The Boutique Fitness Industry Needs a Makeover

By Berna Barshay

Monday, June 8, 2020

Practically overnight, ‘virtual workouts’ went from niche to mainstream…

As fitness centers across the country shuttered in mid-March because of the coronavirus, gyms, studios, and personal trainers scrambled to get online to generate some revenue and maintain their connection with customers. According to the New York Times,

The number of global fitness clubs and studios using digital content has increased nearly 15 times since last fall, according to research from Club Intel, a data firm that tracks the fitness industry. By the third week of April, 74% of clubs and studios offered group on-demand or live classes, up from 5% last October.

While a few large fitness companies were prepared for the moment with existing apps designed for at-home use – notably digital-native ones like Peloton (PTON) and venture-backed Aaptiv – most gyms and boutique fitness studios weren’t immediately ready with at-home products.

Within days of the shelter-in-place orders, many gyms, studios, and trainers were offering Zoom-based group fitness classes in everything from yoga to boot camp. Facebook’s (FB) Instagram also became a hub for fitness content, with instructors “going live” and often leaving sessions up for replay for 24 hours or longer using Instagram’s fast-growing IGTV platform for long-form videos.

Classes based on Zoom Video Communications’ (ZM) platform are easier to monetize as password-protection can lock out users who fail to prepay, and they’re a great way to service existing clients… but Instagram offers better reach for new customers and higher capacity for peak users. Most of the content on Instagram seems to be free, at least for now.

Companies like Aaptiv and Peloton – which I’ll discuss in tomorrow’s Empire Financial Daily – have been pursuing a model of home-based fitness since inception. Some brick-and-mortar competitors – like high-end gym chain Equinox and its subsidiary SoulCycle – have been racing to catch up and offer digital services as well.

Prior to the COVID-19 pandemic, digital fitness was convenient, reduced the need for travel or conforming to a specific schedule, and could bring premium instruction to areas that might not have enough customers to justify a dedicated boutique studio.

All those things remain true during the pandemic. Right now, at-home fitness instruction in some places remains the only game in town. And for some subset of customers who are older, have co-morbidities, live with someone at risk, or are simply cautious, digital fitness will be the best option… even after studios reopen.

But the boutique fitness industry is in trouble…

These studios offer a specialized experience with prices typically ranging from $15 to $40 per class. Boutique fitness has always existed (think yoga and boxing studios), but the category took off around 10 years ago as premium cycling studios went mainstream – first SoulCycle and later Flywheel.

The massive growth in premium indoor cycling studios quickly spread to nearly every fitness discipline – including bootcamp (Barry’s), barre (Pure Barre), dance (Forward Space), Pilates (Club Pilates), rowing (Row House), boxing (Rumble), and stretch (StretchLab), among others. According to fitness industry advisors Atwood Consulting, boutique fitness now accounts for 42% of U.S. health club revenues and is responsible for most of the industry’s recent growth.

From 2013 to 2018, the industry grew a massive 121%, mostly due to private-equity (“PE”) money. Prominent PE firms like TPG and L Catterton – along with specialist firms like North Castle Partners and Snapdragon Capital Partners – have provided the cash for new concepts to quickly roll out the number of units they operate, expand their retail offerings in apparel and equipment, and layer technology into their communications and reservation procedures.

But the arrangement of boutique fitness is antithetical to social distancing… thus putting the entire business model at risk from the pandemic. These studios are likely to be among the last venues to be allowed to open, and when they do, they’ll be at greatly reduced capacity. At a recently reopened SoulCycle in Houston, only 14 of 60 bikes were available for booking. Last month, news outlet Vox described the challenges to the industry…

It’s just a numbers game. When it comes to spreading infectious disease, a mass of people – like, say, the 50 to 60 in a group fitness class – in a small space is the most dangerous thing.

Typically, the most crowded classes happen right before and after work, but studios often have around eight to 10 classes per day scheduled. That’s hundreds of people touching equipment, breathing heavily, sweating, and moving around – the same kind of stuff you’d find at a traditional gym (gyms will have their own dedicated group fitness space, too), plus even closer quarters, more high-fives, and more shared equipment. At the same time, there’s a crowd waiting to get into the next class, and staff trying to maintain the studio.

