Issue No. 150: The Connected Fitness Update
Fitt Insider: September 28, 2021
Since the start of the pandemic, connected fitness has been red hot. But now, there are rumblings that the category is cooling. Were reports proclaiming the death of gyms greatly exaggerated? Let’s take a look.
To Infinity
When the brick-and-mortar fitness industry was forced to shutter, digital workouts took off.
Gyms
2019: US gym/studio revenue reached a record $35B, with 62M members and 41K facilities.
2020: Industry revenue plummeted 58% to $15B, with 22% of US gyms/studios permanently closing as of July 2021.
Digital
2019: The global virtual fitness market was estimated at $6B, accounting for just 6% of total fitness spending.
2020: Home fitness companies grew an average of 194% YoY, with the digital fitness segment set to reach $59B by 2024.
Hardly a new development, digital workouts were gaining ground prior to the pandemic. According to data analytics company Second Measure, in 2019, gyms averaged 6% monthly sales growth YoY, while home fitness companies saw a 30% increase.
More telling, leading connected equipment brands like Peloton (founded in 2012), Tonal (2015), Tempo (2015), and MIRROR (2016) had been working to unbundle the gym for years.
In a few short weeks, COVID supercharged the category.
A meteoric rise, in 2020, Peloton’s smart bikes sold out, the company turned a profit, and its shares surged more than 400% for the year.
Compelled to act, lululemon shelled out $500M for MIRROR. And connected fitness startups seized the moment, raising record levels of funding.
According to PitchBook data, home exercise startups raised $3B in venture capital globally last year, up from $1.79B in 2019. Showing no signs of slowing down, that trend has continued in 2021.
If you’re keeping score at home, here’s a rundown of connected fitness funding totals since the start of the pandemic: Zwift $450M*, ICON/iFIT $400M, Fiture $300M, Tempo $280M, Tonal $260M, Hydrow $148M, FightCamp $90M, Echelon $65M, Ergatta $35M, Liteboxer $24M, Wattbike $15.7M, CLMBR $13.5M, OxeFit $12.5M, CITY ROW $12M, JAXJOX $10M, Arena $5.2M, and more.
*For now, Zwift doesn’t offer equipment. But, the company raised this capital with the goal of launching hardware.
The Gympocalyse
As at-home fitness boomed, the future of in-person exercise looked bleak.
Earlier this year, The Wall Street Journal asked, “Are gyms dead?” A step further, around the same time, Fast Company proclaimed, “Gyms aren’t coming back.”
Outlining the inevitable gympocalyse, the rationale seemed clear: consumer behavior shifted to home workouts. COVID opened everyone’s eyes to the inconvenience of going to the gym, so they bought expensive equipment, effectively cementing a new habit.
Initially, multiple surveys seemed to back up this thinking.
66% of people who tried home workouts during the pandemic prefer it to in-person.
68% of people who started an online fitness program during the pandemic plan to continue using it long-term.
59% of Americans don’t plan on renewing their gym memberships once the pandemic is over.
But, as gyms stay open and look to rebound, is the tide turning?
Raising eyebrows, Peloton’s most recent earnings report revealed widening losses and waning sales.
Net loss of $313.2M
$937M in revenue, down 25.8% from $1.3B last quarter
Forecasted $800M in sales for fiscal Q1 2022, below analyst estimates of $1.01B.
A bigger issue, Peloton’s gross connected fitness margin hit 11.6%, down from 45.3% YoY.
Essential to its business model, Peloton’s hardware margin was supposed to resemble that of Apple. In fact, when breaking down the company’s S-1 in 2019 we wrote:
“Peloton’s hardware margins are better than Apple’s iPhone. Their content subscription generates SaaS-style recurring revenue. And the company’s obsessive user-base will propel the brand forward.”
But, while Apple managed to increase its gross margin, Peloton’s margins eroded as the company cut prices, all while costs continued to rise.
Touch and go. With the holiday season approaching, and the Delta variant threatening a migration back to gyms, Peloton will likely see continued growth into 2022. But the growing number of well-funded connected fitness companies are giving chase. Hoping to capture their piece of the home fitness pie, iFIT, Hydrow, Echelon, and Tonal could go public while the market’s still warm.
Back from the Dead
Contrary to the gympocalypse narrative, brick-and-mortar operators are seeing an uptick in visits and membership.
May. Research firm Jefferies reported that US gym visits reached 83% of January 2020 levels.
July. Studio franchisors F45 Training and Xponential Fitness went public. In August, both companies reported quarterly earnings, with F45 notching 54% revenue growth as Xponential saw sales surpass pre-pandemic levels.
August. Planet Fitness added 700K members in the most recent quarter. During the pandemic, the company opened more than 100 new gyms without shuttering an existing location.
Bullish on the return of gyms, health club operator Life Time recently filed to go public. Brazilian gym chain SmartFit completed its public offering. Shares of UK-based Gym Group are up 28% this year, recouping most of its COVID-related losses. Meanwhile, UK-based Pure Gym is exploring options for a sale or IPO.
Embracing omnichannel. According to research firm ClubIntel, prior to the pandemic, about 25% of gyms offered on-demand workouts. Now, that number is upwards of 72%. By all accounts, the digital/in-person hybrid will define the future of fitness:
A Mindbody survey found that 65% of exercisers intended to complete in-person and at-home workouts in a post-COVID world.
Les Mills data shows that 84% of gym members also work out at home, with the majority of exercisers preferring a 60:40 split between gym and home workouts.
Looking ahead: As connected fitness companies battle each other and in-person options, increased competition will cause every expense, strategic decision, and earnings report to be scrutinized. For more than a year, splashy partnerships and mega-funding rounds defined fitness tech, now the results will do the talking. Meanwhile, gyms aren’t out of the woods just yet. To stave off extinction, they’ll have to embrace technology and cater to the consumer like never before.