With lockdown easing for most sectors in the UK and the welcome news for many that pubs and restaurants can now welcome back customers, the pain of lockdown continues for gyms and sports facilities in England which must remain closed until 25 July. At the same time, fitness and general wellbeing has never been so front of mind and this has resulted in a huge surge in consumer demand for at-home fitness content and equipment as people have been forced to seek alternative ways to stay fit. Regular readers of our blogs will know that, as specialist investors in the consumer space, we are fascinated by these shifts in behaviour and what they mean for brands and business models longer term. Trying to predict which behavioural shifts will become permanent is a key part of our role.
Global spend on fitness and wellness is $600bn1 and here in the UK there are 10.4m gym members which is 15.6% of the adult population or 1 in 7 people2. It is a massive industry and an important part of a lot of people’s daily lives. It is a sector the team at True knows well through involvement in London based gym chain Gymbox and current portfolio company Ribble Cycles. More recently in 2019, True invested in the leading at-home cycling training game Zwift which has given us a particular insight into the rising appeal of at-home training (you can read more about our investment here).
The fitness industry is becoming increasingly resilient through recessions as wellbeing becomes an important non-discretionary part of people’s lifestyle which suggests demand will remain strong through the turbulent times ahead even if there is a significant drop in consumer spending power. This is good news for the industry as a whole but the ongoing shifts in terms of how and when people exercise will likely cause a radical shake up amongst the traditional operators. Here, we share our thoughts on the drivers behind the growth in at-home fitness market, how this might normalise post lockdown and the wider implications on the industry as a whole.
Over the past decade we have seen various fitness trends and crazes emerge. Many of the more bizarre ones, thankfully, were pretty short lived – Shake Weight session or Aqua Zumba anyone? Many others such as Crossfit, HiiT and the prevalence of wearables have endured. We’ve also seen the industry itself evolve as the traditional mid-market ‘white wall gyms’ were squeezed by the rise of budget and premium offerings. Then boutique offerings emerged, challenging the larger formats and swiftly becoming the fastest growing segment in the industry, growing at 121% between 2013 and 20173. More recently, another global challenger to both gyms and boutiques has appeared – the rise of an effective and credible at-home fitness alternative. As fitness equipment has developed, it has led to the convergence of hardware and digital content in ways that have not been possible previously. This has given the consumer the option of a genuinely effective on-demand fitness offering that doesn’t require gym membership. Disruptors like Zwift and Peloton epitomise this alternative fitness option and sit at the forefront of a new and emerging global consumer trend.
Typically fitness trends have started in the US and then made their way across the Atlantic which has given us somewhat of a forewarning as to the next big behavioural shift and this has allowed many businesses to adapt or even pre-empt necessary change. However, as is the case with so many other sectors, the global lockdown has overnight caused a binary shift in behaviour in favour of at-home fitness. In the short term, this has polarised the winners and losers like never before. The key question now, not only for us as investors at True, but also for CEOs and founders in the industry, is whether this shift is permanent or just another fitness fad.
We have seen first-hand the sheer scale of this shift to training at-home – usage at our portfolio company Zwift doubled between January and April this year and they acquired a years’ worth of subscribers in just 4 weeks. Outside of our portfolio, Peloton saw a c60% rise in exercise bike and equipment sales in Q1 this year4. Google searches for fitness equipment were up 300% over 10 weeks in lockdown and many retailers sold out due to demand. This is really no surprise. When gyms closed due to lockdown, government advice was to exercise once a day which is a pretty big advert to workout. You also have the natural propensity for people to focus on their health and wellbeing when faced with the very real and serious threat of the virus. The upshot being that fitness is now more than ever an important part of people’s lives and the home has really been the only viable option since March.
So will behaviour revert to the pre-COVID ‘normal’ once gyms finally reopen and lockdown is lifted? After all, the concept of working out at home has been around for decades but it hasn’t previously been able to dent the appeal of gyms. Investors often utter the cursed phrase ‘this time it’s different’ before being proven wrong. In this case however we believe there are a number of factors that mean that this time it is different.
