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features

Research round-up: Smart money

Can the UK’s boutique health and fitness sector secure sufficient finance to spread its wings? Deloitte’s Alicia Whistlecroft sizes up the stats

Published in Health Club Handbook 2020 issue 1

The domestic health and fitness industry has developed and evolved rapidly over the last 35 years into a relatively mature yet still attractive, growing market.

According to The Leisure Database Company’s 2019 State of the UK Fitness Industry Report, this market is valued at an estimated £5.1bn – a 4.2 per cent rise on 2018 – with a projected compound annual growth rate of around 8.5 per cent in value and 5 per cent in the number of gyms and health clubs over the next five years.

However, this is an industry faced with the challenge of making constant advances in product and delivery, as it’s customers continually become more educated and aware of the benefits of different types of exercise on physical and mental health.

Over the last decade, the main disruption in the UK has been the strong growth of the budget operators, but more recently another storm has hit the industry – in the form of the boutique fitness operators.

The development of the boutique sector is potentially much more diverse in its impact than the growth of the budget operators. It’s also much more challenging from a funding perspective, with the need for specialisation and sustainable differentiation being more important than scale. So how can this sector attract the necessary funding to make a real impact on the structure of the industry?

Elements of boutique
There are three underlying elements that can be used to define a boutique business: a focus on a clearly defined (specialist) product; flexible and/or bespoke delivery of the product; and an underlying desire to create a community amongst its customers.

The focus is often on both a style of exercise and how it is delivered. Some sub-sectors are more developed (e.g. cycling), whereas some players are already well on their way to achieving a strong international footprint (e.g. Barry’s Bootcamp).

People enjoy the flexibility of boutique classes without being tied to a gym membership. Furthermore, with memberships it’s very easy to find an excuse to go tomorrow, whereas with a class-based product, you book a time and frequency to suit you. This means you’re more likely to attend, leading to increased commitment and consistency of training.

Another significant differentiator of boutique fitness studios is that they are able to better offer a sense of community. Given the studios are small with a specific timetable of classes, the staff and customers become familiar with each other. This makes the exercise experience more enjoyable and customers are able to identify with the brand, which in itself is a powerful growth tool. The creation of this community spirit further fuels customer’s appetites to attend a workout class at their favourite boutique studio and in turn this helps to build customer retention.

Demographic drivers
It would appear that the millennial and generation Z demographics are the drivers behind this new type of exercise; young fitness enthusiasts who view health and fitness as a way of life.

They are willing to pay more for a class that is tailored to their specific goals, that is more fun and engaging compared to just a routine gym workout, and for sessions that tend to specialise in one type of exercise with smaller class numbers.

Interestingly, a large portion of customers at boutique fitness classes are women. The Global Boutique Trends Report 2018 found that women made up 83 per cent of classes booked in London. This gender divide is similar in both New York and Los Angeles where women made up 83 and 81 per cent of bookings respectively.

Branding across the pond
The US boutique fitness sector already has some large players such as Barry’s Bootcamp; a brand launched in LA in 1998 which has financial backing from North Castle Partners.

After 11 years of operating solely in LA, this brand is now developing into a global business with studios across the US and franchises in other major cities around the world. It now has over 50 sites in nine countries; the latest one being in Australia.

Orangetheory has grown even quicker through franchising. Since starting out in 2010, it now has around 1,000 worldwide units in roughly 20 countries. Orangetheory has all the typical characteristics of a boutique – its differential niche is the use of heart rate monitors worn by each customer, with the objective of working in specific heart rate zones to ensure maximum calorie and fat burning based on scientific knowledge.

Throughout the workout, all participant’s outputs (heart rate, calories burned etc) are displayed on a main screen in the studio – this helps to drive motivation and competition, maximises output from customers and is another component of the community spirit. The idea of having a differentiated selling point is key for companies trying to gain traction and succeed in this highly competitive industry.

Xponential Fitness on the other hand is a group of boutique brands from across the major categories of boutique fitness (pilates, barre, cycling, rowing, yoga, stretch and dance). The brands are run via franchise models with studios in close proximity to each other, helping to drive the cross brand offering; however, they’re run independently and don’t share central services.

