Fernhollow Fitness: Profitability Case Study with Answer

Profit is revenue minus costs, and the studio count jumped from 18 to 24, so I would first look at the economics per studio rather than the chain totals. A studio makes money when visits times revenue per visit beats its mostly fixed costs: rent, instructors who are paid per class whether it is full or not, staff and upkeep.

I would then split the chain into two cohorts: the 18 mature studios, to see whether the core business got worse, and the 6 new studios, to see whether they are on track to pay back. Finally I would check central costs (marketing and head office) and use what I find to judge the 2026 openings.

• Revenue per studio: visits (bookable spots x fill rate) x revenue per visit, split by channel (memberships, class packs, aggregator apps).
• Costs per studio: instructor pay, studio staff, rent and occupancy, other studio costs, mostly fixed per class or per site.
• Central costs: marketing (including launch promotions) and head-office overhead.
• Hypotheses to test: new studios still ramping (CEO); aggregator apps diluting revenue per visit at mature studios (CFO).
• Expansion decision: break-even fill for a new studio, and whether the new cohort is on a path to reach it.

What the interviewer is looking for

• Good: a revenue and cost split specific to a fitness studio (spots, fill, price per visit, fixed costs per site), not a generic profitability tree.
• Strong: separates mature studios from new ones so that growth does not hide a problem in the core.
• Excellent: turns the CEO's and CFO's views into testable hypotheses and links the analysis back to the 2026 openings decision.

Push-back: Fixed costs are fixed. Why not just look at revenue and stop there?

Operating margin fell from 16.7% (5.4 / 32.4) to 4.4% (1.6 / 36.6), a loss of about 12.3 points. Every studio cost line rose as a share of revenue, with rent (+4.9 points) and instructor pay (+3.1 points) the largest, which looks like a cost problem at first sight.

Per studio it is the opposite. Studio costs were $1.2 million per studio in both years ($21.6 million / 18 and $28.8 million / 24), but revenue per studio fell 15% from $1.8 million to about $1.53 million. Costs did not rise; revenue per studio fell, so the same fixed costs eat a bigger share. Marketing added another 1.5 points, and head-office overhead stayed flat in dollars.

What the interviewer is looking for

• Good: computes both margins correctly and states the drop of about 12 points.
• Strong: normalizes by studio count and sees that studio costs per studio are flat at $1.2 million.
• Excellent: reframes the case as a revenue-per-studio problem before the interviewer does, and asks how that splits between mature and new studios.

Push-back: Rent went up by $2.9 million. How can you tell me this is not a cost problem?

Both theories hold, but the CFO's is the bigger one. At mature studios, fill actually rose from 75% to 85%, yet revenue per visit fell from $30 to $25, so revenue per studio fell from $1.8 million to $1.7 million and contribution from $0.6 million to $0.5 million. Across 18 studios that is $1.8 million of lost profit inside the core business.

The new studios are only 50% full. At $25 per visit they bring in $1.0 million against $1.2 million of costs, so each loses $0.2 million, or $1.2 million for the six. That is well behind the roughly 65% fill the mature studios reached in their first year, so time alone may not fix it. Add $0.8 million of extra marketing and the bridge closes: $5.4 million minus $1.8 million, $1.2 million and $0.8 million leaves $1.6 million.

What the interviewer is looking for

• Good: computes fill, revenue and contribution for each column correctly.
• Strong: builds a profit bridge that ties exactly to Exhibit A and sizes each driver ($1.8 million, $1.2 million, $0.8 million).
• Excellent: spots the paradox that mature studios are fuller but earn less, and questions the CEO's 'just wait' view using the 65% first-year benchmark.

Push-back: Mature studios are fuller than ever. Isn't that a sign the core business is healthy?

The blended revenue per visit is 70% x $30 + 20% x $40 + 10% x $10 = $30 in 2023, and 45% x $30 + 20% x $40 + 35% x $10 = $25 in 2025. Prices did not change; the mix did. App visits pay a third of a member visit.

