India has been no stranger to fitness. Fitness, or rather, wellness has always been part of the Indian culture, and is apparent with the existence of Akhadas, Yoga centers, and Ayurveda practices in the country. However, the approach to fitness is no more traditional: changing lifestyles and growing demands are now shaping this industry. Against just one Akhada in small towns, today there are dozens of fitness centers. These mom and pop centers have further given way to the emergence of more specialized offerings - Zumba, Pilates, Crossfit, Mixed Martial Arts and many more. This trend of fitness centers and studios taking over gyms is a rising global phenomenon, much more pronounced in the west than India. Although, the growing affluence of the middle class, greater exposure to global food trends, and health and fitness concerns are slowly bringing alive the magic of fitness programs in India causing the scales to tip in the favor of fitness studios.
We see two major driving forces behind this revolution in the fitness industry:
1) Change in consumer spending: Look around you- 65% of our population is under the age of 35. For the new-age Indian consumer, fitness is not a knee jerk reaction to a worrying medical report, rather a part of their daily routine. They are young, aspirational, and acutely aware of the importance of preventive healthcare. Earlier, Indian consumers would typically visit a gym and were forced to make upfront payments and buy long-term memberships to get started (which was cheaper than buying a shorter one or three-month package). Irrespective of how much they used their membership, they were billed for all 365 days creating an under-utilization of their funds on fitness. The new-age consumer acknowledges this gap and wants the companies to step up and do better. These ‘New World Users’ are users who want to pay based on their utilization and want the flexibility to occasionally/regularly work out at different fitness centers based on their convenience and desire. Entrepreneurs have capitalized on this need to add convenience and flexibility into physical fitness journeys, marking the entrance of fitness aggregators in this space.
2) The rise of Social Media: The surge of social media has created increased accessibility, accountability, and enthusiasm towards fitness. To add to this, pop culture is increasingly amplifying wellness- all the advertisements (Innerwear, Cars, Life Insurance, FMCGs) have a fitness spin to them. Streaming classes are finally hitting the mainstream. Gradually, these social networks are beginning to have a bigger role in building communities. Naturally, everyone wants to feel like they belong and this feeling is nurtured in communities. Sensing a growing whitespace, companies have evolved and formed powerful communities around their brand. When you feel like you belong, you’re bound to stick, thus tackling the inherent retention problem.
The fitness ecosystem is fairly diverse. We have multiple players operating in a variety of segments- from the Apple Watch tracking your daily footsteps to Classpass providing easy access to multiple gyms and studios. The pandemic has made one thing clear: Coronavirus and gym fitness classes don't mix. For thousands of fitness brands, both big and small, the pivot to streaming is a matter of survival. Exercising is a great tool for transformation, but now COVID-19 compels us all to transform our vision of what exercise looks and feels like. With the pandemic forcing us all to stay at home, consumers have been looking at the fitness ecosystem through a new COVID-19 lens- Online or Offline?
The myriad segments of the fitness ecosystem
With the onset of a pandemic, the global $100BN fitness industry has been forced to go virtual almost overnight. With an already broken business model, COVID has merely shed light on its gaping holes. Business models for brick and mortar gyms are still pretty archaic for 2020. Just like real estate businesses, the focus is on location, location, and location. Accessibility and convenience are the biggest subconscious factors while choosing a gym. Think about it- would you go to a gym 10kms away? With no parking space? The answer is a resounding no. They have high fixed costs, require a significant amount of Capex (>INR 3Cr), and suffer from an abysmally low retention rate (~30%). Overheads increase by 20% annually as ARPU decreases over the years. To counter this, gyms take in 2-3x the total members it can hold. If everyone who had memberships went to their gyms, nobody would actually be able to work out.
Going virtual is often talked about as a blanket solution for all the players in this ecosystem. While partially true, ‘going virtual’ takes different forms across the various segments and might not be the solution at all for some of them. Let’s dive deeper and understand the nuances in each segment and predict what the future of this space looks like in these surreal times. Here’s what we think:
During the last decade, like many consumer-facing businesses, fitness trends have bifurcated the industry into low-cost and premium offerings. This has left the largely undifferentiated mid-priced operators awkwardly stuck in the middle.
Introducing: The Funnel
Pioneering the low-cost end of the spectrum and our Funnel, Planet Fitness expanded aggressively through its first franchise in 2003, reaching 2000 locations and capturing 15MM members by 2020. Providing a welcoming, non-intimidating workout environment at a fee as low as $10 / month has been the secret of Planet Fitness’s success as evidenced by the fact that 35% of new joiners have never had a gym membership before. Some locations have almost 10x as many members as can fit in the gym at any one time. This is exactly what Planet Fitness wants. Members that rarely go to the gym are more profitable and use far less resources than those who go more frequently. Low barrier to entry and a high volume of customers has been pivotal to Planet Fitness thriving.
