As a leading global strategy consulting firm, L.E.K. Consulting has helped its clients deliver value-creating growth by addressing key strategic and operational issues. L.E.K. has worked with fitness clients across many strategic issues, including:
- Developing a post-COVID-19 growth strategy for a leading fitness certification provider
- Supporting the sales process for a leading connected fitness company
- Developing a launch strategy for a digital fitness marketplace
- Quantifying the unit whitespace opportunity for a boutique studio fitness concept
In this episode, we will discuss:
- The current state of the fitness landscape
- Fitness market trends
- Fitness investment themes
To provide insights on these topics, we will hear from Alex Evans, Managing Director and Head of the Los Angeles office for L.E.K. Consulting; Jon Weber, Managing Director at L.E.K. Consulting’s Boston office; Geoff McQueen, Managing Director at L.E.K. Consulting’s Los Angeles office; and Anna Ondik, Senior Engagement Manager at L.E.K. Consulting’s Chicago office.
Read the full transcript below
Welcome to Insight Exchange, presented by L.E.K. Consulting, a global strategy consultancy that helps business leaders seize competitive advantage and amplify growth. Insight Exchange is our forum dedicated to the free, open and unbiased exchange of the insights and ideas that are driving business into the future. We exchange insights with the brightest minds of the day, the most daring innovators and the doers who are right now rebuilding the world around us.
Hello there, and thank you for joining us on this podcast, brought to you by L.E.K. Consulting. My name is Jon Weber and I'm a partner at L.E.K. and I'll be the host for this session.
In this episode, we'll be covering a few topics related to the state of the fitness industry. We'll talk about three areas in particular. First is the state of the fitness landscape overall. Secondly, we'll dive into fitness market trends, what are the latest happenings in the industry from our perspective, and then we'll look to round out the session by touching on some of the fitness investments themes that we see based on our experience and where we see the market going into the future. Our hope is that you find these perspectives interesting and importantly, useful. It's obviously been a bit of a wild ride the last few years, and making heads and tails of what's been going on hasn't been particularly easy, and certainly we will do our best to do so, but we do look forward to sharing our perspectives.
So with that, let me just start by saying a few words about L.E.K.. I won't bore you with too much, but for those of you who might not be familiar with us, we are a leading global management consulting company. We focus on growth strategy and M&A, and in essence help companies grow their businesses and create value. And while as a firm, we do serve many industries, we have very deep expertise across the health and wellness landscape. It's an area where we do many projects during the year and we've been doing that for many years. And in particular, fitness is an area which obviously is the focus of this episode. We have advised the likes of various different companies, including leading gym operators, equipment brands, certification providers, technology platforms, as well as investors. So just to a name for you. I should also say that we are very proud to be celebrating our 40th anniversary as a firm, which is very exciting.
So before we begin, I'd like to ask three of my colleagues, Alex, Geoff and Anna, who are also here with me today, to introduce themselves as we will all be sharing our perspectives as we go throughout the session.
So Alex, I'll have you start.
Great. Thanks, Jon. Hi, this is Alex Evans. I'm a partner based in Los Angeles and I lead L.E.K.'s health and wellness practice in the Americas, and have done a lot of work over the years in fitness. So excited for today's podcast.
My name is Geoff McQueen. I'm a partner in the LA office. I've spent a lot of my past 10 years here at L.E.K., working with Jon and working with Alex on various health and wellness projects, and in particular have started to focus more on the fitness industry over the last four to five years as the COVID pandemic has created a lot of uncertainty in that industry. So looking forward to the discussion today.
Hi, everyone. My name is Anna Ondik. I'm a senior manager in our Chicago office, and I work as well in our health and wellness practice. Excited to be with you here today.
Great. So with those formalities covered, let's dive into our first topic, which is the current state of the fitness industry.
So it's obviously an understatement to say that the fitness industry has been heavily impacted by COVID, and in many ways it's been clawing its way back, so to speak ever since. And we're still in the throes of that, if you will, in some areas more so than others.
Alex, perhaps you can get us going and start by sharing with us some perspectives that you see around the current state of the industry and where we are today versus pre-COVID.
