidance on exercise and diet, helping customers to lose weight and develop healthier bodies in a short period of time (two months). Rizap differs from general sports gyms in a number of ways. It emphasizes weight training and sugar restriction, but more notably, the coaching its trainers provide extends to daily nutritional guidance, encouragement, and praise when clients meet their targets.
Business model of the Rizap Body Making business: (Revenue = members x spending per customer). As of March 2021, cumulative members numbered 163,000 (+16,000 YoY). A two-month/16-session program (before tax, including enrollment fee) is priced at JPY348,000. If the customer elects to continue, a further two-month/16-session program costs JPY298,000 (before tax). The six-month retention rate is 45.6%. On average, members remain active for six months, and revenue per member comes to JPY600,000 to JPY800,000, including sales of supplements. As spaces are smaller and equipment more limited than at general, comprehensive sports gyms, return on investment is swift. Spend per customer is high, so GPM is 60–70%. Advertising makes up the majority of SG&A expenses, and OPM is 10–20% (Shared Research estimates).
Expanded through acquisitions, made M&A mistakes, and restructured: The company listed its shares in May 2006. At JPY2.4bn in FY03/06, consolidated revenue had grown to JPY169.6bn by FY03/21. Revenue growth from the Rizap Body Making business was a major reason for this growth. Aggressive acquisitions also played a key role. As mentioned above, the company vigorously acquired companies in the loosely defined “self-improvement industry” from FY03/16 to FY03/18, and business diversified. However, this rapid M&A led to slower improvement of subsidiaries’ performance, and in FY03/19 the company recorded an impairment loss, a loss on retirement of non-current assets, and a JPY19.4bn loss attributable to owners of the parent. To improve management quickly, the company announced it would pare back its subsidiaries, shrinking, withdrawing from, or selling those that did not deliver good return on investment or improve profitability. The company also plans to reinforce governance and has declared a general freeze on M&A.
Revenue and profit structure: Rizap-related businesses include Rizap Co., the group’s core subsidiary, and related products. (In FY03/20, revenue from Rizap-related businesses stood at JPY40.1bn. Shared Research estimates operating loss, which the company does not disclose, at JPY2.0–3.0bn.) Wonder Corporation (TSE JASDAQ: 3344) operates CD/DVD stores (FY03/21 revenue of JPY56.0bn, pre-tax profit of JPY954mn). MRK Holdings Inc. (formerly Maruko; TSE2: 9980) manufactures and sells shapewear (FY03/21 revenue of JPY18.3bn, pre-tax profit of JPY462mn). Other subsidiaries include IDEA International Co., Ltd. (TSE JASDAQ: 3140), which imports and sells variety goods; HAPiNS Co., Ltd. (formerly Passport; TSE JASDAQ: 7577), which operates variety stores; Dream Vision Co., Ltd. (TSE Mothers: 3185), an online apparel retailer; Jeans Mate, Inc. (TSE1: 7448), which retails casual wear; and Marusho Hotta Co., Ltd. (TSE2: 8105), which handles fabrics.
Financial condition: As of end-FY03/21, interest-bearing debt totaled JPY84.6bn (versus JPY104.9bn at end-FY03/20), with lease obligations accounting for about JPY41.4bn of this amount. The main reason for the rise in interest-bearing debt was the impact on lease transactions of adopting IFRS 16 (moving store leases onto the balance sheet; payable with cash flow as long as business continues). Excluding this, interest-bearing debt came to JPY43.2bn, and the amount has been decreasing in real terms since FY03/18.
Trends and outlook
For FY03/22, the company posted revenue of JPY162.4bn (-3.7% YoY), operating profit of JPY5.2bn (+228.4% YoY), pre-tax profit of JPY3.5bn (pre-tax loss of JPY525mn in FY03/21), and profit attributable to owners of the parent of JPY2.1bn (+32.5% YoY). Revenue declined in the business that mainly operates brick-and-mortar stores due to closures and shortened hours associated with state of emergency declarations and priority measures for COVID-19 prevention. In terms of profit, all segments were profitable and the entire company posted higher profits thanks to management streamlining measures such as group-wide cost optimization, separation of operations, and improvement of operational efficiency through group-wide workflow optimization.
Rizap is considering its full-year FY03/23 forecasts in conjunction with the formulation of a medium-term management plan for the company's core Rizap Body Making business. Although the company expects to increase both revenue and profit, it has decided that it is difficult to calculate appropriate and reasonable figures as of May 2022, and has therefore decided to refrain from issuing a forecast at this time. It will disclose its full-year forecast for FY03/23 at the time of the Q1 FY03/23 results announcement.
Strengths and weaknesses
Shared Research sees Rizap’s strengths as 1) development, success, and recognition of the Rizap method for closely guiding customers toward their goals; 2) expansion into other business domains by leveraging expertise in the Body Making business and exhaustively pursuing related opportunities; and 3) motivation to succeed in acquisitions. We believe its weaknesses are 1) current measures insufficient to prevent M&A mistakes from recurring; 2) effectiveness of the Rizap Body Making business leads to a low retention rate; and 3) management’s risk appetite when targeting earning opportunities. (See the “Strengths and weaknesses” section.)
Key financial data
Note: Figures may differ from company materials due to differences in rounding methods.
Note: The figures shown for FY03/20 results differ from those reported by the company in its official earnings report released in June 2020 owing to the increase in revenue and earnings reported under “discontinued businesses” following the sale of the company’s interest in SYS Inc., Hokuto Printing Co., Ltd., and Nihon Bungeisha Co., Ltd.