Xponential Fitness had much of its initial growth supported by financing from TPG Partners since CEO Anthony Geisler sold Club Pilates to TPG after growing it from 80 to 475 franchise territories. Geisler and his business partner Mark Grabowski (an ex-TPG partner) have since bought Xponential back from TPG Partners.

L Catterton, an established institutional investor with a focus on growing consumer brands, has been very active in the sector. Investments (both past and present) include Peloton, Flywheel, Pure Barre and CorePower Yoga. L Catterton also invests in health and beauty products such as Bliss and in related areas such as healthy food. All of these subsectors have positive market dynamics and there is some convergence as companies look to become more holistic in their overall approach.

The boutique fitness market has not quite reached IPO level yet; SoulCycle previously filed for an IPO but withdrew and Flywheel considered an IPO but has decided against it for now. However, this is something we could expect to see in the near future from some of the larger operators who have had significant success to date.

However, the US does already appear to be a little crowded in some geographies. For example, New York has numerous brands of fitness studios, e.g. the cycle studio space has the likes of SoulCycle, Flywheel, Peloton, Revolve, Crank, Swerve, Cyc, Syncstudio and so on.

By comparison, London, a city with a similar population size to New York, has a much smaller number of boutique fitness studios, with many operators only having a handful of studios, suggesting there remains significant opportunity in the UK, as well as Europe, where there aren’t as many boutique fitness concepts established as yet and the roll out of existing brands has been on a smaller scale.

UK to follow in US footsteps
Many expect the UK to follow in the footsteps of the US, as it has in other sectors, so we could expect to see increased levels of investment in the coming years.

There are a lot of smaller UK boutiques out there with great concepts and rapidly growing customer bases such as TRIB3, Core Collective, KoBox, Psycle, BLOK, Flying Fantastic etc, so there are plenty of opportunities for financial investors either on a single brand basis or through building a brand portfolio.

To date there have been a number of successful capital raises from a wide range of sources including:

Crowdfunding (Crowd Cube and Seedrs, for example) can be an excellent way of proving out an initial concept before approaching the institutional investors to create scale. Crowdfunding can also assist with marketing and establishing a loyal core of advocates for the brand.

Network funding (Wealth Club, Codex Capital, for example) from one of a number of financial advisors with an established network of high net worth investors who are willing help companies present their ideas to this network to raise funds. This tends to be second or third round funding, where there is some proof of concept.

Family funds are becoming more and more active and increasingly structured as high net worth families look into ways of more independently managing their money. Those who have made money in the health, wellbeing and fitness markets are usually more inclined to invest where they feel they have an edge.

Institutional funds (such as NVM and Piper) are expressing more interest and this will enable more scale businesses to be built. These institutions typically raise 10-year funds; the benefit of this being that the money is already raised and follow-on capital can be agreed at the board level (as achieved at Gymbox). Typically, these funds would look to invest in businesses with more than £1m EBITDA.

Accessing capital
In boutique sectors it can be harder to attract interest from institutions because of concerns over scale, competition and ‘keyman’ dependency. In approaching institutional funds and family funds, businesses should focus on being able to answer the following common challenges from investors:

• Over the medium term is it possible to create a scale business?
Institutional investors like to invest in companies that have the potential to continue growing for 10+ years, as this makes it easier to recapitalise the business. For specialists this can be a challenge as the product may have a limited market. As well as creating an effective roll-out model, brands can consider merchandising, franchising, tie-ups with mass market brands etc to provide a range of growth levers.

• Does the model work outside London?
The majority of UK expansion is likely to be within metropolitan areas, with a large portion of the UK’s current boutique fitness studios being in and around London. Some have expanded outside the capital, including Barry’s Bootcamp, which recently opened a site in Manchester, and F45 (a company offering 45-minute high-intensity, circuit training workout classes) which has several franchised locations around the UK, including Birmingham, Brighton, Chelmsford, Harrogate and Reading, with many more opening soon. So no doubt other companies contemplating national expansion will be keeping a close eye on how these studios perform compared to their London counterparts.