Yeah, thanks Jon. Happy to speak to that. So as you said, John, COVID had a meaningful impact on the fitness market. It drove a lot of gym location closures, particularly as we look at the smaller and independent brands, but actually a lot of concepts actually expanded during COVID. If you look at concepts like Plant Fitness and Exponential, they actually expanded units during COVID. That being said, we look at data from mid-2022 when we see surveys suggesting about a quarter of pre-COVID gym members had not yet returned to the gym. So we know that there are some lingering effects. But as we look at the past year, we see that gym industry has rebounded. We're about 10 or 15% below our pre-COVID levels in terms of revenue. And even though we haven't had the typical January bump that you see in fitness memberships the past couple of years, we've actually seen some positive trends. And we've had our first normal January this year since 2019. So we're not quite all the way back, but we're certainly on the way there.
And just to build on Alex's point there, there is some nuance to how this rebound has occurred. And when we think about framing the fitness market, we really think about really four different main segments of in-person fitness gyms and fitness clubs. The first being HVLP, so high value, low price, this is the Planet Fitnesses and the Crunch Fitnesses of the world, generally with that 9.99 price point. The mid-market, which is more LA Fitness, a chunk of your independent operators and regional chains that will have monthly memberships in the $50 to $70 range on average. And then there's the premium segment, the lifetime and equinoxes of the world where it can be 150 plus dollars a month for a membership. Then the last segment we think about is boutiques, which is a number of the brands that have really grown over the last six to eight years, the Orangetheory Fitnesses, Barry's Bootcamps, Solidcore, Exponential Fitness, those types of segments.
And when we think about those segments individually, they've absolutely experienced different levels of bounce back. HVLP has really been the big winner. When we look at the data, we think they're up about 20% versus pre-COVID levels. So, 2022 versus 2019. Really led by Planet Fitness, Crunch Fitness, driving a lot of location growth, capturing share, rolling out that 9.99 price point to a broader audience across the US. We've also seen a lot of success at the HVLP 2.0. So these are high value, low price locations that have a bigger footprint, offer more amenities and really focus on providing that extra value above and beyond just strength equipment and cardio equipment. And those are the VASA Fitness, EoS Fitness, Chuze Fitness, et cetera. And so, HVLP has really been the big winner in terms of segments and so they're back, above and beyond pre-COVID levels.
Next up, mid-market. Mid-market was challenged before COVID. It's even more challenged after COVID. We think, continue to be hollowed out, the mid-market, and see this segment down, really down about 30 to 35%. So it's been a pretty big drag on the overall fitness industry, and just continuing to face challenges as they are seeing increased competition on the value front from the HVLP players and increased competition on just the amenities and the experience from the premium players.
The premium players, they're coming back, but they're still not quite back to pre-COVID levels. They're down about five to 10% versus pre-COVID. And really, when you think about Life Time and Equinox, and Life Time is publicly traded, you can look at their data. It's interesting to see what's occurring there because membership is still down in the 10 to 15% range, but they've really been able to increase prices. And we've seen a similar story with Equinox in some of the credit card data that we look at, where members aren't quick coming back, but they're able to increase prices to offset some of that delta. Life Time is in a bit better of a position just with their more country club type of offering. Whereas Equinox, just given the more urban environment and given the shift to remote working, may still be some headwinds there. So it still seems a little bit off, but given the strength of those brands, will be interesting to see to what extent they're able to claw back to pre-COVID levels here over the next year as we continue to have more normalcy in the environment.
Boutique studios, it depends on the modality, depends on the location footprint, but Exponential here has really been the big winner. They are going gangbusters, their revenue is up versus pre-COVID. You look at their AUVs doing very well. But really, they're the exception, not the rule. A lot of the other brands are still facing some challenges and have rebounded, but still a bit of a gap between where they are, where they were pre-COVID. Thinking specifically about some of the bootcamp style offerings, the high intensity interval training types of workouts, we see a lot of those brands still being down about five to 10%, maybe a little bit more in some instances. And some brands are obviously struggling a little bit more. Think about the spinning brands now competing with a much bigger Peloton audience that has grown over the last several years. And so dynamics definitely vary within boutique in terms of across the different modalities, but have continued to see some of the leading players build on their strength and continue to grow.