Note: In November 2021, the company announced partial corrections to past financial statements from FY03/19 through FY03/21. The above table is based on data prior to these corrections.
Recent updates
Notice of reorganization of group companies in Lifestyle segment
Rizap Group Inc. announced the reorganization of group companies in its Lifestyle segment.
The Lifestyle segment comprises mainly subsidiaries REXT (encompassing Wonder Corporation, HAPiNS, and Jeans Mate) and BRUNO. Since REXT needs to undergo major restructuring and shift to a more profitable business format to ensure its business continuation, Rizap Group will conduct the following corporate restructuring.
REXT subsidiaries Wonder Corporation, Jeans Mate, HAPiNS, and other group companies in the Lifestyle segment (except BRUNO) will be consolidated and reorganized into REXT Holdings (which will serve as an asset management company with headquarters functions) and REXT Inc. (which will serve as a business management company), with an effective date expected to fall in June 2022. However, the business of HAPiNS related to the development, manufacture, and sale of household goods centered on kitchen appliances, will not be included in this reorganization.
BRUNO will absorb the restructured HAPiNS (whose main business will be the development, manufacture, and sale of household goods, centered on kitchen appliances), with an effective date expected to fall in June 2022.
On the same day, Rizap Group announced the resolution of "significant developments affecting going concern assumption."
In FY03/20, the company recorded operating loss and net loss attributable to owners of the parent for the second consecutive fiscal year, due largely to the COVID-19 outbreak. As a result, it was in breach of financial covenants in its loan agreements with financial institutions. Starting with its financial report for FY03/19, the company therefore stated that there had been developments that may raise significant doubts about the company's ability to continue as a going concern.
In FY03/21, the company posted operating profit and net income attributable to owners of the parent for the first time in three years, and went on to maintain a profitable position in FY03/22. This means that, as of May 2022, it is no longer in violation of the financial covenants in its loan agreements with financial institutions for significant loans.
Trends and outlook
Quarterly trends and results
Note: Figures may differ from company materials due to differences in rounding methods.
Note: Companies categorized as discontinued operations: Japan Gateway Co., Ltd. and Tatsumi Planning Co., Ltd. in FY03/19, Tatsumi Planning Co., Ltd. and Tatsumi Management Co., Ltd. in Q1 FY03/20, Pado Corporation in Q3 FY03/20, Misuzu Co., Ltd. in Q4 FY03/20, SYS Inc. and Hokuto Printing Co., Ltd. in Q3 FY03/21, and Nihon Bungeisha Co., Ltd. in Q4 FY03/21.
Note: In Q2 FY03/22, Act Co., Ltd. was reclassified as a discontinued operation.
Note: Figures may differ from company materials due to differences in rounding methods.
Note: “—” denotes a YoY change of more than 1,000%.
Note: Net increases are in comparison with three months earlier.
Note: FY03/19 was a 13-month period due to a change in the accounting period.
FY03/22 figures reflect the combined figures of Wonder Corporation and Tsutaya (under REXT Inc.)
Note: BRUNO’s fiscal year ends in June. Shared Research has adjusted the figures to a March year-end by using quarterly results.
Consolidated results for full-year FY03/22
* Profit/loss attributable to owners of the parent
Revenue declined YoY. The non-face-to-face businesses, including e-commerce, were unable to offset the decline in revenue at bricks-and-mortar stores, resulting in a company-wide decline in revenue. Revenue in the businesses with operation of bricks-and-mortar stores declined due to store closures and shortened business hours in accordance with the declaration of the state of emergency and quasi-emergency measures related to the pandemic. On the other hand, in the e-commerce domain, the company's focus area as a new revenue source, the company implemented initiatives to share the best practices of Auntie Rosa, which successfully converted to e-commerce, and BRUNO, which achieved a record e-commerce revenue, across the group. As a result, e-commerce revenue increased at a number of group companies, including HAPiNS, where e-commerce revenue grew by about 1.8x YoY, and Jeans Mate, where e-commerce revenue grew by about 1.5x YoY.
Rizap's earnings structure improved following management reforms, resulting in profitability in all segments and increased profits across the board. The company implemented management streamlining measures, such as group-wide cost optimization, separation of operations, and improvement of operational efficiency through group-wide workflow optimization.
Breakdown of results by segment
Healthcare and Beauty segment
The segment's main businesses are the Rizap-related businesses and MRK Holdings.
In the Rizap-related businesses, sales and profits rose. The company continued its initiatives from FY03/21 to optimize costs and improve earnings structure, including promotion of remote work for head office employees and reduction of rental costs through sharing offices with group companies.
MRK Holdings reported revenue of JPY18.7bn (+2.2% YoY) and operating profit of JPY588mn (-3.9% YoY). At its women’s underwear and related businesses, MRK Holdings saw a good response to its new colors and limited-time offer of special products for its mainstay shapewear products. Its new M.B.M.S. (Maruko Beauty Make Supplement) business selling doctor-recommended original supplements also saw growth in revenue. In terms of profit, operating profit under J-GAAP decreased, but operating profit under IFRS increased due to a smaller impairment loss than a year earlier and optimization of advertising expenses.
Lifestyle segment
In April 2021, the company brought the core subsidiaries in the Lifestyle segment—Wonder Corporation, HAPiNS, and Jeans Mate—under the umbrella of REXT Inc., a newly formed holding company.
Wonder Corporation: Wonder Corporation opened APORITO outdoor specialty stores within some WonderGoo stores. The company worked to improve profit margins through the rollout of new stores combining the recycled goods specialty store WonderREX, the entertainment specialty store WonderGoo, and the trading card specialty store Ganryu. In this manner, the company continues to open new stores with formats designed to better meet customer needs while also making over existing stores.