In visits per studio: member visits fell from 42,000 to 30,600 (minus 11,400, worth $342,000), class-pack visits rose from 12,000 to 13,600 (plus $64,000) and app visits rose from 6,000 to 23,800 (plus 17,800 visits, but only $178,000). Net, each mature studio lost about $100,000 a year even though it served 8,000 more visits. Member numbers fell from 350 to 255 per studio, and exit surveys suggest some members simply switched to the cheaper app route: the apps are cannibalizing memberships, not just filling empty spots.

What the interviewer is looking for

• Good: computes the blended $30 and $25 correctly and says the mix, not price, drove the drop.
• Strong: converts shares into visits and shows that 17,800 extra app visits did not make up for 11,400 lost member visits.
• Excellent: uses the member count and exit surveys to argue cannibalization, and notes that Fernhollow controls which classes appear on the apps, so the lever is in its own hands.

Push-back: The apps brought 17,800 extra visits per studio. Wouldn't those studios be emptier without them?

Break-even: a new studio needs $1.2 million / $25 = 48,000 visits a year, or 60% fill. Today it runs at 50%. With the marketing push it also has to cover $0.1 million more, so break-even rises to 52,000 visits, which is exactly the 65% fill the COO expects. In other words, the push at best brings each new studio from a $0.2 million loss to break-even: worth $1.2 million for the six.

App move: each mature studio gives up 12,000 app visits at $10 ($120,000) and wins back 6,000 visits at $32 ($192,000), a gain of $72,000 per studio with no extra cost. Across 18 studios that is about $1.3 million.

Together the two moves add about $2.5 million, taking operating profit from $1.6 million to about $4.1 million, still below the $5.4 million of 2023.

What the interviewer is looking for

• Good: gets the 60% break-even fill and about $1.3 million from the app move.
• Strong: includes the cost of the push and sees that 65% fill only gets the new studios to break-even, not to a profit.
• Excellent: concludes that new studios in this format need well above 65% fill to earn back a $1.5 million build-out, which undermines the case for 6 more openings now.

Push-back: What if only a quarter of the lost app visits come back instead of half?

Pause the 6 openings planned for 2026 and fix the existing studios first. Profit fell from $5.4 million to $1.6 million for two reasons. First, aggregator apps cannibalized memberships at the mature studios: revenue per visit fell from $30 to $25, costing $1.8 million. Second, the 6 new studios are only half full and lose $0.2 million each, $1.2 million in total, with $0.8 million of launch marketing on top.

Taking peak classes off the apps adds about $1.3 million, and a marketing push that lifts new studios to 65% fill brings them to break-even, adding $1.2 million. That takes profit to about $4.1 million. The main risks are that fewer app users come back as members and that the new suburbs never reach 65%; we should test the app change in a few studios for one quarter and set 65% fill as the bar before any new opening is approved.

What the interviewer is looking for

• Good: gives a clear answer on both the profit drop and the 2026 openings.
• Strong: quantifies both drivers and both levers with numbers that tie to the analysis.
• Excellent: makes the expansion decision conditional on a measurable trigger (65% fill) and names what would change the recommendation.

Pause the 6 studio openings planned for 2026 and fix the existing 24 studios first.

Operating profit fell from $5.4 million to $1.6 million because aggregator apps diluted revenue per visit at mature studios from $30 to $25 (minus $1.8 million), the 6 new studios run at 50% fill and lose $0.2 million each (minus $1.2 million), and launch marketing added $0.8 million.

Taking peak classes off the apps adds about $1.3 million a year, and a marketing push that lifts new studios to the 65% fill they need to break even adds $1.2 million, taking profit back to about $4.1 million.

Next steps: test the app change in a few studios for one quarter, track fill and member count by studio every month, and approve new openings only once the current new studios hold 65% fill or better.