• Can the differentiation be sustained?
Many industry experts believe there is an increasing pool of additional customers alongside the existing fitness industry as millennials place a greater importance on their fitness than previous generations. Appealing to these more ‘intense’ users of health and fitness should be expanding the market. However, with sometimes relatively low barriers to enter and also existing mainstream players who already have the footprint to exploit new concepts, the investors will need to be convinced the growth plan is sustainable.

• ‘Keyman’ dependency
Not a challenge for more tech-driven products but where the customer experience is largely governed by the people delivering the training, replicating this as a business grows can be challenging.

Future growth
One thing is for sure, as more competition comes along in the form of both new concepts as well as new sites for existing companies, the quality of the studios and the classes available will need to be the best in the market in order to succeed.

More mature consumer sectors have a long history of creating new boutique products and we expect the health and fitness sector to continue to throw up new and interesting alternatives to the mainstream. This is a market that has seen rapid growth and will continue to prosper as individuals become more focused on their health and fitness and the different ways to train. If this is the case, it becomes a question of consumer preference, which training methods are most favourable and if there is the same level of appetite outside the major cities. These factors will help define which boutiques are successful and can grow significant market share.

There is a lot of growth still to come in this sector, from both new emerging concepts as well as existing concepts taking advantage of the ever increasing empty retail spaces on the high street and expanding into new studios across the country. Private Equity is well placed to support this growth and make the most of an industry that is set to continue to grow as health and fitness becomes a more integral part of consumers’ lives.

Moreover, this growth isn’t just in the fitness space, the increasing focus on ‘wellness’ is extending to nutrition, supplements, clothing and more. Investors have been active in this segment of the market, including Lion Capital’s investment in the sports nutrition company Grenade, Piper’s investment in Proper Snacks and Pembroke VCT’s investment in Plenish Cleanse. Plus, there are plenty more nutrition or healthy snacking based companies out there, such as Fulfil Nutrition, Eat Natural, Pip & Nut, Rude Health, Pure&Co and many more. Boutiques are well placed to benefit from partnerships with businesses from these other sectors, which are keen to build on the strong customer loyalties experienced in the boutique fitness market.

Additionally, there is a big opportunity for boutiques, as well as their financial investors, to work alongside health organisations, insurance companies etc, and provide evidence-based fitness programmes to their customers as part of a wider integrated health and wellness programme. By aligning themselves with these types of organisations, boutique brands will gain further exposure to different markets, such as healthcare, and by doing so will cement themselves in the industry as a key player and one that is responsible and sustainable, whilst no doubt a partnership like this would have a significant impact on their growth trajectory.

Overall, the UK boutique fitness market is an exciting space to be with lots more opportunity and growth still to come. With many appealing investment characteristics we believe it is only a matter of time before private equity and other financial investors take a real plunge into this market.

Alicia Whistlecroft is a manager at Deloitte’s M&A Advisory Corporate Finance Department
[email protected]
Sign up here to get Fit Tech's weekly ezine and every issue of Fit Tech magazine free on digital.
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features

Research round-up: Smart money

Can the UK’s boutique health and fitness sector secure sufficient finance to spread its wings? Deloitte’s Alicia Whistlecroft sizes up the stats

Published in Health Club Handbook 2020 issue 1

The domestic health and fitness industry has developed and evolved rapidly over the last 35 years into a relatively mature yet still attractive, growing market.

According to The Leisure Database Company’s 2019 State of the UK Fitness Industry Report, this market is valued at an estimated £5.1bn – a 4.2 per cent rise on 2018 – with a projected compound annual growth rate of around 8.5 per cent in value and 5 per cent in the number of gyms and health clubs over the next five years.

However, this is an industry faced with the challenge of making constant advances in product and delivery, as it’s customers continually become more educated and aware of the benefits of different types of exercise on physical and mental health.

Over the last decade, the main disruption in the UK has been the strong growth of the budget operators, but more recently another storm has hit the industry – in the form of the boutique fitness operators.

The development of the boutique sector is potentially much more diverse in its impact than the growth of the budget operators. It’s also much more challenging from a funding perspective, with the need for specialisation and sustainable differentiation being more important than scale. So how can this sector attract the necessary funding to make a real impact on the structure of the industry?

Elements of boutique
There are three underlying elements that can be used to define a boutique business: a focus on a clearly defined (specialist) product; flexible and/or bespoke delivery of the product; and an underlying desire to create a community amongst its customers.

