Fitness industry heat check
Opinion piece examining fitness themes across public and private markets given recent headline risk
Hey there! I’m Jordan Pascasio, Investor at Next Ventures.
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The increasing frequency of negative private and public market developments in the fitness space begs the question of how investors and builders should handle headline risk in a vertical that continues to see consumer behavior normalize. Just in the past 45 days, we’ve seen multiple early-stage companies in the fitness creator vertical SaaS space dissolve or pivot as well as the massive trading correction and public crucifixion of Peloton. Given the combination of waning positive investor sentiment for pandemic solutions and the increasing commoditization across fitness product offerings, it’s worth conducting a heat check on the fitness industry to determine risk appetite going forward.
🔎 Areas of correction
Public markets: Connected fitness
I’m certain that everyone reading this piece is acutely aware of what happened to Peloton over the past few weeks. If not, Blackwells Capital and Liam Killingstad of FOS put together comprehensive analyses of the company’s recent struggles if you need to catch up. Before adding my $0.02, it’s important to point out that the significant correction Peloton endured wasn’t a localized event. Pandemic trades across multiple verticals have underperformed considerably as of late.
For example, an adjacent market such as Healthcare Tech has shed hundreds of billions in market cap from its 2021 highs as investor sentiment cooled on companies that may have benefited from the pandemic and on the nature of their long duration assets (i.e., majority of cash flows are still in the future) against the backdrop of a hawkish Fed. As a result, stocks across the industry have declined between 8-88% over the past year or since their 2021 IPO, and are now trading at 12-51% of their 52 week highs, as shown in the chart below.1
Circling back to Peloton - I won’t get too deep into reported coverage as numerous outlets have covered the provocative story of how the once fitness tech darling ended up posting a total shareholder return of -84% over the past year. Instead, I’d like to opine on thematic catalysts that drove the interim influx of demand that ultimately led to poor management decisions around demand planning and irrational spend.
Peloton was arguably one of the biggest beneficiaries of the pandemic as their solution sits at the intersection of many secular growth themes within consumer internet. Peloton’s community of users, high-quality influencer driven content and at-home connected devices allowed users to stay active during lockdowns. The boost in demand was significant, averaging a quarterly member growth rate of ~20% over the first year of the pandemic. This growth served as the driving force behind the decisions to increase production capacity and to shore up inventory in the second half of CY 2020.
The outsized demand was likely predicated by irrational consumer purchasing behavior that was made at the peak of the pandemic as cabin fever set in and as access to 0% financing (via Affirm) was free flowing. Peloton’s FY 2020 (ending June 30th) saw a meaningful uptick in ‘buy now pay later’ utilization amongst Connected Fitness Product purchasers with 68% of hardware sales being financed through Affirm’s embedded solution. This was significantly higher than the preceding and succeeding year.
One could argue that the pandemic-fueled consumer purchasing behavior created a false signal of demand, leading Peloton to increase inventory by over 110% in just 6 months (June 2020 to December 2020). Two months later (February 2021), CEO John Foley boasted, “We've increased the [manufacturing] capacity by 6x, which is pretty herculean, but we're definitely not going to stop there. We bought Precor. We're going to be investing in U.S. manufacturing.”2 One month later (March 2021), the U.S. surpassed 100M vaccinations administered, marking the very start of fitness consumer behavior normalization after being in lockdown for a year. I personally don’t find the sharp decline in member growth that started the next month (April 2021) to be a coincidence.
While many companies that benefited from pandemic trades have endured a recent fall from grace in public markets, it’s particularly difficult for a company like Peloton, which is still deeply unprofitable and operating a much less agile business model than, for example, pure-play SaaS, to right size the ship in short order.
With that said, Peloton remains the connected fitness leader on the back of its superior hardware, high quality content and beloved coaches. This is evidenced by its extremely low monthly churn rate of 79 bps which theoretically implies an average customer lifetime of 10.5 years! According to Street analysts, the company has laid out slower growth and more rationalized costs for the next two quarters as it completes FY 2022 (ending June 30th), including elements of low/no marketing, headcount reductions and utilizing existing inventory levels for connected fitness hardware/subscription growth.3 With a new and more pragmatic CEO leading the recalibration, it will be interesting to see how Peloton executes on a much needed operational adjustment.
While it’s easy to connect the dots in hindsight, the company’s past 24 months serve as an insightful precedent for developing a view around fitness consumer behavior and demand planning, depending on your business model.
Private markets: Fitness creator vertical SaaS
Since the start of the pandemic, new market entrants across all things digital fitness ballooned as workouts went virtual during lockdown. However, over the first two months of 2022, we’ve witnessed a precipitous pruning of startups building vertical SaaS solutions for fitness creators as the market saturates and as consumer fitness behavior normalizes amidst virtual fatigue.