Thanks Alex and Geoff, that was very interesting. And just picking up this concept of boutique, one related area, but one that's certainly getting a lot of attention is at-home fitness. Anna, what can you tell us about what's happening in the at-home fitness market and importantly, what do you think the future holds for it, versus other areas of the fitness landscape?
Thanks Jon. Well, maybe we start a little bit on the digital connected fitness side. So we know over the past decade there's really been a proliferation of digital and connected fitness services. And obviously during COVID with the closures of the gym, even more people working out at home in Peloton and all of those connected fitness equipment pieces and services. But that really led to intense competition coming out of COVID. And as Geoff and Alex talked about, the return to in person has then caused a correction in the connected fitness market. So decreases in valuations, announcements of layoffs from brands like Hydro and Peloton, and increasingly focusing on cost control, but really the consumers still want that experience. So we've seen continued search traffic interest in at-home fitness equipment, and we've seen people continuing to really indicate that they want to have some aspect of at-home workouts.
So we see some opportunities still, in connected fitness moving forward, particularly with brands that have an established installed base. And for those who have multi-modalities, so bikes and rowers as an example. But it's really not just about digital versus in-person. We see really, and we expect to continue this hybrid approach for consumers. So taking a best of breed, so maybe I'm going to my HVLP, and then also belonging to a studio to do some yoga. I have my Peloton at home and we see people getting outside more, so hiking or golf, tennis. So really the expectation we have is a hybrid approach moving forward, and consumers really not relying on a single provider for their fitness needs.
Thanks, Anna. Very interesting. The point about hybrid is one that we have seen in a lot of our own research as well, and I thought it might be useful to just share a few perspectives from our consumer work. In 2015, what we saw is that 19% of health club members had multiple memberships. If you flash forward to 2021, that number had risen fairly substantially to 26%. So clearly there was a group of consumers who were finding the multiple membership concept attractive. And when we further look at different populations within the marketplace, we see some interesting nuances as well. For example, when you look at studio fitness members, 80% of those members have more than one club membership. And when you look at other areas like Peloton users for example, 65% of Peloton users tell us that they belonged to a gym when they first purchased their Peloton.
So there's clearly a segment here in the market that is already very hybrid focused and taking a best of breed approach as Anna had mentioned, and importantly, they're willing to pay for it. On the other hand though, we do see the other side of the spectrum, which is only about 28% of members. If you think about just fitness only clubs, only 28% of those members have multiple memberships. And so there's quite a bit of way to go there. And that's not to say that everybody in that group is going to want to, or even be able to afford multiple memberships in the future, but it does feel like there are pockets of consumers there, which would appreciate a multi- modality fitness regimen, and there is white space. But some gaps would need to be closed for that really to happen. Things along the order of more education around the value proposition, configuration of concepts to meet their specific needs and so forth.
But the incremental white space is something that, as we pointed out earlier, there are modality specific concepts that are focusing and taking advantage of this, but there's also concepts such as HVLP 2.0 for example, who are trying to package more services, including classes, under one roof to get at this. And so, rather than have the consumer have multiple memberships, if you can have a great value with multiple modalities under the same roof, that could be pretty compelling. And so we'll see where that takes us. But an interesting area, as Anna mentioned, I just thought would be highlighted by some interesting perspectives from our consumer work.
Let's now move on to our second topic, which is current market trends. And obviously there are many to talk about here. But Alex, share with us what you see as the major trends impacting the fitness market.
Great. Thanks Jon. One of the trends we're seeing, we think this was really amplified by COVID, was the move towards more holistic wellness in terms of what consumers were looking for. So holistic wellness is around a consumer thinking about all aspects of their wellness. So it could include mental wellbeing, sleep quality, healthier eating, and of course fitness. And where we see this manifested is in certain areas like recovery in the broader wellness movement. In recovery, we've seen several emerging areas, things like IV drip therapy, red light therapy, infrared saunas, cryotherapy, and even assisted stretching start to proliferate. We've seen some gyms start to expand beyond their traditional offerings and offer these recovery services to their members. For example, 24 Hour Fitness has partnered with iCRYO to offer recovery related services, and others like Planet Fitness and Crunch have also expanded their offers around recovery as well. These are major chains in the gym space. We expect to see others, in other categories, smaller players, start to get into these recovery related services as well, because we think there's a lot of opportunity there.