• Technology – the reason most home fitness equipment never got used in the past is because it was incredibly dull! Sitting on a stationary bike or treadmill for hours staring at a wall isn’t anyone’s idea of a good time no matter how motivated you are to lose the lockdown bulge. Today however, fitness equipment can stream live classes, track data and create personalised training plans. The user experience is now truly engaging. Zwift is a case in point – it is a fitness company born from technology and, more specifically, gaming. It is the combination of gamification within its own virtual worlds and a global digital community that not only make it so engaging and but also provide it with a deep competitive moat. In addition to specialist platforms like Zwift, there is also access to huge amounts of content and workouts through YouTube or fitness apps which don’t require investment in hardware. Today there are over 30,000 fitness apps on Google Play compared to just over a 100 ten years ago which shows the scale of growth and we are just at the start. The influence of technology will continue and further democratise the industry as it becomes cheaper and more accessible.
• Community – one massive barrier to at-home fitness becoming mainstream historically was the lack of a social or community aspect. Essentially that sense of motivation or competition you get from working out with others which keeps you coming back for more. We are social beings after all. Through platforms like Zwift and Peloton you can now exercise with other people from around the world – all without ever leaving the home. It is this passionate community that we consider the next leg of social networks and it is this community that is the key to both engagement and retention.
• Long term shifts in working habits – we know that location is a key determining factor for people when joining a gym. People typically don’t like to travel far to workout – ideally less than 4 miles if you drive5 and less than 10 mins if you’re walking. People often base that location on their place of work. Our view at True is that this period of enforced working from home will drive a permanent shift in working habits with more people working remotely and increased localisation. For those now using their home as an office, that 10 minute walk for a workout has become a 10 second walk to the next room.
• On-demand economy – due to the combination of technology and a more variable lifestyle epitomised by changing working habits, on-demand services are more popular than ever. We have already seen examples of this pre-COVID with the rise of Uber and Netflix and this will only accelerate. Disruptors within the fitness space that can offer a fully on-demand offering will differentiate themselves from gyms which don’t or can’t offer that flexibility.
These months spent at home have forced people to change how they exercise and because working out at home is now more engaging, enjoyable, sociable and accessible than ever before, that behaviour will, this time, likely continue post lockdown for a significant proportion of people. This is why the recent acquisition of Mirror by Lululemon for $500m makes strategic sense. It is also why we are excited more than ever by the opportunity for Zwift as the potential scale of the digital disruption is huge, not just in fitness but in adjacent areas; This year Zwift held the first ever virtual Tour de France with professional athletes competing in a digital world. Sport and fitness are changing.
So does this mean the end of traditional gym membership? No, its never as simple as that. There will, in our view, always be a need and demand for gyms but many chains won’t survive and the winners will be, as usual, the ones that recognise and adapt to the new normal the quickest. In the short term it will be a rough ride for every operator as it’ll take time for a lot of people to be comfortable in a gym even with measures in place. There will always be a core group of people who will hold onto their gym membership.
Why? Firstly because as good as virtual classes have become, a lot of people will still want to exercise with others and those gym-goers have always been the most loyal – statistically you are 56% more likely to cancel your membership if you only use the gym as opposed to attend classes6. Secondly there is the issue of space and cost. An exercise bike, rack or treadmill isn’t cheap and takes up a lot of space which a lot of younger people living in cities just don’t have. Finally there is the fact that a lot of gym-goers seem to go to gyms just to see other people. According to a survey by Kettler, 50% of gym goers claim to go to the gym just to check out attractive fellow members and 30% claim they never break a sweat as they are too busy chatting with other members. Gyms are not just about exercise, they are also a place for many people to connect, meet friends and even pick up a date.
So which gyms will win? In my view it’ll be the operators that embrace the digital revolution by offering content virtually as well as physically. That content will also need to be fresh, varied and engaging to compete with their at-home rivals.
The next 12-24 months will certainly see a rapid shake-up in the fitness industry. At-home fitness is not a fad and is here to stay and we will see significant winners as a result. For the more traditional operators there will be opportunity but we can expect to see some brutal corporate Darwinism which will separate those that acknowledge and adapt to new consumer behaviours and those that don’t and simply expect a return to the pre-COVID normal. This is true not just within fitness but in every sector we look to invest in.
1. Global Wellness Institute
2. LeisureDB – The 2019 State of the UK Fitness Industry Report.
4. Peloton 2020 Q1 trading update
5. Dstillery – What Gym Rats can tell us about the future of mobile marketing.