HAPiNS: Focused on product development of its original character, Fuku Fuku Nyanko, and worked to expand its lineup of profitable private brand products. It augmented various marketing initiatives to enhance character IP content such as LINE stamps. Fuku Fuku Nyanko accounted for 56.4% of total revenue (+17.5pp YoY). In its online business, the company opened new stores in online malls, invested in internet advertising, and released special offerings available only to online shoppers. As a consequence, online sales grew 78.2% YoY. At bricks-and-mortar stores, the company strove to improve finances through cost optimization.
Jeans Mate: Having focused on e-commerce business, sales increased 38.4% YoY due to strengthened efforts in various web sales promotion measures and expansion of dedicated products.On the other hand, bricks-and-mortar stores continued to struggle due to sluggish consumption and changing customer preferences, despite efforts to recover traffic. In addition, on the back of initiatives to fortify private brand products and increased promotions, private brand products accounted for 60.1% of sales (+15.4pp YoY).
BRUNO: For April 2021–March 2022 (adjusted to a March year-end), BRUNO reported revenue of JPY17.2bn (+1.3% YoY) along with operating profit of JPY1.2bn (-13.8% YoY). In the merchandise brand BRUNO, sales of kitchen appliances such as the mainstay compact hot plate increased YoY due to distribution through TV programs and social media. Overseas revenue increased owing to heightened recognition of the BRUNO brand through advertising in Taiwan. Revenue in the Milesto travel product brand declined. In terms of profit, the company worked to reduce fixed costs through cost cutting, but profit decreased due to increased advertising to improve brand awareness.
Investments segment
SD Entertainment reported revenue of JPY4.0bn (+8.9% YoY) and an operating loss of JPY75mn (versus loss of JPY270mn in FY03/21). The company implemented structural reforms centered on the reduction of interest-bearing debt, selection and concentration of businesses, and liquidation of unprofitable stores.
In the fitness center business, the mainstay of the wellness business, the company changed its business format from a "comprehensive-type" to "24-hour type" and "365-day type," and closed some stores where improvement was overly challenging.
Revenues from the childcare business rose YoY amid steady growth in capacity utilization at new facilities opened since FY03/21.
Dream Vision reported revenue of JPY5.0bn (-17.8% YoY) and operating profit of JPY27mn on an IFRS accounting basis (versus loss of JPY450mn in FY03/21). The mainstay apparel business reported a decline in revenue but growth in profit. GPM increased as a result of the withdrawal from unprofitable stores at the consolidated subsidiary, focusing on securing profitability, and the curbing of unnecessary discounting through the implementation of more flexible sales price measures for each product. Revenue in the jewelry business increased, but revenue and profits declined in the toy business.
Marusho Hotta reported revenue of JPY3.7bn (-2.0% YoY) and an operating loss of JPY174mn (versus loss of JPY536mn in FY03/21). The company achieved increased profits in spite of decreased revenue by promoting the selection and concentration of businesses, the elimination and consolidation of functions, reviewing of expenses, improvement of operational efficiency, and reduction of fixed costs through productivity improvements.
Company forecast for FY03/23
Rizap is considering its full-year FY03/23 forecasts in conjunction with the formulation of a medium-term management plan for the company's core Rizap Body Making business. Although the company expects to increase both sales and profit, it has decided that it is difficult to calculate appropriate and reasonable figures as of May 2022, and has therefore decided to refrain from issuing a forecast at this time. It will disclose its full-year forecast for FY03/23 at the time of the Q1 FY03/23 results announcement.
Medium-term outlook
Plan was to target growth under new medium-term plan from FY03/21, but release of plan has been postponed
In FY03/19, Rizap Group posted a JPY19.4bn loss attributable to owners of the parent, stemming from impairment losses and a loss on retirement of non-current assets. A surge in acquisitions since FY03/14 has led to delays in improving performance at subsidiaries. To improve its own management, Rizap Group has positioned FY03/19 as a period for eliminating negative factors and FY03/20 as a time for building the foundations for growth. To achieve this, Rizap Group plans to shrink, withdraw from, or sell companies it judges unlikely to deliver positive return on investment or that will have difficulties improving profitability. The company is also strengthened governance and put a general freeze on M&A.
In 1H FY03/20, business restructuring expenses were down YoY, so major consolidated subsidiaries Wonder Corporation and MRK Holdings posted higher profits. This led to improved performance for Rizap Group, centered on listed subsidiaries. Also, the adoption of IFRS 16 led to a decrease in rent. As a result, in 1H Rizap Group recorded operating profit of JPY2.7bn (operating loss of JPY5.9bn in 1H FY03/19) versus a full-year operating profit forecast of JPY3.2bn.
In FY03/20, Rizap Group expected consolidated operating profit and profit to turn positive and was positioning FY03/21 as a year for returning to growth. It planned to formulate a new medium-term management plan. However, in light of the impact of the COVID-19 pandemic in Q4 FY03/20, it recorded a one-time valuation loss of about JPY5.9bn on stores and other fixed assets and on inventory. This was the main cause of the JPY752mn operating loss booked in FY03/20 (operating loss of JPY8.4bn in FY03/19).
In FY03/21, the company planned to move to a growth track and make progress toward sustainable growth under a new medium-term management plan, but the pandemic caused the business environment to deteriorate, and the outlook became uncertain. As a result, it turned its attention to responding to the COVID-19 crisis. Specifically, it worked to integrate the common functions of group companies to maximize economies of scale and optimize costs across the whole group. In addition, it worked to develop businesses that do not rely on face-to-face contact and to secure new earnings sources.