The focus is often on both a style of exercise and how it is delivered. Some sub-sectors are more developed (e.g. cycling), whereas some players are already well on their way to achieving a strong international footprint (e.g. Barry’s Bootcamp).

People enjoy the flexibility of boutique classes without being tied to a gym membership. Furthermore, with memberships it’s very easy to find an excuse to go tomorrow, whereas with a class-based product, you book a time and frequency to suit you. This means you’re more likely to attend, leading to increased commitment and consistency of training.

Another significant differentiator of boutique fitness studios is that they are able to better offer a sense of community. Given the studios are small with a specific timetable of classes, the staff and customers become familiar with each other. This makes the exercise experience more enjoyable and customers are able to identify with the brand, which in itself is a powerful growth tool. The creation of this community spirit further fuels customer’s appetites to attend a workout class at their favourite boutique studio and in turn this helps to build customer retention.

Demographic drivers
It would appear that the millennial and generation Z demographics are the drivers behind this new type of exercise; young fitness enthusiasts who view health and fitness as a way of life.

They are willing to pay more for a class that is tailored to their specific goals, that is more fun and engaging compared to just a routine gym workout, and for sessions that tend to specialise in one type of exercise with smaller class numbers.

Interestingly, a large portion of customers at boutique fitness classes are women. The Global Boutique Trends Report 2018 found that women made up 83 per cent of classes booked in London. This gender divide is similar in both New York and Los Angeles where women made up 83 and 81 per cent of bookings respectively.

Branding across the pond
The US boutique fitness sector already has some large players such as Barry’s Bootcamp; a brand launched in LA in 1998 which has financial backing from North Castle Partners.

After 11 years of operating solely in LA, this brand is now developing into a global business with studios across the US and franchises in other major cities around the world. It now has over 50 sites in nine countries; the latest one being in Australia.

Orangetheory has grown even quicker through franchising. Since starting out in 2010, it now has around 1,000 worldwide units in roughly 20 countries. Orangetheory has all the typical characteristics of a boutique – its differential niche is the use of heart rate monitors worn by each customer, with the objective of working in specific heart rate zones to ensure maximum calorie and fat burning based on scientific knowledge.

Throughout the workout, all participant’s outputs (heart rate, calories burned etc) are displayed on a main screen in the studio – this helps to drive motivation and competition, maximises output from customers and is another component of the community spirit. The idea of having a differentiated selling point is key for companies trying to gain traction and succeed in this highly competitive industry.

Xponential Fitness on the other hand is a group of boutique brands from across the major categories of boutique fitness (pilates, barre, cycling, rowing, yoga, stretch and dance). The brands are run via franchise models with studios in close proximity to each other, helping to drive the cross brand offering; however, they’re run independently and don’t share central services.

Xponential Fitness had much of its initial growth supported by financing from TPG Partners since CEO Anthony Geisler sold Club Pilates to TPG after growing it from 80 to 475 franchise territories. Geisler and his business partner Mark Grabowski (an ex-TPG partner) have since bought Xponential back from TPG Partners.

L Catterton, an established institutional investor with a focus on growing consumer brands, has been very active in the sector. Investments (both past and present) include Peloton, Flywheel, Pure Barre and CorePower Yoga. L Catterton also invests in health and beauty products such as Bliss and in related areas such as healthy food. All of these subsectors have positive market dynamics and there is some convergence as companies look to become more holistic in their overall approach.

The boutique fitness market has not quite reached IPO level yet; SoulCycle previously filed for an IPO but withdrew and Flywheel considered an IPO but has decided against it for now. However, this is something we could expect to see in the near future from some of the larger operators who have had significant success to date.

However, the US does already appear to be a little crowded in some geographies. For example, New York has numerous brands of fitness studios, e.g. the cycle studio space has the likes of SoulCycle, Flywheel, Peloton, Revolve, Crank, Swerve, Cyc, Syncstudio and so on.

By comparison, London, a city with a similar population size to New York, has a much smaller number of boutique fitness studios, with many operators only having a handful of studios, suggesting there remains significant opportunity in the UK, as well as Europe, where there aren’t as many boutique fitness concepts established as yet and the roll out of existing brands has been on a smaller scale.