Premium or Cheap, anything but the Middle
At the other end of the spectrum, instead of appealing to the casual consumer, boutiques targeted the hardcore fitness elite. The premium experience developed in two ways: the luxury health club, defined by Equinox, and the specialized boutique, such as OrangeTheory. A study found that premium clubs made up the fastest-growing brick-and-mortar exercise category and pushed the global industry to $100BN. From 2013 to 2017, membership at boutique studios grew over 120% despite thousands of free instructional videos on YouTube and an estimated 250,000 apps devoted to fitness. Personalization and tribalism are fueling the boutique demand at the upper end while low price, ubiquity, and high volume are helping the High Value Low Priced (HVLP) gyms thrive at the lower end of the funnel.
Mid-tier gyms found themselves stretched between the ends of the spectrum pulled wide by Planet Fitness and Equinox. They provide no redeeming factor- neither do they have a low barrier to entry, nor do they have any specialization. These mid-tier operators are in a downward spiral, with memberships falling significantly and increased margin pressure. Add to this their equipment-heavy operations, resulting in a high upfront Capex making it a tad unappealing for an investor too. These foundations on which mid-tier operators have thrived over the years are now becoming outdated, forcing them to reinvent themselves within the market. To achieve this, it is likely that they are going to require additional funding against a backdrop of poor performance. No wonder their traditional customer base is being hollowed out by offerings at the top and bottom of the market.
With the gyms being shuttered due to the pandemic, mid-tier gyms are in a precarious position. Already riddled with high debt, high churn, and with no solid digital offering, their only source of income is being threatened. Many household names, once thought invincible, have already fallen to COVID. Gold’s Gym recently filed for bankruptcy under Chapter 11 and sought to restructure its debt along with closing 30 company-owned gyms. 24 Hour Fitness, with more than 440 clubs, carried too much debt for what it earned and had observed a gradual decrease in membership. It recently filed for Chapter 11, permanently closing 100 US locations in 14 states. Town Sports International is tethering on the edge too after its acquisition of FlyWheel fell through. It has a $200MM loan due in November with a high chance of defaulting. Back home, Talwalkars, once the most popular fitness company in the country, has been reduced to a penny stock with a Market Cap of a mere $1MM. Nearly three-fourths of the promoter shareholding is pledged and it has been defaulting on its loan since August 2019. It has racked up debt of $96MM. Are any more examples really needed?
The pandemic has exacerbated the problems faced by mid-tier gyms- be it mom and pop outlets or global brands. It traps them between a rock and a hard place- either adapt or perish. The choice is theirs
With traditional gyms and boutique fitness studios shutting their doors, a lot of fitness enthusiasts are also taking to at-home fitness solutions. While Lululemon’s $500MM acquisition of Mirror has definitely been the talk of the town and has put at-home startups at the forefront, Peloton is enjoying its spot at the apex of the funnel with it’s sweet $17BN valuation and over 1MM customers. Peloton’s digital operating model has allowed them to capitalize on this forced shift in consumer behavior very rapidly. The Peloton platform provides remote access to both live classes and thousands of on-demand classes in varying formats.
To understand the growth of Peloton, we have to jump back a few decades. In the ’80s, ’90s, and early 2000s, cycling was one of the most popular group exercises at any traditional gym in the US. In 2006, SoulCycle opened its first store in Upper West Side. It described itself as a complete ‘mind-body experience’. It shrugged off metrics and instead focused on spirituality and community through their workout. Building on the culture SoulCycle had started, FlyWheel was founded in 2010. They decided to focus on competitive racing elements using data tracking. Both classes developed cult-like followings, propelled by the support of celebrity fans. Thus, luxury spinning was born. Spinning classes have existed for the past 50 years in the US. Peloton is simply the new pioneer with its tech-enabled, at-home approach.
Being at the very top of the funnel, Peloton enjoys a lot of perks- it boasts of a retention rate of 95%, which is practically unheard of in this industry. Apart from quarantined fitness enthusiasts, a lot of churn from spinning classes decide to buy a Peloton bike. Priced at $2250 +$40/month subscription, you break even within 6 months if you go to SoulCycle 4 times/week. Not a bad deal, eh?
Peloton has a lot of things working for it- complete vertical integration, a strong digital community, multiple revenue streams, way more flexible classes, and a solid product. Unfortunately, it has a very high price point for the Indian market. This seems to be a problem across at-home services with Mirror’s $1500 product. The average Indian house is also much smaller than its western counterpart- there’s no space to keep a 4ftx2ft 60kg bike. Moreover, there is simply no culture of spinning classes in India. Peloton will sustain benefits from the pandemic through an accelerated at-home fitness trend but at-home fitness really needs to find its sweet spot for pricing and product to enter the Indian market.
