Soul Hypercycle and the Wave of New Fitness Boutiques

Soul Hypercycle and the Wave of New Fitness Boutiques

The fitness industry is large, growing steadily and rapidly evolving. Since the 1980s, health club locations and memberships have more than tripled to 36,000 and 57 million, respectively. Yet, over the past decade, 35% of its customer base has shifted away from incumbent brands. This article analyzes some of the shifts in the fitness industry that are illustrative of broader economic issues and highlights interesting implications for other consumer-facing businesses.

Executive Summary

The fitness industry is large, growing steadily and rapidly evolving
  • Since the 1980s, health club locations and memberships have more than tripled to 36,000 and 57 million, respectively, and total revenue has increased 450% to $27 billion. For reference, the US population and GDP grew 36% and about 300% (in constant dollars) over this time period.
  • Over the past decade, 35% of its customer base has shifted from incumbent brands.
  • Fitness boutiques are driving the shift by offering more tailored experiences, leaving mid-priced operators like Town Sports International, languishing.
Trends mirror those seen in other consumer-facing industries
  • As with retail and grocery, customers are moving to premium and low-cost options. At the low-end, Planet Fitness targeted the 80% of adults who weren't gym members with its "judgement free zone" while higher end players like Equinox sought out the luxury set, charging members 15-20x more than low-cost operators.
  • Customers are valuing experience over stuff. Kevin Logan, U.S. chief economist for HSBC, notes that purchases of clothing and shoes as a share of discretionary spending have dropped. Instead, consumer spending on recreation, travel and eating out has been trending up for more than a decade.
Incumbent gyms have taken interesting measures to stay competitive
  • Reacting directly to the market shift, incumbents are building gyms within gyms to satiate fitness omnivores. For example, soon nested within many of the 200 World Gym locations, RedCon ("redline conditioning") will offer high intensity interval training classes similar to those offered by OrangeTheory.
  • 24 Hour Fitness launched TC24, while also making Daily Burn available as a $5 monthly add-on.
  • Equinox took a slightly different path, launching a separate brand, Blink Fitness, a low-cost operator targeting the same demographic as Planet Fitness.

Whether laying down our yoga mat or saddling up to our front-row spot in cycle class, we probably rarely consider the business model at work behind our favorite fitness boutique. However, over the past decade, a massive shift has recast the $27 billion fitness industry—one equivalent in size to auto rentals—into a diverse landscape of disruptive new entrants.

A fascinating microcosm of broader economic seismic shifts, the fitness industry illustrates pervasive trends across the economy, trends that are relevant to many consumer-facing businesses: the bifurcation to premium and low-cost options, the unbundling of experiences from large aggregators to specialized providers, the rise of the experience economy, the experience itself as self-branding and status symbol.

What follows is an article that highlights the evolution of the fitness industry, and the consumer forces re-shaping its landscape. Its story presents invaluable lessons for operators across verticals witnessing similar business model disruption, particularly consumer-facing membership or subscription-based businesses.

From Fringe to Mainstream in Two Decades

Major gym chains were born during the 80s, including Gold’s Gym, 24 Hour Fitness, LA Fitness, and the Bally Company. They targeted two archetypes: weight lifters and aerobics fans. Popular fitness and entertainment personalities amplified these niches, with Arnold Schwarzenegger and Lou Ferrigno defining one end and Jane Fonda and Richard Simmons the other.

Although increasingly popular through the 80s, fitness was not yet mainstream. Across the US, 17 million people—roughly 7% of the population—spent $6 billion (inflation-adjusted) annually as members of the country’s 10,000 gym locations. However, exercise popularity exploded throughout the 1990s and early 2000s, during which time dozens of regional and national chains sprouted. By 2016 health club locations and memberships more than tripled to 36,000 and 57 million, respectively, and total revenue increased 450% to $27 billion. For reference, the US population and GDP grew 36% and about 300% (in constant dollars) over this time period.

Figure 1: Fitness Industry Growth Significantly Outpacing GDP

Up until the financial crisis, the health club industry followed a fairly simple, consistent business model: build a facility in a high traffic location; fill it with equipment; aggressively sell memberships until fixed costs are covered; reap rewards of membership fees in excess of fixed costs. Ancillary service revenues such as personal training were marginal additions. Essentially, health clubs were on-premise fitness equipment rental businesses with a few classes thrown in for good measure.