The company returned to profitability in FY03/21 with operating profit of JPY1.2bn and achieved YoY gains in monthly operating profit from August 2020 onward. It says that it completed management restructuring in FY03/21 and is steadily responding to the COVID-19 crisis, and will be able to return to a growth track in FY03/22.
Rizap Group has not announced a new medium-term management plan, but has identified BPX (see below) as a key theme for FY03/22. Shared Research understands that new programs (Senior Program and Medical Body Making Program) in the Rizap Body Making business will drive earnings growth.
Promotion of Business Process Transformation (BPX)
In FY03/21, the company continued groupwide cost-cutting measures, while also optimizing costs, enabling the flow of human resources between group companies, and creating businesses that do not rely on face-to-face contact under its ONE RIZAP project for integrating group functions. As a result, SG&A expenses declined JPY11.7bn YoY, including a drop of about JPY11.2bn in fixed expenses. In FY03/22, the company will promote Business Process Transformation (BPX) as follows.
Shared Research understands that the BPX advocated by Rizap Group comprises business process innovation and the building and use of an integrated database.
Business process innovation
The company will implement business process innovation in administrative and business divisions as follows.
BPX in administrative divisions (shift to high value-added operations through selection and concentration of operations)
In terms of administrative divisions, each group company will review its back-office operations, and Rizap Group will work to integrate common functions to streamline groupwide value chain and management support functions, specifically in regard to logistics, human resources, planning, accounting and finance, and systems. In addition, it will work to reduce personnel demand by outsourcing or automating (utilizing BPO and RPA) any non-core operations (including data entry, expense settlement, printing and mailing, sales-related clerical work, design, and document preparation). The company will then use internal resources freed by these initiatives to promote digital transformation (quantification and indexing of best practices and building of an integrated database), develop private label products, and concentrate management resources in e-commerce.
BPX in business divisions (organization and horizontal deployment of best practices)
In terms of business divisions, the company will identify employees who contribute most to the company’s performance from among Rizap Body Making business trainers and sales staff at group companies operating stores. It will then quantify, index, and visualize their conduct, and, where reproducible, endeavor to get all employees to engage in similar conduct. As an example, it plans to quantify, index, and visualize the conduct of trainers who achieve high customer satisfaction in the Rizap Body Making business, and disseminate that information to trainers nationwide for horizontal deployment. Many new members of the Rizap Body Making business are gained through customer referrals. By establishing and sharing best practices, the company aims to improve customer satisfaction and increase the number of referrals.
Building and use of integrated database
Each of the group companies manages its own customer information, loyalty points, and other data. In some cases, they even manage online and offline customer information separately. Rizap Group plans to unify and standardize such data. Furthermore, as part of the ONE RIZAP project, it plans to make it possible for each group company to analyze and utilize customer information, making them able to propose goods and services customers need right when they need them.
For example, if a customer is planning to get married, the company can propose goods and services such as weight-loss training in the Rizap Body Making business or shapewear or wedding venues from MRK Holdings. The company aims to maximize customer lifetime value by increasing the number of contacts with customers who have purchased or used its products and services, serving as a partner throughout their lives, and providing high value-added goods and services.
Performance growth in the Rizap Body Making business
In the past, the Rizap Body Making business has grown through the beauty and diet domain, centering on people in their 20s to 40s. In addition to this area, the company says it expects to drive growth further by adding customers in the healthy living and healthcare domain, focusing on corporate and middle-aged/senior customers.
Beauty and diet domain (Rizap Body Making business)
In the beauty and diet domain, the company aims to increase the number of Rizap Body Making members and step up efforts to attract senior members.
Increase the number of Rizap Body Making members: The number of Rizap Body Making studios expanded from 30 in September 2014 to 123 in June 2021. During that period, cumulative membership swelled from 22,000 to 163,000. Over the medium term, along with this sort of growth the company plans to boost the number of members by making studios more efficient.
Step up efforts to attract senior members: The company’s briefing materials for Q3 FY03/20 noted that people aged 60 and above accounted for 5% of Rizap Body Making members. At general sports clubs, 30–50% of members are 60 or older. (In FY03/21, 45.5% of members at Central Sports Co., Ltd. [TSE1: 4801] were 60 or older. The figure was 35.9% for Renaissance Inc. [TSE1: 2378].) Rizap Group thinks these figures suggests it has room to increase its own 60+ membership, as well. In July 2020, the company launched the Rizap Senior Program, aimed at improving the physical fitness and muscle strength of people aged 60 and older to extend their healthy life expectancy. With this program, Rizap medical trainers assigned to individual customers provide one-on-one guidance and support in training and daily diet. Fees are set at a level similar to the standard training program.
Healthy living and healthcare domain (Rizap Body Making business)
The company plans to carry on joint research with universities in the healthy living and healthcare domain, train and station medical trainers, and strengthen its system for accepting members with illnesses, so that it can bring in customers with lifestyle diseases. Rizap Group will also continue to work with local governments and companies to promote health improvement initiatives.
Connection with medical treatment, improvement in lifestyle diseases: In the past, in the Rizap Body Making business the company focused on attracting members interested in weight loss. As Japan’s society ages, over the medium term the company plans to expand its business by attracting members with lifestyle diseases and helping them improve their health.