UK to follow in US footsteps
Many expect the UK to follow in the footsteps of the US, as it has in other sectors, so we could expect to see increased levels of investment in the coming years.

There are a lot of smaller UK boutiques out there with great concepts and rapidly growing customer bases such as TRIB3, Core Collective, KoBox, Psycle, BLOK, Flying Fantastic etc, so there are plenty of opportunities for financial investors either on a single brand basis or through building a brand portfolio.

To date there have been a number of successful capital raises from a wide range of sources including:

Crowdfunding (Crowd Cube and Seedrs, for example) can be an excellent way of proving out an initial concept before approaching the institutional investors to create scale. Crowdfunding can also assist with marketing and establishing a loyal core of advocates for the brand.

Network funding (Wealth Club, Codex Capital, for example) from one of a number of financial advisors with an established network of high net worth investors who are willing help companies present their ideas to this network to raise funds. This tends to be second or third round funding, where there is some proof of concept.

Family funds are becoming more and more active and increasingly structured as high net worth families look into ways of more independently managing their money. Those who have made money in the health, wellbeing and fitness markets are usually more inclined to invest where they feel they have an edge.

Institutional funds (such as NVM and Piper) are expressing more interest and this will enable more scale businesses to be built. These institutions typically raise 10-year funds; the benefit of this being that the money is already raised and follow-on capital can be agreed at the board level (as achieved at Gymbox). Typically, these funds would look to invest in businesses with more than £1m EBITDA.

Accessing capital
In boutique sectors it can be harder to attract interest from institutions because of concerns over scale, competition and ‘keyman’ dependency. In approaching institutional funds and family funds, businesses should focus on being able to answer the following common challenges from investors:

• Over the medium term is it possible to create a scale business?
Institutional investors like to invest in companies that have the potential to continue growing for 10+ years, as this makes it easier to recapitalise the business. For specialists this can be a challenge as the product may have a limited market. As well as creating an effective roll-out model, brands can consider merchandising, franchising, tie-ups with mass market brands etc to provide a range of growth levers.

• Does the model work outside London?
The majority of UK expansion is likely to be within metropolitan areas, with a large portion of the UK’s current boutique fitness studios being in and around London. Some have expanded outside the capital, including Barry’s Bootcamp, which recently opened a site in Manchester, and F45 (a company offering 45-minute high-intensity, circuit training workout classes) which has several franchised locations around the UK, including Birmingham, Brighton, Chelmsford, Harrogate and Reading, with many more opening soon. So no doubt other companies contemplating national expansion will be keeping a close eye on how these studios perform compared to their London counterparts.

• Can the differentiation be sustained?
Many industry experts believe there is an increasing pool of additional customers alongside the existing fitness industry as millennials place a greater importance on their fitness than previous generations. Appealing to these more ‘intense’ users of health and fitness should be expanding the market. However, with sometimes relatively low barriers to enter and also existing mainstream players who already have the footprint to exploit new concepts, the investors will need to be convinced the growth plan is sustainable.

• ‘Keyman’ dependency
Not a challenge for more tech-driven products but where the customer experience is largely governed by the people delivering the training, replicating this as a business grows can be challenging.

Future growth
One thing is for sure, as more competition comes along in the form of both new concepts as well as new sites for existing companies, the quality of the studios and the classes available will need to be the best in the market in order to succeed.

More mature consumer sectors have a long history of creating new boutique products and we expect the health and fitness sector to continue to throw up new and interesting alternatives to the mainstream. This is a market that has seen rapid growth and will continue to prosper as individuals become more focused on their health and fitness and the different ways to train. If this is the case, it becomes a question of consumer preference, which training methods are most favourable and if there is the same level of appetite outside the major cities. These factors will help define which boutiques are successful and can grow significant market share.

There is a lot of growth still to come in this sector, from both new emerging concepts as well as existing concepts taking advantage of the ever increasing empty retail spaces on the high street and expanding into new studios across the country. Private Equity is well placed to support this growth and make the most of an industry that is set to continue to grow as health and fitness becomes a more integral part of consumers’ lives.