While no firm has comprehensively studied the risk of boutique fitness in the U.S., Vox noted some disturbing news out of South Korea…

There’s a disconcerting study out of South Korea that has found a cluster of infections from a group fitness class there. According to a CDC research letter from health experts at South Korea’s Dankook University Hospital and College of Medicine, a total of 112 people were infected with the coronavirus from a fitness dance class – the majority, 50.9%, of those infections were from instructor to student.

“Characteristics that might have led to transmission from the instructors in Cheonan include large class sizes, small spaces, and intensity of the workouts,” the researchers hypothesized. “The moist, warm atmosphere in a sports facility coupled with turbulent air flow generated by intense physical exercise can cause more dense transmission of isolated droplets.”

As Vox reported, the closures and the dimmed outlook are already hurting the industry…

Back in March, the founder of Solidcore, a workout that gained cult status because of a Michelle Obama endorsement, emailed clients that it laid off 98% of its staff. Flywheel, an indoor cycling studio, also reportedly laid off 98% of its workforce that same month. In late April, according to former employees, SoulCycle had a second round of cuts, laying off studio staff and instructors.

It’s an insanely fast change of fortune for an industry that was recently growing by more than 20% per year for many years. The news about Solidcore was particularly shocking… I saw its inspirational founder Anne Mahlum present at a conference in January and would have been first in line to invest in her business.

Many boutique fitness companies have shifted to offering classes online, but usually at a huge discount. Industry pioneer Barry’s would normally offer bootcamp classes at $38, but the online iteration only fetches $7.50 per class. Barry’s and others have stepped up their efforts to sell athletic apparel and sell or rent fitness equipment, but it’s still not enough to offset the high overhead costs of rent (usually in pricey neighborhoods) and payroll. As Barry’s founder and CEO Joey Gonzalez told Vox…

It’s been extremely difficult to continue to pay staff. Although we’ve been hard at work innovating the core business, developing Barry’s At-Home [its online classes], and retailing apparel as well as fitness equipment, the revenue generated hasn’t been enough to even cover payroll.

I’m grateful to have incredible private equity partners and shareholders that have been supportive of investing in our employees throughout this crisis. Realistically, continuing to support an employee base of this size isn’t sustainable, and we will unfortunately be in a tough position if we can’t resume business within the next few weeks.

The challenges the boutique fitness industry faces will likely delay at least one initial public offering (‘IPO’)…

In January, reports surfaced that Xponential Fitness – a roll-up of several boutique fitness brands, including Pure Barre, CycleBar, and Row House – was exploring an IPO.

The PE-backed startup wants to consolidate the fragmented boutique fitness space, and the backers hope to use greater scale to generate increased profitability. Xponential seeks better deals for common supplies through collective negotiation across brands and thinks a larger parent organization will help attract star talent – always a scarce resource in the fitness world. Scale could also decrease technology costs, as all brands operate on one platform.

Xponential also hoped having multiple brands would strengthen its position when negotiating with landlords, as many owners of malls and lifestyle centers have been eager to create a cluster of boutique fitness studios. These studios attract steady repeat traffic… and make a great neighbor for other tenants – such as juice bars or athleisure retailers like Lululemon Athletica (LULU) – who seek a similarly wealthy and health-conscious clientele.

With so many spots to fill due to store closures at regional and national retail chains, boutique fitness has been a bright spot within retail real estate… until many of the chains suddenly couldn’t pay rent.

Not everyone is a loser during ‘pandemic fitness’…

For many people, the obvious solution to closed gyms was a return to solitary exercise outdoors. They resumed long-abandoned running habits… And so many people wanted to ride a bike that the U.S. is currently experiencing a bicycle shortage.

According to market-research firm NPD, sales of leisure bike were up a staggering 121% in March alone. Bicycles have been in hot demand for exercise as well as a substitute in urban areas for public transportation, suspected to be the site of many COVID-19 infections.

By the end of April, many stores and distributors had sold out of low-end consumer bikes. Now, global supply chains – which the coronavirus outbreak has disrupted – are struggling to meet the surge in demand.

Other winners of the pandemic have been the select boutique fitness instructors who have managed to raise their profile and increase their reach during the pandemic via Instagram and IGTV broadcasts.