Alex, I think another one centers around data and personalization. So consumers are increasingly leveraging wearables and seeking out personalized feedback on their performance to really track and measure progress towards fitness goals. And to your point on more holistic wellness, the technology around wearables has really gone beyond what it was before. So tracking an increasing number of physiological metrics, so not just the steps I take in a day, but blood sugar, blood pressure. So really allowing someone to see a more holistic view of performance.
The American College of Sports Medicine recently indicated that wearables is the number one fitness trend so far in 2023 based on some of their survey work. So an interesting trend in terms of data and personalization. And this one is even more important for younger generations who we know are becoming a bigger portion of gym members.
Yeah. And it's also important to think about some of the evolving trends within these consumer demographics. When we collaborated with the URSA team to draft the 2022 state of the consumer report, we saw some of these trends continue. As younger members make up a larger proportion of the base, you have more engagement from the Hispanic population and so forth. And so we see this shift in the consumer demographics that are going to be important to address and build into your future roadmap and initiatives. Gen Z for example, just tends to be more fitness oriented compared to the broader population. About 70% exercise at least several times a month compared to only about 60% of the general population. And they're also about 20% more likely to work out at a gym on a weekly or monthly basis than the general population.
And it's interesting when you look at the different generations and what their preferred exercise modalities are. When you get older, the boomer generation, it's generally around aquatics and stretching, some light cardio. Gen X is much more around strength training and weights and throwing that around. And then you get into millennials and now Gen Z and it's much more of a community oriented fitness. It's the boutique classes, it's functional strength, kettlebells, that sort of thing. So it is a different approach to fitness. And then Gen Z also, you likely will need just a different approach to capture them as members, right? Because they have a unique set of needs compared to the rest of the population. They're younger, they may still be in school, so maybe they only are in town for the summer or a shorter duration. And so having more flexibility in memberships can help attract Gen Z into locations. Social media and influencers are also key marketing channels to tap into this group, and they are particularly engaged with the omnichannel fitness approach and connected fitness, and use Peloton or Hydro or some of the other offerings that are out there.
On the flip side, the older part of the population, the boomers, are continuing to age but remain an attractive opportunity for gyms and fitness clubs. They are highly motivated to exercise and maintain that general health and wellness, but they're looking for different things out of their gym membership than younger members are. So investing in more low impact equipment or offering activities like water aerobics can help bring this group in and just really focus more on exercising to feel good, to be able to play with your grandkids, that sort of thing, can help differentiate and attract folks from that member segment.
Yeah, it's interesting. Gosh, there's just so many trends aren't there happening? And you've all touched on some really great ones, particularly related to the fitness industry. I'll just throw another one out there, which is a little bit broader from an adjacent perspective, but I think has implications obviously for those in the fitness industry and how you deal with it. But it's just in general, consumers living more active lifestyles and there's always been an aspiration for that amongst US consumers. And sometimes they're able to do that, sometimes they aren't. But we've clearly seen through COVID some pretty material upswings in some areas. Some areas as broad as hiking for example. That's one where you've seen a lot of participation growth, a segment which was growing around 5% a year for the decade prior to 2019. That surged around 16% from '19 to '21 and is sustained reasonably well.
So pointing out that consumers are just finding other ways to be active, not always necessarily in the gym or that type of environment. It's being active, it's being social, having fun. Another fun one that people like to talk about a bunch of pickleball, which surged tremendously over the last few years and the last couple of years. In fact, the Sports Fitness Industry Association named it the fastest growing sport. And so that just tells you how people are getting out and being active. And pickleball, while still fairly niche, is an example where it's fairly broad-based, as is hiking by the way, in terms of just ages that can participate and ability to do so on a reasonably frequent basis as opposed to necessarily paying for monthly memberships. And so we'll have our eye on that as well as you saw golf, as well as other areas saw some participation gains.
So while some people do have certainly more time to spend with work from home and otherwise to be fit and live active lifestyles, are doing so in the gym as well as outside. So we need to be aware of those things that I'm sure will continue to evolve fitness concepts as they try to augment their concepts to try to cater to all these different areas that consumers are getting into.