Premium or Cheap, Anything but the Middle

Following a similar pattern as retail and grocery, during the last decade, fitness trends bifurcated the industry into low-cost and premium offerings, leaving undifferentiated mid-priced operators such as Town Sports International (TSI) languishing as customers moved to extremes (TSI operates New York, Boston, Washington D.C and Philadelphia Sports Clubs). Within fitness, seeds for the split were sown during the early 2000s, as both budget-minded operators and luxury offerings began to expand and differentiate.

Pioneering the low-cost end of the spectrum, Planet Fitness expanded aggressively through its first franchise in 2003, reaching 1,400 locations by 2017 and capturing 10 million members—an impressive 17% of the total market. However, price wasn’t everything. There was also pizza. Planet Fitness carefully built a brand for the biggest market: non-gym goers. Targeting the 80% of adults who weren’t gym members, Planet Fitness appealed to the uninitiated with its “judgment free zone,” monthly pizza nights, and a casual attitude toward exercise “We’re going after the first-time exercisers or casual user,” CEO Chris Rondeau told Business Insider. “Gym intimidation is real.” He positioned Planet Fitness as the exercise on-ramp for Americans without a gym membership, making it approachable for those who said, “I’ve got to work out and get in shape before I join a gym.”

Although counterintuitive and seemingly misguided, Planet Fitness acted on a critical insight: new members are intimidated by exercise. So Planet Fitness made joining, visiting and continuing to pay for the gym as easy as possible: forgettably cheap, unpretentious, and even indulgent. Their orthogonal approach relative to the sleek body, rep-counting marketing broadcast by most gym brands offers a lesson to executives in other industries.

Instead of fighting to win share from competitors with an incremental message, a counterintuitive, divergent brand and culture can attract untapped customers.

At the other end of the spectrum, instead of appealing to the casual consumer, boutiques targeted the hardcore fitness elite who demanded more than the traditional big-box gym could deliver. The premium experience developed in two ways: the luxury health club, defined by Equinox, and the specialized boutique, such as OrangeTheory. Each charged members 15-20x more than low-cost operators, competing on brand prestige, elite status (more on that below), marquee urban locations, and a highly-tailored experience.

Figure 2: Boutique and Luxury Brands Deliver Specialized, High-price Experience

As distinctly casual and even irreverent as Planet Fitness was towards fitness with its gaudy purple and pizza boxes, Equinox was equally devout on the other side, defining fitness high worship with its angular spaces void of primary colors, and graced by lean bodies following its core belief: “It’s not fitness. It’s Life.”

Big box brands found themselves stretched between the ends of the spectrum pulled wide by Planet Fitness and Equinox. While these intermediate brands serve as worthy case studies, the fascinating stories lie in the proliferation of boutiques and disruptive technology entrants competing along new axes of differentiation.

The Rise of Boutique Fitness

Fitness Boutiques re-defined the industry, driving much of the membership growth over the past decade. They adapted to the unique preferences of millennials and younger generations who sought more specialized experiences, a sense of community, and flexible participation (read: no pushy sales, or year-long unbreakable contracts). Highlighting their rapid expansion, the definitive trade organization IHRSA notes that boutique memberships expanded 74% from 2012 to 2015, compared to 5% for health clubs. Admittedly, boutiques started from a smaller base, but their share of total revenue—some 35%—proves their presence is significant.

Although no definitive date marks the birth of fitness boutiques, several seminal brands were founded during the early 2000s, grew aggressively, and enticed a multitude of new entrants over the last ten years. Pioneering boutiques specialized in particular forms of fitness and crafted distinct cultures. These entrants included Crossfit, founded in 2000 in Boston to deliver high-intensity cross training for the “athlete”; SoulCycle, founded in 2006 in NYC to torch calories and derive spiritual enrichment, and OrangeTheory, founded in 2010 in Miami to make the circuit workout competitive by broadcasting participants’ heart rates on flat screens. Many other formative models launched in other regions, including Barry’s Bootcamp (similar to OrangeTheory) in the northeast, CorePower Yoga in the west, and Pure Barre (ballet-inspired group exercise) in the midwest.