Outsized characters with star appeal have always dominated this industry… but during the shelter-at-home period, some instructors have significantly dialed up their celebrity status. Dubbed the “breakout star of virtual fitness” by the New York Times last month, Isaac Calpito has been attracting thousands of people to his Torch’d workouts – broadcast daily on Instagram at 11 a.m.

Including the replay, 20,000-plus people are tuning in daily, a huge increase versus the 60 people he would reach in his prior career as a SoulCycle instructor, or even more versus the audience of 2,000 he might have performed for during his time on Broadway. While Calpito has kept his classes free, he has solicited donations for charity No Kid Hungry. As of this morning, donations had topped $337,000.

With the survival of the entire boutique fitness industry on the line, a long list of companies and their private-equity backers will need to figure out how to mimic the online energy and feeling of personal connection that Torch’d has manifested.

Here are some places you can get your virtual workout on for free right now…

  1. Thirty days free of classes, including strength and meditation (no equipment necessary) at
  2. Seven days free of trainer-led workouts in several categories, including running and yoga at
  3. Free Torch’d (toning and strength) workouts on Instagram with @isaacboots daily at 11 a.m. Eastern time, with replays on IGTV.
  4. Free strength workouts and indoor cycling classes on the @aarmy IGTV channel. 

In today’s mailbag, three readers relay their struggles to get travel refunds…

Are you working out online? Are you back in the gym yet? Share your experiences at [email protected].

“In January my wife and I booked a trip to Italy for July through Diamond Resorts Int’l. It was for northern Italy and we were to fly in and out of Venice, one of the first Italian airports to be shut down. The trip had to be cancelled. American Airlines refunded our $2,116.90 to Diamond Resorts, but we have yet to be able to get Diamond Resorts to pay us. Their travel people acknowledge that they received the money from AA and on 3/19 requested a refund be sent to us. Multiple attempts to get Diamond to answer the phone or respond to e-mails have failed. The kicker is that at Diamond’s suggestion we bought the insurance for these flights. We filed a claim with CSA Travel Protection and the claim was denied because Diamond has approved a full refund and therefore there is no loss. So we have no money from CSA or from Diamond. It is most annoying that Diamond Resorts HAS our money but won’t send it to us. Not sure what our next step is here. Sure could use the money in these difficult times!” – David F.

“I approached my refund by filing a dispute with Visa. Disputes are very easy to file online and you don’t have to wait for an operator. I included that I am 61 years old, with a history of two heart attacks and I have asthma. That makes me very high risk for Covid-19. I stated that if Ticketmaster could not guarantee that I will be safe attending their event, I require a refund. I attached the CDC requirements for social distancing, knowing that they could not guarantee a distance of six feet from another concert attendee. I received the refund. Ticketmaster has been not refunding for years, by hiding behind the statement ‘It is not the producers policy to issue refunds’. Then they direct to their other company Tickets Now, expecting you to resell [your] tickets (giving them another commission on the sale). Very shady. I hope this information helps your readers.” – Michael T.

“I had the same experience trying to get refunds from airlines: they would only offer (sometimes quite restrictive) travel vouchers, and I was yoyo’ed between Expedia and the airline. Ultimately, I went the credit card chargeback route, and in all instances immediately got my money back. That’s what I recommend to all my friends, many of whom surprisingly don’t know about chargebacks. The only issue is when the flight was booked using miles / reward points, in which case I’m still trying to reach customer service, and may have to contend with travel vouchers.” – Marc H.


Berna Barshay
June 8, 2020

Whitney Tilson
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About Whitney Tilson

Prior to creating Empire Financial Research, Whitney Tilson founded and ran Kase Capital Management, which managed three value-oriented hedge funds and two mutual funds. Starting out of his bedroom with only $1 million, Tilson grew assets under management to more than $200 million.

Tilson graduated magna cum laude from Harvard College with a bachelor’s degree in government in 1989. After college, he helped Wendy Kopp launch Teach for America and then spent two years as a consultant at the Boston Consulting Group. He earned his MBA from Harvard Business School in 1994, where he graduated in the top 5% of his class and was named a Baker Scholar.

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