Joint university research: The company is conducting joint research with a number of universities and medical institutions. The company presented research it is conducting on the “safety of low-sugar diets” in collaboration with the Institute for Adult Diseases of the Asahi Life Foundation at a conference of the Japan Diabetes Society in October 2018. The presentation was on research results showing that “short-term low-sugar diets for treatment of obesity are safe and effective.” The company also has case studies showing that people with severe diabetes can use Rizap’s method to reduce visceral fat and normalize blood glucose and HbA1c (hemoglobin A1c) levels. According to the Japan Clinical Trial Association, Rizap’s personal training has helped to reverse metabolic syndrome and improve blood pressure, triglyceride, and blood sugar levels.
Launch of Rizap Medical Body Making Program: In November 2020, the company launched its Rizap Medical Body Making Program, in which it creates an original program based on the trainee’s blood test results to improve health-related indicators (weight, body fat, blood pressure, triglycerides, and blood sugar) under the supervision of a physician through the cooperation of a medical institution. The program aims to improve the health-related indicators through one-on-one training with a dedicated Rizap trainer twice a month, weekly dietary guidance by a nutritionist, and management via a smartwatch. There is an enrollment fee of JPY50,000 (before tax) and monthly fee of JPY29,800 (before tax) (conditional on maintaining membership for 12 months). Since the number of times one-on-one training is held is smaller than with other programs, the fees are set lower than for the standard training program or the Senior Program.
Returning to M&A
Rizap Group has positioned FY03/19 as a period for eliminating negative factors and FY03/20 as a time for building the foundations for growth. To achieve this, it moved to shrink, withdraw from, or sell companies it judges unlikely to deliver positive return on investment or that will have difficulties improving profitability. Rizap is also strengthening governance and put a general freeze on M&A. It says it completed management restructuring in FY03/21 and will return to a growth track in FY03/22.
Rizap Group is undecided about resuming M&A activity as it returns to a growth track. However, even if the company resumes such activity, Shared Research thinks it will be more attentive to reducing the risk associated with acquisition-related failures than it has been in the past. A sudden increase in the number of acquisitions between FY03/16 and FY03/18 led Rizap Group to post significant losses. We will be monitoring the company’s analysis of the reasons for these losses, its efforts to reinforce governance, and the functioning of the newly established Investment/Finance Committee.
Reasons past acquisitions failed
Numerous acquisitions between FY03/16 and FY03/18 caused the number of consolidated subsidiaries to grow from 19 in FY03/15 to 76 in FY03/18.
Japangals SC (formerly As’ty)
Angeliebe
Marimura
IDEA International
SD Entertainment
Dream Vision
Tatsumi Planning
Misuzu
Passport
Maruko
Jeans Mate
Pado
Wonder Corporation
Sankei Living Shimbun
Notably, many of Rizap Group’s acquisitions in FY03/17 and FY03/18 generated gains on negative goodwill, which lifted operating profit. Of the JPY10.2bn in operating profit the company generated in FY03/17, JPY5.8bn was from gains on negative goodwill. Similarly, gains on negative goodwill accounted for JPY8.7bn of JPY11.8bn in operating profit in FY03/18. The company says acquiring negative goodwill was not the objective of the acquisitions, but the company did take this factor into its assumptions when making forecasts, and Shared Research thinks it figured into the company pursuing a large number of M&A to generate profit with little emphasis on post-merger integration and synergy creation. Some of the companies Rizap Group acquired were in business sectors in structural decline, such as apparel retailers, free newspapers, and CD/DVD retailers, and had needed to downsize multiple times. After acquiring such companies, performance improved temporarily after unprofitable departments were pared away. Even so, it is unclear whether sustainable management reorganization is possible.
The company says it has learned from its experience of having to record impairment losses on the goodwill generated in past acquisitions, so it tries to acquire companies as inexpensively as possible. The company also believes it can take advantage of the negative goodwill generated when it buys a company at a price below the net asset value, and use the gains on negative goodwill in corporate restructuring.
The sharp increase in M&A activity led Rizap Group to post significant losses in FY03/19, as it was unable to focus sufficient attention on corporate and business restructuring. As the companies it purchased for less than net assets were often understaffed, they required management attention on the personnel front, and Rizap Group says some of its integration efforts were insufficient. The company explains that it knew what elements corporate and business restructuring needed but was unable to allocate sufficient personnel to create management structures at the acquired companies and to then formulate and enact restructuring plans.
The company does not consider the acquisitions themselves to have been a failure. By analyzing the reasons for its failures, Rizap Group believes it can grow through M&A. Shared Research understands this to mean the company intends to recommence acquisitions in the medium term. That said, we understand that the company intends to consider the acquisition frequency and PMI improvement more carefully than in the past.
Strengthening governance and setting up the Investment/Finance Committee
Organizational changes on the Board of Directors:
In FY03/18, the company had 12 directors: a representative director/president/CEO, a representative director/COO, seven other directors, and three outside directors.
As of FY03/19, the Board had six members: five outside directors and only one inside director (President Seto). Since June 2019, Nobuhide Nakaido (outside director, former vice president and representative director of Sumitomo Corporation, as well as former chairman and president of SCSK Corporation) chaired the company’s Board of Directors.
In June 2020, in addition to President Seto, three executive officers assumed director positions, and Tsutomu Fujita (former vice chairman of Citigroup Global Markets Japan) and Masahiro Matsuoka (representative director of Frontier Management) became outside directors.
Investment/Finance Committee: In July 2019, the company set up the Investment/Finance Committee, an internal committee comprising all Board members except the representative director. The committee is tasked with reconfiguring the company’s rules related to investment/finance and M&A. The committee’s role is to deliberate M&A and alliances before they are proposed to the Executive Committee and the Board of Directors.