Moreover, this growth isn’t just in the fitness space, the increasing focus on ‘wellness’ is extending to nutrition, supplements, clothing and more. Investors have been active in this segment of the market, including Lion Capital’s investment in the sports nutrition company Grenade, Piper’s investment in Proper Snacks and Pembroke VCT’s investment in Plenish Cleanse. Plus, there are plenty more nutrition or healthy snacking based companies out there, such as Fulfil Nutrition, Eat Natural, Pip & Nut, Rude Health, Pure&Co and many more. Boutiques are well placed to benefit from partnerships with businesses from these other sectors, which are keen to build on the strong customer loyalties experienced in the boutique fitness market.

Additionally, there is a big opportunity for boutiques, as well as their financial investors, to work alongside health organisations, insurance companies etc, and provide evidence-based fitness programmes to their customers as part of a wider integrated health and wellness programme. By aligning themselves with these types of organisations, boutique brands will gain further exposure to different markets, such as healthcare, and by doing so will cement themselves in the industry as a key player and one that is responsible and sustainable, whilst no doubt a partnership like this would have a significant impact on their growth trajectory.

Overall, the UK boutique fitness market is an exciting space to be with lots more opportunity and growth still to come. With many appealing investment characteristics we believe it is only a matter of time before private equity and other financial investors take a real plunge into this market.

Alicia Whistlecroft is a manager at Deloitte’s M&A Advisory Corporate Finance Department
[email protected]
Sign up here to get Fit Tech's weekly ezine and every issue of Fit Tech magazine free on digital.
Gallery
More features
Editor's letter

Into the fitaverse

Fitness is already among the top three markets in the metaverse, with new technology and partnerships driving real growth and consumer engagement that looks likely to spill over into health clubs, gyms and studios
Fit Tech people

Ali Jawad

Paralympic powerlifter and founder, Accessercise
Users can easily identify which facilities in the UK are accessible to the disabled community
Fit Tech people

Hannes Sjöblad

MD, DSruptive
We want to give our users an implantable tool that allows them to collect their health data at any time and in any setting
Fit Tech people

Jamie Buck

Co-founder, Active in Time
We created a solution called AiT Voice, which turns digital data into a spoken audio timetable that connects to phone systems
Profile

Fahad Alhagbani: reinventing fitness

Let’s live in the future to improve today
Opinion

Building on the blockchain

For small sports teams looking to compete with giants, blockchain can be a secret weapon explains Lars Rensing, CEO of Protokol
Innovation

Bold move

We ended up raising US$7m in venture capital from incredible investors, including Andreessen Horowitz, Khosla Ventures, Primetime Partners, and GingerBread Capital
App analysis

Check your form

Sency’s motion analysis technology is allowing users to check their technique as they exercise. Co-founder and CEO Gal Rotman explains how
Profile

New reality

Sam Cole, CEO of FitXR, talks to Fit Tech about taking digital workouts to the next level, with an immersive, virtual reality fitness club
Profile

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The app is free and it’s $40 to participate in one of our virtual events
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Workout Anytime created its app in partnership with Virtuagym. Workout Anytime’s Greg Maurer and Virtuagym’s Hugo Braam explain the process behind its creation
Research

Physical activity monitors boost activity levels

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Editor's letter

Two-way coaching

Content providers have been hugely active in the fit tech market since the start of the pandemic. We expect the industry to move on from delivering these services on a ‘broadcast-only’ basis as two-way coaching becomes the new USP
Fit Tech People

Laurent Petit

Co-founder, Active Giving
The future of sports and fitness are dependent on the climate. Our goal is to positively influence the future of our planet by instilling a global vision of wellbeing and a sense of collective action
Fit Tech People

Adam Zeitsiff

CEO, Intelivideo
We don’t just create the technology and bail – we support our clients’ ongoing hybridisation efforts
Fit Tech People

Anantharaman Pattabiraman

CEO and co-founder, Auro
When you’re undertaking fitness activities, unless you’re on a stationary bike, in most cases it’s not safe or necessary to be tied to a screen, especially a small screen
Fit Tech People

Mike Hansen

Managing partner, Endorphinz
We noticed a big gap in the market – customers needed better insights but also recommendations on what to do, whether that be customer acquisition, content creation, marketing and more
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