Not Just a Fad, Boutiques Growing into Big Money Business

Pioneering fitness boutique brands have grown into formidable companies, with attendance, revenue and enterprise values rivaling some of the nation’s largest incumbent operators. In fact, monthly dues across boutiques have far surpassed those of all but the most elite health clubs.

Figure 3: Boutique Customers Spending More, but Health Club Dues Are Flat

Crossfit has grown to 11,000+ “boxes” worldwide, generating an estimated $100 million of annual revenue at the parent company (Note: Crossfit generates most of its revenue through certifications sold to instructors who open boxes). SoulCycle sold a majority investment to Equinox in 2011, and grew to $112 million of revenue and $25 million of profit in 2014, according to its 2015 IPO filing. OrangeTheory has grown to 625 franchises, fueled recently by a growth equity investment from Roark Capital, which also backed Anytime Fitness in 2014.

Fitness boutiques prospered mainly by dominating market niches, serving pent-up demand for a highly specialized experience. They were also more closely in-tune with consumptive preferences of their predominantly younger customers, who demanded convenience, flexibility, and a sense of community. Whether strategically or circumstantially, boutiques exploited the fact that incumbent health clubs were inexorably anchored to the membership model. Boutiques centered on class-based payment, with membership as an option for super-consumers.

The rapid rise of boutique fitness brands offers valuable lessons to young, growing companies: dominate a niche. Offering a highly unique experience and cultivating close relationships with customers these brands built loyal, high-paying customer bases.

Interestingly, however, flexible pricing proved a double-edged sword for fitness boutiques. On one hand, it fueled their proliferation by eliminating the barrier of long-term commitment for new customers. No more expensive sign-up fees, contracts, or year-long commitments. On the other, flexibility undermined sustainable revenue by, well, eliminating year-long commitments from new customers who were continually presented with new and equally exciting options.

Early success of pioneering boutiques opened the floodgates for many fast followers, some mimicking proven models, and others discovering untapped niches. In total, these new models targeted the long tail of consumer demand, much like Netflix and Amazon do for entertainment and eCommerce today. For these infinitely scalable platforms, no topic or product is too obscure, no customer too distant. However, unlike technology platforms, boutiques were limited by geography and focus. A CrossFit could not also be a SoulCycle. Nor could a CrossFit based in New York regularly serve a customer living in Seattle.

The Shifting Landscape Opened New Market Opportunities

The proliferation of boutiques created a market gap with two critical components, solved by one clever solution. First, faced with diverse options, customers increasingly visited multiple venues as part of their weekly routines. However, with drop-in rates often exceeding $20, a 3x per week exerciser could easily spend over $200 per month in class fees. Second, amongst a growing field of competition, each new boutique struggled to stand out and win new customers and keep classes full. And unlike health clubs, an empty spot in class meant lost revenue, so boutiques were particularly motivated to maximize attendance.

Recognizing the market gap, Payal Kadakia, an MIT-trained former dancer and passionate boutique customer addressed a need shared by many fellow New Yorkers: discover and book a spot in a boutique class. Her company’s story is well-documented on TechCrunch, and illustrates the circuitous path of innovation, and refining a product in response to market reaction. In the highlight reel version, Kadakia launched Classtivity in 2012 to help fellow New Yorkers find and book available boutique classes. Soon recognizing a bigger opportunity in blending the predictable price of a gym membership with the breadth of options across multiple boutiques, her company launched (and soon changed its name to) ClassPass. With the new model, ClassPass charged customers a fixed monthly rate of $99 and granted them unlimited access to a wide variety of classes. When a customer attended a class, ClassPass paid the boutique a 50% discounted rate. On average across its member base, ClassPass assumed it would pay less than $99 per month, profiting from the difference. From the boutique’s perspective, although the ClassPass payment was less than the full drop-in rate, their otherwise empty class spot was now earning money, and likely filled by a new customer.

Wise to free money, customers likely exploited ClassPass by attending many more classes than expected, resulting in significant unit losses for super-users. Although ClassPass never disclosed their unit economics, rough math suggests an unlimited pass customer paying $99/month and attending $20 retail-priced classes became gross margin negative following the 10th attendance, an easy hurdle for someone attending more than two classes per week.

