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03/19/19

Past Issues

The business of fitness and wellness.

Replacing retail

 

With big-box stores struggling to stay relevant during a time when iconic brands like Sears declare bankruptcy, fallout from a retail apocalypse is creating a world of opportunity for fitness providers. From budget gyms and boutique studios to high-end health clubs, fitness is filling the void left by brick-and-mortar retailers. 

In an about-face, real estate developers have taken to recruiting gyms as anchor tenants in a variety of projects — from malls to shopping centers and apartment complexes to office buildings. As Sandeep Mathrani, CEO of Chicago-based GGP Inc., told the WSJ, retail’s retraction “is giving us a chance to reinvent the wheel.” And fitness is playing a central role in that makeover.

Years ago, gyms were basically blacklisted by malls. According to Steven Gartner of CBRE, health clubs appeared on a list of “prohibited uses” alongside “massage parlors, billiards halls, and pawn shops.” Why? Gyms were thought of as attracting visitors who take up parking spots and walk around in sweaty clothes, or who don’t shop at all. But a shift in spending habits proved these assumptions wrong.

In 2017, the US fitness and health club industry grew to $30B, attracting some 60M members. Among those members, IHRSA found that 40% of reported household incomes exceeded $100,000, compared to 26% of households in the overall US population. Meanwhile, boutique concepts were booming. As studios packed their classes full of members paying $30 per session, the perception of the gym-goers began to change. Plus, in stark contrast to retail apparel sales that have completely stagnated over the past decade, health and beauty sales grew more than 34%. Suddenly, gyms, studios, and their members were in high demand. 

But it’s not as though developers had much of a choice. Facing increased competition from the likes of Amazon, foot traffic plummeted and retail vacancies soared. In response, malls and shopping centers began moving toward the idea of “place making”, and fitness providers spotted an opportunity. 

Since 2013, the amount of square footage leased by gyms and fitness centers in malls has grown 70%, according to CoStar Group. And in 2017, Planet Fitness leased more new square footage in US malls than anyone else. With more than 12M members, 1,700+ locations, and plans to reach 4,000 gyms in total, Planet Fitness sees vacant malls and empty big-box stores as being central to their growth. The same goes for Life Time, Gold’s Gym, and Equinox’s Blink Fitness.

And boutique studios are getting in on the action too. From New York City to San Francisco and Chicago to DC, boutique fitness is becoming an essential building block of new retail projects. In some instances, entire developments are being devoted to health and fitness. In Boston, FITRow houses five studios—Club Pilates, TITLE Boxing Club, Orangetheory Fitness, barre n9ne, and CycleBar—and a Squeeze Juice Company under one roof, with a shared entrance. San Diego’s One Paseo pairs a SoulCycle with Joe & The Juice, Tender Greens, and Sweetfin Poké. And two new projects in Cleveland, Pinecrest and The Van Aken District, are putting fitness front and center.

However, where some see dollar signs others see red flags. Jan Kniffen, CEO of J. Rogers Kniffen Worldwide Enterprises told CNBC that gym-goers don’t frequent nearby stores enough to make an impact. And even if they do, there’s bound to be rough waters ahead for fitness. Scott Burns of Los Angeles real estate firm JLL put it, “there will be some consolidation eventually and some fallout when the market changes.” 

Of course, that’s to be expected — markets and sectors ebb and flow. For the time being, though, there’s demand from consumers and supply on the real estate side. Looking to the threats on consumer demand, the elephant in the room will be the emergence of at-home and on-demand workout options.

Coming full circle, the retail shakeup reads like a kind of cautionary tale: at a time when gyms and studios can’t open new locations fast enough, the Peloton of ‘X’ and “Netflix of fitness” concepts are reinventing the exercise experience. Does that mean streaming workouts and connected equipment are the fitness equivalent of Amazon and e-commerce? And if they are, can gyms and studios continue to thrive as fitness becomes accessible anywhere? The stage is set for those ponderings to play out in real time.

Headlines & Happenings

🍔 Fake It Till You Make It 

Thanks in part to growing number of burger joints willing to add plant-based protein to the menu, fake meat has gone mainstream. From White Castle to Carl’s Jr. and A&W to TGI Fridays, restaurants are selling out of their meatless options almost overnight. But for Steve Heeley, CEO of fast casual vegan chain Veggie Grill, plant-based is old news. As Heeley told Skift Table, the real headline here is that the new plant-based alternatives actually taste good. 