So with that, why don't we move on to the last topic. It's been a great discussion already around the industry and the key trends, but we did want to spend a little bit of time and get some final thoughts on overall industry attractiveness and opportunities for investors in particular. So with that, Alex, I'm going to turn that back over to you to kick us off on that topic.
Sure thing, Jon. We're still big fans of the fitness industry as an area for investment, like that it's a large market, 30 plus billion dollars. We think there are good tailwinds and long-term growth potential in the market. There's a passionate consumer base, and as we've been talking about, there's ongoing innovation in this market which creates new opportunities. But as Geoff pointed out, different segments of this market have very different profiles and can boom and bust. And so you need to be thoughtful about where you play in this market. One of the most direct ways to participate in fitness is investing in the franchise groups of successful fitness concepts like Planet Fitness or Crunch. We know a number of private equity funds have gone this route.
And as we discussed earlier, another area we like is the recovery and wellness services market with consumers looking for holistic healthy solutions and innovation in this category. New concepts are emerging. Restore Hyper Wellness is one of the few concepts that has achieved some scale so far. Most of the others are small, but they bear watching as this market's growing rapidly, and undoubtedly there'll be more interesting investment opportunities in the next couple of years.
We'd say before investing in any of these recovery concepts, we recommend a thorough due diligence process, really to understand the sustainability of the consumer proposition and the economic model, as undoubtedly not all of these concepts will survive, but we think some will. So again, we remain bullish, but certainly you need to choose carefully where you plan to invest.
Yep. Yeah, Alex, couldn't agree more. I think the growth we're seeing in recovery is exciting, but it's still pretty nascent. So, it will be interesting to see how far that is able to scale if it's able to truly be a national footprint or if it will be more a high end, high income type of offering. I think that the jury's still out, but curious to see how it evolves.
Beyond recovery and some of the franchisee groups, and just thinking about some of the segments and where investors can potentially place their bets, in general, we like the ends of the spectrum. As I mentioned earlier, the middle is being hollowed out. HVLP is gaining share. Premium still has a very strong value proposition. And this is something that we see in other industries as well. When we think about what's going on in the media world, you see this with the streamers, the streaming platforms today, where they're re-evaluating their content spend and they're really focusing it on premium prestige TV on one hand. And the other hand is low cost, unscripted content that can provide the content tonnage to keep you engaged with the platform. And so it's really hollowing out those $50 million films that Netflix released a number of over the last couple of years.
They're shifting away from that strategy and we're seeing that play out in the fitness environment as well, as more and more consumers are either opting for HVLP or opting for Premium. In particular, within HVLP, we think the 2.0 concepts here, the VASA Fitnesses, EoS Fitnesses, Chuze Fitness of the world, I think those are a particularly interesting concept, as they look to bring multiple modalities, multiple offerings under one roof. They've all explored this hit style class and incorporating it into their offering. And if you think about it from a positioning standpoint, doesn't have to be as good as an Orangetheory or as good as a Barry's Bootcamp, as long as it can be good enough that that $30 price point a month becomes a lot more palatable to a lot more people than what a boutique style experience can cost.
And as we look towards the macroeconomic environment here over the next couple of years and some of the uncertainty around it, I think those HVLP 2.0 players are really well positioned to capture share, moving forward.
Great points, Geoff and Alex. There's certainly a lot to consider as you think about investing in the fitness landscape and identifying what are the right pockets of opportunity as well as concepts to invest in.
It looks like we've come to the end of our session, so to close out the conversation, I'd just like to thank my colleagues, Alex, Geoff and Anna for joining and sharing their perspectives on the industry. As always, very insightful and useful. I always learn a lot going through these types of things, and in hearing your perspectives, I'm sure others do as well. For those of you who are interested in learning more, we're always happy to provide more detailed perspectives upon request, and we invite you to connect with us to learn more about L.E.K. consulting and how we've helped clients succeed and create value and done great work in the fitness industry. Thank you.
Thank you, our listeners, for joining us today at the Insight Exchange presented by L.E.K. Consulting. Links to resources mentioned in this podcast can be found in the show notes. Please subscribe or follow for future episodes wherever you listen to your podcasts. Also, we encourage you to submit your suggestions for future insights, online at lek.com.