As a result, ClassPass evolved its pricing model to include tiered pricing tied to capped attendances, essentially creating a digital punch-card. While their pricing overhaul resulted in positive unit economics and gross margin improvement to 20%, it also caused 10% customer churn. Nonetheless, ClassPass has grown to a company valued at over $400 million, with annualized revenue likely now exceeding $150 million.

Figure 4: ClassPass History: A Tale of Pivots, Growth, and Disruption

While ClassPass applied an elegant service solution to the rapidly expanding fitness boutique market, many other technology-driven brands sought to define entirely new markets. Free and paid digitally distributed content, available to customers in any location, quickly drew large audiences.

For example, Fitness Blender, started by husband and wife personal trainers during the recession and distributed through YouTube, now boasts 4 million followers. The brand generates revenue primarily through video ads, but also through customized food and exercise plans. Along similar lines, Daily Burn streams live classes to members, who pay $15 per month for the service. Both approaches redefine the model by allowing users to participate in a premium experience that is location-agnostic, engaging users wherever they prefer to exercise: at home, while traveling, or even at their local gym.

The Experience Economy, Paying Up for Lifestyle and Status

Consumer-facing businesses must tune their brands to evolving consumer tastes and psychology. Those that read the market right ride repeated waves, while those who don’t are soon forgotten. Two critical consumer trends shape the backdrop for the fitness industry: a secular trend favoring experience over stuff, and fitness as a status symbol.

Across demographic lines and particularly amongst millennials and younger generations, experience beats stuff. Elaborating on this shift in a Fortune article, Kevin Logan, U.S. chief economist for HSBC, notes that purchases of clothing and shoes as a share of discretionary spending have dropped. Instead, consumer spending on recreation, travel and eating out has been trending up for more than a decade.

Figure 5: Spending on Experiences has Increased While Spending on Goods Has Decreased

Playing into this theme, young customers allocate a growing share of their monthly budget to fitness. An example of this trend, profiled in a Wall Street Journal article, Alison Dougherty of New York spends $500 a month on boxing club membership and personal training sessions, a massive hike over the $30 a month she previously paid for a health club membership.

Healthy living defines the identity of a growing segment of the population. Guiding leisure time, food choices, and apparel selection, healthy living presents a form of personal branding. According to Euromonitor, “Healthy living is becoming a status symbol, as more consumers opt to flaunt their passion for wellness through paying for boutique fitness sessions, “athleisure” clothing, food with health-giving properties and upscale health and wellness holidays.” These trends are evident in the strong performance of health-oriented brands including Lulu Lemon, Whole Foods Market, and the growth of fitness-focused events such as Marathons, Tough Mudders, which despite the recent slowdown, still draw hundreds of thousands of racers annually. Picturing our most health-minded friends, they likely consume products from several or all of these brands.

Parting Thoughts: Does the Rise of Fitness Boutiques Mark the End for Incumbents?

Echoing a retail trend, in which marquee locations continue to shutter, replaced by new economy tenants or left vacant, the fitness industry picture is challenging but less bleak. Many operators are reacting to market forces by doubling down on the “bundled experience,” promoting premium amenities such as child care, pool facilities, and work space.

Reacting directly to the market shift, they’re also building gyms within gyms to satiate fitness omnivores. For example, soon nested within many of the 200 World Gym locations, RedCon (“redline conditioning”) will offer high-intensity interval training classes similar to those offered by OrangeTheory. Echoing boutique customer preferences, Jim Teatum, the head of international development and franchising at World Gym recognized studios deliver more specialized, price-transparent experience to younger customers, drawing members from clubs like his, or seeing members double up with studio memberships.

Like World Gym, many other clubs are following suit to satisfy younger members and capture more of their fitness wallet. In a similar move, 24 Hour Fitness launched TC24, while also making Daily Burn available as a $5 monthly add-on. Equinox took a slightly different path, launching a separate brand, Blink Fitness, a low-cost operator targeting the same demographic as Planet Fitness.

These strategic moves highlight a sound reaction to competitive entrants stealing share or expanding the total market: if you can’t beat them, join them. Incorporate elements of winning models to meet shifting customer demand.

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