If Lululemon’s acquisition of the remote fitness company Mirror was a half-billion dollar bet on ‘the future of fitness’, it’s fair to wonder if that means the traditional indoor gym is destined to be the ‘fitness destination of the past’. The high-profile struggles of several national chains (see: Gold’s Gym, 24 Hour Fitness and New York Sports Club) would seemingly support that conclusion. But Simeon Siegel says that smart at-home fitness products are more likely to be complementary to monthly gym memberships rather than replace them. The BMO Equity Analyst sees companies like Mirror, Peloton and Tonal to be “a piece of the workout routine rather than the entirety of it.”
Our Take: Before getting carried away with the momentum behind the remote fitness trend it’s important to understand that we’re currently in the “eye of the perfect storm.” Siegel reminds that the coronavirus outbreak and subsequent shelter-in-place orders enacted over the last four months have coincided perfectly with the proliferation of at-home fitness products. There’s certainly no guarantee that working out at home will remain in vogue as states open up and people can resume their normal fitness routines.
It would also be fair to suggest—as Siegel has—that this four-month self-isolation period may have just been “a hyped-up New Year’s Resolution” and that the strength of the at-home craze will fade like countless fitness fads before it. That’s because “at the heart of it, people need to want to work out—and work out for an extended period of time—for [the pie] to grow incrementally; and historically speaking, fitness has had a very high cancelation rate.” If there’s a reason to believe things will be different this time, it’s because the connected fitness companies are not just manufacturing hardware, she said, “they’re interacting with the consumer in their home and that inherently opens up a longer relationship.”
Peloton has a $58/mo. Interest-free offer on their bikes—in line with the average monthly cost of a gym membership (granted, this does not include the monthly cost for their content)—so it would be reasonable to assume prospective purchasers are choosing between a piece of at-home equipment and their traditional workout routine. But Siegel said it’s too early to tell if gym businesses are losing a large number of members to the at-home trend. While the “aspirational” customer may be forced to select one or the other, those with high disposable incomes “see the luxury purchase as complementary to a gym membership.” Unfortunately, given that Peloton is the only publicly traded company in the space right now, there’s not enough data to make definitive claims about the user base.
To date, there’s been no indication that gym memberships numbers have fallen off. Because a large portion of the fitness ecosystem wisely opted to halt monthly dues at the beginning of the COVID-19 outbreak, Siegel said, “many gyms eliminated the consumer’s need to churn at a time when there likely would have been churn.” It bears watching if membership levels decline now that facilities have reopened and accounts are once again being charged, but anecdotally the equity analyst says that hasn’t been the case thus far. Recent “checks” with various fitness chains (including Planet Fitness) showed “higher new joins are offsetting higher churn and cancellation.” Another reason it’s unlikely smart equipment will replace the need for a traditional gym membership is that “generally speaking, people that go to gyms do so for the social experience,” Siegel said.
Of course, as Laura Martin (CFA, Needham) astutely pointed out, the longer COVID remains a threat, the more likely it is that people will invest in their own fitness equipment as a permanent replacement. Eventually it becomes their new ‘normal.’ As noted earlier, several mid-tier gym chains have found themselves in financial difficulty, but Siegel suggested their struggles are more likely indicative of how they’re positioning themselves, not signs of a dying industry. As Martin reminds, there were still 62 million people paying for monthly gym memberships in 2019; by comparison, fewer than 900,000 had purchased Peloton bikes.
Successful fitness centers can position themselves as “luxury amenities with high price tags or as functional places to work out and compete on price,” but it has to be one or the other. Siegel says that in a post-COVID world, the high-value, low-priced gyms are the ones “best positioned to capitalize on the [anticipated] dislocation within the fitness industry.” That’s because aside from remaining affordable in the midst of an economic depression, “if [the virus] reduces engagement or if at-home fitness shrinks the number of times one goes to a gym per week, that’s going to hurt [the luxury fitness clubs]. The higher the price point, the more the consumer needs to feel they’re getting out of the membership.”
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