Private Equity in the Fitness Space
By Ziad Razzak
Power in Community
Let’s face it, fitness is not going anywhere; it will constantly evolve and change, but ultimately, we all understand that it is a critical aspect in keeping us healthy and around longer. We invest our time, energy, and financial resources in sampling a variety of concepts until we find a few that work for us, and then we build our routine.
While several brands such as Peloton, P90X and Beachbody offer the convenience factor of in-home workouts, there is something that is infectious and energizing about pushing oneself in a community-based setting; the magic of collective sweating, multiple hearts pumping faster together and that unified ‘sigh’ when the last beat of the last song is hit. Creating community entails creating a space with attributes including not just a terrific workout, but a welcoming, inclusive environment.
Brick and mortar operations cost money, and this is where private equity (PE) comes into play. PE provides designated funds for the acquisition of existing clubs or the build-out and support of new ones.
Why the appeal?
More people than ever are focused on physical fitness. As a result, fitness industry revenue has grown from $22.4 to $30 billion between 2014 and 2018. According to IHRSA (International, Health Racquet and Sportsclub Association) there has been a 15% increase in health club and studio memberships nationwide since 2013. The recent boom in boutique fitness studios has accounted for the majority of this growth with a 121% increase in memberships from 2013 to 2018. Boutique fitness is currently the fastest growing segment of the health club industry and now makes up approximately 42% of the U.S. health club market.
The growth of the boutique studio market is partially a result of consumers’ willingness to spend more on a premium, specialized, experience as well as the loyalty of these consumers to their brands. These characteristics help to sustain the consumer contribution to a predictive revenue model, aka recurring monthly revenue. As a matter of fact, according to the 2018 IHRSA Profiles of Success, retention rates at premium clubs (monthly dues of $70 or more) reached approximately 73% in 2017.
The Private Equity Advantage
PE firms have taken notice and are banging on the doors of successful boutique studio operators. They are developing portfolios that include a variety of brands. Logistically, we are seeing private equity-backed concepts opening various offerings within the same boutique fitness space, or within very close proximity to a sister brand. They want their concepts to be individually identifiable, however, they want to offer the end-users an opportunity to cross-train across their spectrum.
PE firms are also leveraging themselves in the software space as they work with developers and ask for specific product and development work to enable cross-club functionality across the same concept utilizing a single sign-in. Eventually, we should expect to see single mobile apps that can be utilized for all “related” verticals under the same PE umbrella. One login to book a Connect ride at CycleBar, an Empower class at Pure Barre, and a Dance class at AKT.
So, other than software feasibility, what changes when brands are sold to private equity? Well, to name just a few – the ability to leverage market presence to achieve lower build-out costs, renegotiate vendor contracts, reinvest in existing studios, hire more robust training teams and simply make the product better through more resources. The dynamic relationship between the corporate office and its partners becomes a more symbiotic because ultimately, the long-term success of one benefits the other.
Tevia Celli, Director of Education at CycleBar Franchising shared some valuable information about what PE funding has resulted in for CycleBar and its franchisees.
“We now possess the ability to invest a variety of resources back into studios where revenue has been lacking. We can assess the needs from a sales, instructor, and operations training side, and deploy the necessary resources to help address any existing issues. We are smarter in not letting studios open without the appropriate metrics being met. We want studios to open and be successful, so we now consistently offer GM trainings, lead instructor, and franchisee trainings as well as provide the franchisee with access to other valuable information resources.”
Investment in fitness is not slowing down anytime soon. As concepts tire, new ones are developed. As long as there is predictive revenue, controllable costs, and a community-based desire to being healthy, the justification will be there!
Private Equity in fitness is a good thing. Gone are the days of monopolizing big box gyms and mediocre workouts and experiences. The competition will trickle down from investors all the way to the class experience level. Higher end-user costs for the boutique experience will demand that the industry hires the best-of-the-best, starting from the top-down. People want to belong to a place that instills purpose, hope and motivation in their lives; whether it’s an inspiring instructor, a studio that values charitable giving or a place they can let go of the weight of their world, we all have our reasons for spending hundreds and even thousands of dollars a year to feel the way we do. Fitness brands don’t just sell a sweaty experience. They provide users with an irreplaceable feeling that makes a true difference in their lives.