Rizap Group’s management philosophy and business domains
The group’s management philosophy is “We prove that ‘people can change.’” Its business domain encompasses the self-improvement industry, which targets the top rank of Maslow’s five-tier hierarchy of needs: “self-actualization.”
At the FY03/21 earnings results briefing, President Seto commented that the company aims to introduce products and services that are not mere commodities, but give customers a sense of value and make them self-confident. He defines the self-actualization industry as one that continually provides self-actualization solutions that support customers throughout their lives, rather than just selling goods. Globally, the self-actualization market is worth some JPY250tn.
Business
Business overview
Overview: Rizap Group is a holding company with 72 consolidated subsidiaries (six of which are listed), as of March 2021. Its core company is Rizap Co., Ltd. (“Rizap Co.”; operates Rizap personal training gyms, which aim to help people lose weight). Rizap Group has grown through acquisitions centered on the self-improvement industry. The company interprets the phrase “self-improvement industry” broadly; subsidiaries’ businesses are diverse, ranging from the sale of shapewear to the operation of stores selling CDs/DVDs, apparel, and variety goods to the publication of free newspapers.
Started with diet foods, launched the Body Making business in 2012: Takeshi Seto, the current president, established the company in April 2003 at the age of 24. The company started out by selling dietary supplements, but performance was lackluster. However, a soy milk-based cookie—an item previously given out for free—became a hit when the company modified the recipe and began selling it as a weight-loss food. This product helped boost revenue above JPY10.0bn in the company’s fourth year. Sales of soy milk cookies waned as competition grew more stringent. Later, the company experienced boom-and-bust cycles for other products, such as a facial massager sold in combination with periodically replenished consumables, and clay-based soap. In 2012, the company launched its current core business, the Rizap Body Making business (operation of Rizap personal training gyms). The catchphrase “Commit to the result®” and television commercials highlighting celebrities’ weight loss through Rizap have boosted the company’s name recognition, driving performance.
Expanded through acquisitions, made M&A mistakes, and restructured: The company listed its shares in May 2006. At JPY2.4bn in FY03/06, revenue had expanded to JPY169.6bn by FY03/21. Revenue growth from the Rizap Body Making business was a major reason for this growth. Aggressive acquisition also played a key role. As outlined above, the company vigorously acquired companies in the loosely defined “self-improvement industry” from FY03/16 to FY03/18, and business diversified. However, this rapid M&A led to slower improvement of subsidiaries’ performance, and in FY03/19 the company recorded impairment losses and losses on retirement of noncurrent assets, resulting in a JPY19.4bn loss attributable to owners of the parent. To improve management quickly, the company announced it would pare back its subsidiaries, shrinking, withdrawing from, or selling those that could not deliver satisfactory return on investment or improvement in profitability. The company also plans to reinforce governance and has declared a general freeze on M&A.
Revenue and profit structure: Rizap-related businesses include the performance of Rizap Co., the group’s core subsidiary, and related products. (In FY03/20, revenue was JPY40.1bn, but the company does not disclose operating profit/loss.) Wonder Corporation operates CD/DVD stores (FY03/21 revenue of JPY56.0bn, pre-tax profit of JPY954mn). MRK Holdings (formerly Maruko) manufactures and sells shapewear (FY03/21 revenue of JPY18.3bn, pre-tax profit of JPY462mn). Other subsidiaries include IDEA International, which imports and sells variety goods; HAPiNS, which operates variety stores; Dream Vision, an online apparel retailer; Jeans Mate, which operates stores selling casual wear; and Marusho Hotta, which produces fiber materials.
Business segments
The company has three business segments: Healthcare and Beauty, Lifestyle, and Investments.
Healthcare and Beauty segment (FY03/21: 25.5% of revenue, operating loss of JPY113mn)
Companies in the Healthcare and Beauty segment operate Rizap personal training gyms, Rizap Golf gyms, and other Rizap-related businesses, as well as selling shapewear and health, beauty, and cosmetics items.
Rizap-related businesses
Rizap-related businesses include the Rizap Body Making business, Rizap-related products and services, B&D, D&M, Gochisouyasobei, and Isshin Watch. Shared Research understands that Rizap Co., Ltd., and the sale of Rizap-related products contribute substantially to performance in the category of Rizap-related businesses.
Note: Performance for Rizap Co is for FY03/21. Performance for Rizap English is for FY03/20.
The company discloses revenue only for Rizap-related businesses.
Overview of the Rizap Body Making business
The principal consolidated subsidiary in the Rizap Body Making business is Rizap Co., which operates Rizap personal training gyms (123 locations at end-FY03/21), Rizap Golf gyms (24 locations), and EXPA body toning studios for women (12 locations).
At Rizap personal training gyms, dedicated trainers tailor training programs to individual customers. They offer daily nutritional guidance focused on restricting sugar intake and provide verbal instruction as they help customers sculpt their ideal physique. This core business launched in 2012. A television commercial featuring the phrase “Commit to the result®” and showing a celebrity losing weight through Rizap-based instruction boosted awareness of the business. As of end-March 2021, cumulative members totaled 163,000.
The company explains that many weight-loss methods and training approaches exist, and some are widely known. Even so, many people do not persevere with their weight-loss efforts or rebound after seeing some initial success. Rizap notes that the source of the problem lies in behavioral psychology: people thinking they cannot continue or are unable to get past a certain hurdle. Customers go to the gyms to achieve their ideal physique, and not necessarily to learn a particular training method. According to the company, the role of Rizap trainers is to stay close to their customers, providing support through daily nutritional guidance, encouragement, and praise for any progress being made. In this way, trainers strengthen customers’ ability to overcome the mental hurdles they face to develop their ideal physique.