In late January of this year, Interval closed up shop (rolling its instructors into arketa) and Talent Hack made the decision to pivot away from fitness creator software. Two weeks later, IndiFit also closed doors, citing significant headwinds around growth and creator monetization. The Talent Hack news was particularly shocking as the company just raised $17M of Series A funding this past November with aspirations to dominate the fitness creator market.
So what happened that caused three startups in the space, each led by extremely capable and talented founders, to either close up shop or pivot? I’ve compiled some thoughts based on conversations with some of the aforementioned founders and other founders in the space.
💨 Headwinds
Lack of earnings potential for creators
Last month, I published an opinion piece on how cloud studios present fitness creators with a compelling lever to increase content quality and to unlock hybrid monetization. The impetus for sharing my thoughts came from seeing so many vertical SaaS enablement platforms that, on average, yielded underwhelming annual earnings potential. At the end of the day, these platforms need to help fitness creators generate primary income that can support their daily lives. Otherwise, the platforms will be utilized for supplementary income (i.e., side hustle) and thus be at risk for inconsistent fitness creator engagement and/or retention.
For the long-tail and chunky middle of a platform’s creator distribution, meaningful monetization is difficult. The median annual earnings across most of these platforms’ creator pools is below $10K. Moreover, creators eat what they kill. With just a digital channel to offer, it becomes difficult for the average creator with average content to boost gross merchandise value (GMV), and thus earnings, from net new customers given market saturation and the lack of endemic knowledge around how to market themself.
In addition to customer acquisition headwinds, we must also remember that creators not only are building a business on top of extremely fickle consumer behavior (i.e., humans historically have poor adherence to fitness goals), but also are running up against the same consumer fitness behavior normalization that Peloton ran into.
Captive addressable market
Creator micro-monetization isn’t an issue for platforms like Patreon or OnlyFans that serve much broader pools of creators. However, for platforms serving more captive creator pools like fitness, generating meaningful top-line revenue becomes challenging.
While sources have estimated the number of fitness instructors and trainers in the US at 370K, it’s not clear how many of those instructors maintain a digital presence or have a following or clientele large enough to monetize digitally.
Using Curastory’s API as a proxy, the proprietary data source indicates that there are only 35K fitness creators across IG, YouTube, TikTok, Twitch and Twitter with at least 10K+ average video views (or 5K+ average video views if HypeAuditor growth has increased exponentially over time). Taking those numbers at face value, even if you won the entire market of larger fitness creators and made $1K per creator per year (via take-rate or monthly subscription), you’d still be a sub-$50M business in terms of annual revenue. And this excludes any assumptions around churn.
Furthermore, a creator land grab within a relatively smaller addressable market creates acquisition friction for vertical SaaS platforms, especially as challenger offerings become increasingly commoditized and as incumbents like IG roll out subscription features.
🔮 Remedy considerations
In order to build a venture-scale platform, the remaining vertical SaaS players need to test ways that they can increase a creator’s average GMV, cover the full spectrum of fitness stakeholders (from creators to gyms/studios) and expand the surface area of creators beyond just fitness. Additionally, strategic consolidation could also be an interesting consideration given the concentration of companies building at opposite ends of the stakeholder spectrum.
GMV expansion
Enabling creators to expand their average monthly GMV by way of longitudinal product offerings can help increase creator earnings as well as total platform GMV. Currently, most creators on vertical SaaS platforms monetize through dissemination of video-on-demand (VoD) and live-stream content. In order to unlock a Shopify for fitness & wellness model, platforms could also offer seamless integrations with white-labeled merch and nutrition, bespoke mobile app development and the ability to facilitate IRL classes and events/retreats. While these cross-sell features may only be material to the fat head of a platform’s creator distribution, providing a holistic tool set can help juice GMV.
Services also represent a good way to sustain or increase GMV through retention or acquisition, respectively. Services such as marketing automation, social media consulting and content consulting can help creators enhance their customer retention or optimize their top-of-funnel.
Cover the full spectrum of fitness stakeholders
To mitigate any concerns around the market captivity of solo fitness creators, platforms can offer vertical SaaS solutions that also serve use cases for gyms/studios and creator collectives.
The former likely requires more technical resources, a net new product offering and additional capital. However, if a platform is able to find initial success building solutions for solo creators, positive consumer sentiment and validation may bode well for selling a new product into gyms/studios.
The latter presents an interesting opportunity if platforms were able to consolidate their most successful instructors on platform into creator collectives to create cross-sell opportunities and marketing efficiencies. Kind of like Amazon rollups for fitness creators.