It is unclear exactly when people will feel comfortable working out in enclosed fitness studios and gyms again, and by then, consumers may have shifted their behaviors. Brands now have the opportunity to help shape what those new fitness habits will look like. At-home fitness startups are becoming the new gyms and with tech businesses typically valued at higher multiples than retail, the big fitness brands all want in. Lululemon’s acquisition of Mirror, the home-fitness startup that streams workouts through a mirror-like device, for $500MM is pure omnichannel gold. Mirror gives Lululemon a front-row seat, as well as its own self-contained platform, helping it expand from premium fitness apparel to premium online workouts.
Going omnichannel is especially useful for brands with an only physical presence. This is especially relevant in India. As the country went under lockdown, there was also a race to pivot to a digital offering. Who would be the first one to offer the best quality product? Cure.fit has done especially well in this regard. Within a few days of the lockdown back in March, Cure.fit announced the launch of Cult.live. This is a group fitness class led by star trainers, that lets customers experience the energy from the comfort of their homes. Aggregators like Fitternity have also offered their ‘OnePass’ online- offering customers similar flexibility in an online world.
We feel the ability to expand and have roots in an omnichannel distribution space would be an important yardstick to measure the company’s success in the fitness industry.
They say the true test of brand recognition of your product is when it becomes a verb. Just Dunzo it. Let’s Uber it. WhatsApp me. Do you want to Zoom call? As the world shifts to communicating virtually, so do a lot of important milestones- birthdays, anniversaries, graduation... and your Yoga class. Zoom has a lot of use cases and it adapts well to all of them. Aggregators sure have a strong supply and demand but they have to resort to Zoom to provide the tech to connect the two. With the notable exception of Cure.fit, it has proven difficult to build your own robust tech platform to facilitate exercise classes.
Zoom is widely used in the country. India was the biggest market for Zoom in terms of the number of mobile application downloads in April 2020, amounting to 24MM. Its daily active users have grown from 10MM in December 2019 to 190MM in April 2020, taking care of the demand side. On the supply side, 95% of the entire fitness market is fragmented. These mom and pop gyms don’t have access to sophisticated technology, resources, or a ton of capital. Most of them don’t even have websites or any digital presence, but they know how to use Zoom. If Zoom simply decides to add a payment layer on its platform, we see it becoming the Shopify of the fitness industry. Just like Shopify allows anyone to set up an online store and sell their products, Zoom will allow anyone to set up their own ‘fitness store’ and get paid for their services- personal trainers in gyms, fitness influencers on Instagram, and even your 70-year-old Yoga teacher. All it needs to do is monetize it’s already existent network.
At the beginning of this blog, we spoke about the evolution of how fitness is defined. Perhaps, nothing is a better example than the rise of full-stack players like Cure.fit. Fitness is not solely related to exercise anymore, it’s becoming an integral part of the larger health and wellness industry. Since its launch in 2016, Cure.fit has introduced multiple services in a bid to become a ‘super-app’ centered around better health. Starting with gyms in 2016, the company expanded to Eat.fit for healthy eating, Mind.fit for yoga and mental wellness, and Care.fit for primary healthcare. They recently added Whole.fit and Gear.fit to their offerings.
While Cult contributes a large chunk of overall revenue for Cure.fit by virtue of its large ticket size, it is food that really brings in the numbers. The vision at Cure.fit seems to be clear: build an ecosystem of health, fitness, and healthcare and it plans to get there with a simple strategy- outburn your competitors. Cult has managed to create a situation where other gym chains find it difficult to compete with it on membership costs. In other words, at Cult, it is always New Year’s Day. Due to this high capital raise, which is around $400MM to date, they can afford such discounts and a cash burn of $25-30MM/year.
If you scroll up, you’ll see that Cult.fit also occupies a very unique position in the funnel- the top and the bottom. It can take in a high volume of customers at relatively low prices and are being able to open larger locations because of sufficient cash raise and an asset-light model due to minimum equipment. It offers several different exercises - HRX, S&C, Yoga, Pilates, HIIT- establishing a niche of their own, thus sitting comfortably in both the top and bottom of the funnel, but never in the middle. While the pandemic did cause them to shut operations in India and the UAE, their digital transition (cult.live) has been well received.
Aviral Bhatnagar puts it brilliantly in his blog: Cure.fit is not a company providing disparate services, it is a healthcare data company. All this marketing, and these various verticals, is to acquire highly lucrative and valuable customer health data. Just like your data allows Amazon and Google to sell you products better, Cure.fit will sell you healthcare services better.
This idea of a holistic approach to fitness is being seen in a few other fitness startups too and it’s a trend we love to see. Aggregators like FitPass are also providing an AI personal coach, dietician, and a nutritionist along with providing flexible gym memberships. Several of these users overlap across different offerings — which is the foundational idea behind creating this fitness ecosystem. Thus, a customer will be served better, purchase more, get healthier, and most importantly- remain retained.