President Seto talks of a personal experience from high school. He had a girlfriend who was trying to lose weight, so he went running with her and phoned her to offer words of encouragement. Three months later, she had changed so much as to be almost unrecognizable. At the time, he had no knowledge of weight loss or training, but through the process he learned that working together and providing encouragement was the key to helping people reach their goals rather than offering a specific technique or method. Based on President Seto’s experience, Rizap developed a personal training approach that differs from sports gyms’ conventional offerings and turned this approach into a business.
Rizap’s trainers apply behavioral research and analysis based on the company’s accumulated training experience to create and provide training programs optimized for individual customers. Dedicated trainers provide one-on-one instruction. The company says its recruiting process is rigorous, and it hires only 3.2% of applicants. Successful candidates undergo more than 200 hours of training at one of two in-house academies in Japan. During this concentrated training, the new employees learn about training, nutrition, and customer relations.
Fees in the Rizap Body Making business
One-on-one training programs
When joining a Rizap personal training gym, customers choose a one-on-one training program, a pair training program, or a specialized program.
One-on-one training program (50 minutes/session x 16 sessions over two months): This program costs JPY348,000 (before tax), including an enrollment fee of JPY50,000 (before tax). With one-on-one training for two 50-minute sessions each week, customers aim to develop their ideal physique in as little as two months. The program fee includes three counseling sessions, nutritional guidance, and clothing to wear while training.
Pair training program (50 minutes/session x 16 sessions over two months): This program costs JPY448,000 (before tax), including an enrollment fee of JPY50,000 (before tax). Two trainees work with a trainer for two 50-minute sessions each week for a minimum of two months. As with the one-on-one training program, this program includes three periodic counseling sessions, nutritional guidance, and free renting of sportswear for training.
Senior Program
Launched in July 2020, the Rizap Senior Program aims to improve the physical fitness and muscle strength of and extend the healthy life expectancy of people aged 60 and older.
The objective of the training programs provided by the Rizap Body Making business is to attain the ideal physique. The Senior Program on the other hand focuses on the role of muscles in extending the healthy lifespans of older people so that they maintain their independence and do not end up bedridden; its objective is to ensure that seniors remain mobile and physically active. The program uses metrics such as muscle ratio, body weight, body fat ratio, and physical-strength age. Rather than simply gain muscle, the program seeks to improve muscular strength, flexibility, balance, and agility to extend healthy lifespans.
Rizap medical trainers serve as personal trainers for customers, providing one-on-one training sessions and daily dietary management support. Medical trainers for the Senior Program are selected from those who have undergone 192 hours of training, have knowledge of diet, exercise and nutrition, and have completed specialized training in illnesses and injuries that are common in seniors. Each customer has a customized training menu and receives detailed advice on choosing foods and cooking methods depending on body shape under the guidance of a dietitian.
Fees are similar to the Shape-up Program, comprising a JPY50,000 (plus tax) enrollment fee and training fees outlined below.
Medical Body Making Program
The Medical Body Making Program aims to improve health-related indicators (weight, body fat, blood pressure, triglycerides, and blood sugar) based on blood test results. In cooperation with more than 190 medical institutions across Japan, trainees undergo blood tests and medical checks under the supervision and support of a physician. The program supports training under the guidance of the physician.
The trainee uses a blood collection kit to submit a sample for the blood test. Based on the results, the company creates a custom program to improve health-related indicators under the physician’s supervision and with the cooperation of the medical institution. Under the program, the trainee undergoes one-on-one training with a dedicated Rizap trainer twice a month, uses a special app to consult with a nutritionist and receive dietary advice once a week, checks their daily health and sleep quality using a smartwatch that can measure some health-related indicators, and can receive advice from a physician based on individual training status.
For an enrollment fee of JPY50,000 (before tax) and monthly fee of JPY29,800 (before tax) (conditional on maintaining membership for 12 months), the trainee receives one-on-one training twice a month, but can use a private studio at the Rizap facility as needed.
Earnings model of the Rizap Body Making business
The company does not disclose performance for the Rizap Body Making business, but Shared Research thinks Rizap Co. (which handles most of this business) serves as a good proxy.
In its annual securities report, the company discloses Rizap Co.’s results in the principal categories of revenue, recurring profit, and net income. It does not provide CoGS, gross profit, SG&A expenses, or operating profit.
In the public notice of financial results for FY03/17 and FY03/18, the company released the following breakdown of gross profit, SG&A expenses, and operating profit for Rizap Co. Shared Research understands the company did not disclose this information for FY03/19. However, at its earnings announcement for FY03/19, the company did note that operating profit for the Rizap Body Making business was 3.5x the FY03/17 level.
Notes: Pre-tax profit for FY03/16, FY03/19, and FY03/20 is recurring profit.
Figures for FY03/17 and FY03/18 are from announcements of financial results.
Revenue in the Rizap Body Making business
Revenue from the Rizap Body Making business equates to member count times revenue per member. Major variables are the number of members and the retention rate. The company influences revenue per member by introducing new programs and selling supplements.
Members: As of March 2021, cumulative members totaled 163,000 (up 16,000 YoY), of which between 15,000 and 17,000 were active members. The retention rate as of FY03/19, calculated as the percentage of members who joined in April 2018 and were still active six months later, was 45.6% (44.6% in FY03/18). The company says six months is the average duration for active members. Rizap works to increase the number of members by running television commercials featuring celebrities. Membership is also affected by the company’s reputation for performance.