“I think what we’re seeing is that the innovation and development on the product side has finally caught up with and is intersecting with the consumer demand.” 
— Steve Heeley, Veggie Grill CEO

With investment into meat substitutes on the rise, companies like Beyond Meat have been able to fund product innovation. The result has been a burger that looks, cooks, and tastes like the real thing. Now that consumers who want a healthier option don’t have to sacrifice on taste, and the products are only getting better, we may have reached a tipping point. If we can’t tell the difference, does animal meat eventually get phased out? While it’s unlikely to disappear entirely—and these folks sure aren’t having it—plant-based everything has never been more popular.

📦 Special Delivery

In Issue No. 16, we explored the topic of direct-to-consumer healthcare. More specifically, the write-up focused on companies like Hims, who are removing the barriers to and stigma around ailments like ED. As we learned, though, generic Viagra and hair loss pills are just the beginning. These DTC companies believe they represent the future of healthcare. And if that’s true, Truepill wants to be the infrastructure for that future.

“The plan for Truepill's API and fulfillment service is to be as indispensable as Amazon Web Services is to companies.”
— Business Insider

Take Hims, for example. They’ve built the brand and a website. They handle customer acquisition and have assembled a team of contracted doctors who write prescriptions. But when the patient gets prescribed a medication on the Hims platform, it gets sent to Truepill, who fulfills it and ships it out the same day. 

Not to be confused with an online pharmacy like PillPack, Truepill is focused on "pharmacy API and fulfillment service," as they call it. As telemedicine grows and more companies go the DTC route, Truepill is positioning itself as the behind-the-scenes player powering this movement.

🛒 Shop & Sweat

In the UK, DW Fitness First and Nike are partnering on in-gym advertising. From testing shoppable experiences—like buying the same leggings your fitness instructor is wearing—to placing branded ads on the display screen of a treadmill, Nike wants to know how hard they can push ads. As Nike strategic account director Adam Sutton suggests, there has to be a way to unlock more value from the 500,000 Fitness First members.

“Consumers want less choice—they just want to be more confident in their choices. The economy is shifting towards bundled services/products.”
— Scott Galloway, L2 founder

More interesting, though, is what Nike will do with the findings. As the retail landscape shifts and consumers entrust more decisions to fewer brands (think: Amazon Prime), Nike could become a wellness mega-brand. As Scott Galloway of L2 speculated, Nike could control all of our fitness and healthcare needs. “For an annual fee, you’ll begin staying at a Nike-approved hotel, with Nike trainers, and a Nike dietitian,” Galloway said. “And when you visit the hospital, Nike physicians will take care of you.”

It’s too soon to tell if Nike is pursuing the idea, but don’t be surprised as more companies introduce the concept of the bundle.

💰 Money Moves

 

Mark Wahlberg Investment Group and FOD Capital are buying a minority stake in F45 Training, valuing the fitness franchise at nearly $450M.

Glossier closed a $100M Series D funding round led by Sequoia Capital valuing the beauty brand at $1.2B. 

Private equity firm L Catterton is selling CorePower Yoga to TSG Consumer Partners for an undisclosed sum. CPY has 200-plus locations in 23 states.

Oaktree Capital and Navis Capital Partners are seeking a buyer for their Asia-based fitness business, Evolution Wellness Holdings, in a deal that could be worth $1B. With 170 health clubs, including Fitness First, and 370,000 members across Hong Kong, Singapore, Thailand, Malaysia and Indonesia, Evolution Wellness is one of Asia’s largest fitness providers.  

WeWork is launching a coworking space for food startups and plans to make $1M worth of equity investments into a cohort of companies selected for its accelerator program.

SmileDirectClub, an at-home orthodontic startup, has selected JP Morgan to lead its upcoming IPO. SDC has raised some $400M in funding, with the last round coming with a $3.2B post-money valuation.

Truepill, an online pharmacy fulfillment service, closed $13.4M in funding.

Singapore-based startup Nutrition Innovation, makers of a “healthier” version of sugar, has raised $5M in a Series A funding.

The Real Good Foods Co., maker of high-protein, low-carb frozen foods, received a minority investment from Strand Equity. Financial terms weren’t disclosed.

WIT Fitness, a London-based sports retailer specializing in footwear and apparel, has landed a $2.6M investment from growth capital investor VGC Partners.

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