Expansion of creator surface area and addressable market
Creators come in all different shapes, sizes and focus areas. I would guess that the feature set built for fitness creators is also relevant to wellness creators. These could be creators that facilitate breathwork, meditation, group therapy, pre- and post-natal exercises, etc. As health & wellness literacy continues to emerge as a core pillar of society, alternate flavors of wellness creators should grow in lockstep, providing new customer acquisition opportunities for platforms beyond just fitness creators.
Consolidation
As the number of vertical SaaS point solutions for creators and gyms/studios continues to proliferate, consolidation is one way to establish differentiation through comprehensive, longitudinal models given the large concentration of early-stage companies building at both ends of the spectrum (i.e., vertical SaaS for creators and vertical SaaS for gyms/studios).
This could include two leading challengers coming together to bridge the gap or an industry incumbent (e.g., Mindbody) bolting on the market winner of solo creator enablement, for example.
☀️ Bright spots
Private markets: Digital coaching
Despite this piece’s analysis of recent negative events, there are still a ton of bright spots within the fitness space - notably, digital coaching experiences.
Digital coaching leader Future continues to make waves in the fitness space with its asynchronous coaching experience that pairs users with a qualified coach to coordinate and execute on fitness, nutrition and stress management goals. The consumer love that I see for the product within fitness & wellness communities aligns with the extremely impressive user metrics that the company generates.
Future’s supply-side is highly curated, requiring a tertiary-level education, 1-2 years of relevant training experience and certifications. Once on the platform, coaches have access to proprietary CRM software that helps to maximize client load. In other words, the platform allows coaches to service more clients relative to coaching IRL, unlocking meaningfully higher annual earnings.
On the demand-side, the product UX is drastically different from digital class platforms as 1-to-1 relationships drive far greater client accountability. Seemingly small aspects such as daily check-ins via text message go a long way.
The model of pairing a user with a dedicated human counterpart digitally or IRL to drive higher accountability and functionality has been successful across adjacent markets such as digital health as well. Examples include health coaches that help patients manage their chronic conditions; or college-aged companions for the Medicare Advantage population that provide day-to-day assistance and conversations.
Final thoughts
The importance of fitness cannot be understated as it relates to proactively combating chronic disease and reducing the total cost of care. We remain excited to see how innovation can drive increased adherence and give birth to truly differentiated product experiences within a space that is so pivotal to driving a conscious shift towards a healthier future.
However, given what has materialized in the space recently, early-stage companies should develop near-term contingency plans that take into consideration the effect of mask mandate removals on normalization pace, the non-zero chance of softening digital fitness demand and the increasing commoditization across fitness solutions.
These considerations are not intended to proclaim doom and gloom going forward, but more so to stress that the period of comfort amongst fitness companies during the pandemic created conditions for vulnerability as the pandemic unwinds. As such, it’s important to brainstorm scenarios in which failure could occur in order to develop plans to mitigate them or address them head on.
Here are a few market developments in the space that I’m looking forward to watching play out:
Will additional incumbent connected hardware companies such as Tonal or Mirror suffer from any lingering demand planning mishaps this year?
Within the creator enablement space, how will the dichotomy between pure-play vertical SaaS and marketplace platforms play out?
Is this a winner-take-all market and which model is best suited to win?
Will class platforms with fully-curated supply sides (e.g., FitOn, Obe) continue to see success post-pandemic?
Are these self-sustaining platforms into the future or better suited as bolt-on acquisitions for payors or media incumbents?
What will the return to IRL fitness look like at scale and by gender?
The majority of users on digital class platforms are female
Can the eldertech fitness platforms that are currently operating B2C2B motions (not to be confused with the B2B2C business model) prove the efficacy of ‘healthy aging via fitness’ in DTC and then work with managed Medicare via shared savings or capitation down the road?
Or would payor partnership require more longitudinal offerings to help older users treat chronic disease or comorbidities?
What fitness modalities are best suited for this population (e.g., digital coaching 1-to-1 or digital class platforms 1-to-many)?
If you are building or investing in the health & wellness space, I’d love to chat! Please reach out to jordan@nextventures.com, or I can be found here.
Goldman Sachs Equity Research, Deciphering the Digital Disruption: Initiating at Buy on TDOC, DOCS, SGFY, ACCD and HCAT
https://www.blackwellscap.com/wp-content/uploads/2022/02/BW_Peloton_Presentation_Feb072022.pdf
Goldman Sachs Equity Research, Peloton Interactive Inc. (PTON), 2QF22 Review: Adjusting The Business Model For A Post-Pandemic Normal
Salut and Airsubs also shut down, and OnPodio sold to Recess.tv
Core Fitness has also exited the market