Source: Shared Research based on company dataRevenue per member: The one-on-one training program is priced at JPY348,000 for 16 sessions over two months (including an enrollment fee). To help prevent a rebound following short-term weight loss, the company recommends a three-month, 24-session package priced at JPY482,000 (including an enrollment fee). After completing the one-on-one training program, customers have the option of leaving or doing another one-on-one training program comprising 16 sessions over two months and priced at JPY298,000 (no enrollment fee). Alternatively, they can shift to the Medical Body Making Program, which is priced at JPY29,800 per month and includes two sessions. The average membership duration is six months. During this period, the company provides core programs and sells supplements and protein products, generating revenue per member of JPY600,000–800,000 (for instance: JPY348,000 for the Shape-up Program plus the Medical Body Making Program plus supplements).
Rizap Body Making business: Expenses and profits
The company says the Rizap Body Making business has a cost of revenue ratio of around 20%, compared with some 70% at general sports clubs. General sports clubs have low membership fees, but personnel costs are high. Also, because general sports clubs have extensive facilities that may include swimming pools and baths, rent, utilities, maintenance, and depreciation and amortization expenses are high. By comparison, membership fees are high at Rizap personal training gyms, but personnel costs are low despite its one-on-one training format that requires more employees per customer. Rizap facilities also require less space than general sports clubs and have no swimming pools and large bathing facilities, so rent, utilities, maintenance, and depreciation and amortization expenses are lower.
Based on the public notice of financial results for FY03/18, Rizap Co.’s gross profit was JPY15.6bn and GPM was 61.3%. As is described in more detail below in the section titled “Peer companies in the Rizap Body Making business,” the Rizap Body Making business competes with another operator of personal training gyms, twenty-four seven inc. (TSE Mothers: 7074), which has GPM of around 60%. In contrast GPM is around 15% at companies that operate general sports clubs, such as Central Sports Co., Ltd. (TSE1: 4801) and Renaissance Inc. (TSE1: 2378).
The Rizap Body Making business has a higher GPM than general sports clubs. On the other hand, its SG&A expense ratio is higher, because Rizap attracts customers by advertising across multiple types of media, such as running television commercials featuring celebrities. Given this earnings structure, Shared Research understands that operating profit in the Rizap Body Making business fluctuates according to advertising expenses.
According to the public notice of financial results for FY03/18, Rizap Co.’s SG&A expenses were JPY13.3bn, for a SG&A expense ratio of 52.2%.
Another operator of personal training gyms, twenty-four seven, has an SG&A expense ratio of 44.2% (FY11/19), with advertising accounting for 53% of SG&A expenses (revenue declined in FY11/20 due to the COVID-19 pandemic, so the SG&A expense ratio climbed to 66.3%, with advertising expenses accounting for 58% of SG&A expenses). Among general sports clubs, Central Sports, has an SG&A expense ratio of 7.6% (FY03/21), and Renaissance’s was 7.7% (FY03/21).
Subtracting the advertising and sales promotion expenses of the group’s major listed subsidiaries from consolidated totals yields a remainder of JPY12.0bn in FY03/19 and JPY9.2bn in FY03/20. Shared Research assumes advertising expenses for Rizap Co. account for the majority of these amounts.
Markets related to the Rizap Body Making business
Fitness clubs
According to the Ministry of Economy, Trade and Industry’s Survey of Selected Service Industries, fitness clubs generated JPY223.5bn (-33.2% YoY) in revenue in 2020 (based on the top companies, accounting for around 70% of the market). The market shows long-term growth, with CAGR of -2.8% over the decade to 2020. At 2.6mn people, the CAGR for the number of members was -1.0% over that period. Annual revenue per member was JPY86,000 (JPY100,000 in 2019).
As is described later in more detail, the top 10 fitness clubs have total revenue of more than JPY320.0bn (FY2015), and most fitness clubs are operated by large companies.
Peer companies in the Rizap Body Making business
twenty-four seven inc. (TSE Mothers: 7074) is a peer in the Rizap Body Making business. Other peers include sports gyms: Konami Sports Club Co., Ltd. (a subsidiary of Konami Holdings Corporation), Central Sports Co., Ltd., and Renaissance Inc.
Note: Figures for the Rizap Body Making business are from FY03/21 and for twenty-four seven from FY11/20. Figures for Central Sports and Renaissance are from FY03/21.
twenty-four seven inc. (TSE Mothers: 7074)
twenty-four seven operates 24/7 Workout personal training gyms (67 locations as of May 2021) and 24/7 English personal English-language schools (five locations).
24/7 Workout gyms have private training rooms where they provide individualized training, nutritional guidance, and motivation aimed at helping customers develop their ideal physique in as little as two months. twenty-four seven and Rizap differ on nutritional guidance. At Rizap, in addition to the nutritional guidance given post-enrollment, customers report on and trainers offer advice for each meal taken. 24/7 Workout gyms provide post-enrollment nutritional guidance, but dietary management is then left up to customers. 24/7 Workout gyms have an enrollment fee of JPY38,000 and cost JPY98,000 per month (eight 75-minute sessions), providing a service similar to Rizap’s at a lower price. Cumulative members exceed 61,000 (as of September 2019).
Central Sports Co., Ltd. (TSE1: 4801)
With the aim of fostering top swimmers and gymnasts, Central Sports was founded in 1970 by athletes who competed in the Tokyo Olympic Games of 1964. The company has produced a number of Olympic swimmers and gymnasts since. Central Sports was the first company to open fitness clubs in Japan, and it is second in the industry by revenue.