LONDON, NEW YORK, Jan 6 (Reuters Breakingviews) – On the ground floor of a Chelsea office building on 20th Street in New York City, over 40 muscled people are elbow to elbow and ready for a workout. It feels less like a damp Tuesday afternoon in a gym, and more like a nightclub, with red lights on the low ceilings and heavy bass blaring out of the speakers. It’s the start of a class known as high-intensity interval training, a combination of treadmill and weight-lifting, at the boutique fitness studio Barry’s.

The Los Angeles-based company, last valued at $700 million in 2019 according to Pitchbook, has drawn a cult following with David Beckham and Harry Styles among its regular attendees. Backed by private equity firm North Castle Partners, its murderous workout includes mile sprints, hill climbs, push-ups and calisthenics known as “burpees,” and is done in under 50 minutes. Costing $40 per class in New York City, Barry’s is just one of the popular boutique studios that specialises in a single workout routine.

It and dozens of other similar facilities are reinventing how people get and stay in shape and pay for the privilege of such torture, putting pressure on established, traditional facilities that charge a monthly rate. Yet as the fitness business has grown – it brought in almost $100 billion in revenue globally before the pandemic took a bite out of business, according to the International Health, Racquet & Sportsclub Association – the battle for dollars has become much more bruising. As a result, many companies are struggling to justify their value. There will be a few that dominate: they will be asset-light and brand heavy.

THE ONE-HIT WONDERS

Fitness junkies are favouring small boutique studios that have set routines partly because of their flexible pricing model. Barry’s and other similar gyms offer both memberships and pay-per-class pricing packages instead of the conventional gym’s year-long subscription. These boutique brands have outpaced the growth of the whole industry and made up 40% of the $32 billion profit made by the U.S. gym business before the pandemic, according to data from IHRSA. The struggle to recreate a sense of community at home may explain why post-pandemic customers have readily returned. For instance, Barry’s was back to 95% of pre-Covid attendance globally in November.

The trouble is gym-goers are fickle. Some decide to ditch workouts altogether. Others aren’t loyal and tend to jump around. While users like the flexibility of paying for a single class, gyms have no certainty they will continue to show up and no contract that requires them to pay. The speciality gyms also need to open new sites to keep attracting users.

This dynamic can be risky for investors, as fitness firm F45 Training (FXLV.N), backed by actor Mark Wahlberg, has shown. The company is franchised, and the number of chains increased considerably in 2021 after the pandemic and continued to grow in 2022. But as the business has expanded, visits to the gym hasn’t gone up as much. In the first nine months of this year, the number of total franchises rose 22% while system-wide visits to the gym are up just 10%. Losses are still high, too, as costs including those associated with brand marketing and fitness programming far outweigh the sales the company brings in the door. F45’s shares have fallen almost 85% since the company’s initial public offering in July 2021.

THE FLAMEOUT

The one-hit wonder’s opposite is perhaps Peloton Interactive (PTON.O), the virtual-workout company that leads users down a portal of seemingly endless fitness classes, led by an instructor who films in front a small class, remotely. The $3 billion company founded by John Foley shot to stardom while fitness users were confined to their homes. A $50 million studio a few blocks south of Barry’s in Manhattan is a window into the cult following that now includes some 6.7 million members. Instructors, who resemble those at Barry’s in both body type and energy, are brought into classes by bodyguards. The “athletes” – averagely-built class attendees who sign up months in advance – get a crack at being in a video that is then piped into thousands of homes around the world.

Peloton’s business model was novel, and it, too, won loyalty. High-profile commercials and celebrity plugs created a buzz, and by early 2021 the company was selling so many bikes and treadmills that there was a wait to own one. It bought a production facility to try to crank out the hardware faster. Then, people’s habits abruptly changed.

The company has recently struggled to keep up with its cash burn. The problem is that it grew too quickly. Last quarter the company’s connected fitness division, which sells the bikes and treadmills, brought in $200 million, less than half the same quarter the previous year.

Peloton has quickly tried to pivot back to being asset-light. But it competes with the likes of Barry’s and F45 now, and the in-home workout is a supplement rather than the go-to. The number of members that the company had fell in the first quarter of its fiscal year, which ended in September. Losses are widening, and it continues to burn through cash. If its most recent quarter’s operating cash burn of around $200 million were annualised, it would run out of dough in five quarters.

THE GYM FOR ALL

Planet Fitness (PLNT.N) is something of a middle ground. It doesn’t have trendy brands and about 90% of its outlets are franchise-owned. But it in part benefits from being the antithesis of other gyms. The no-frills workout experience attracts a wide range of people, and its low price point invites apathy, which is good for business. Its origin story is scrappy. Brothers Michael and Marc Grondahl started a gym in Dover, New Hampshire in 1992 that had it all: a juice bar, day care center and exercise classes. Their front desk worker, Chris Rondeau, figured they could attract more consumers if the environment weren’t so intimating. People disliked “lunk” behaviors like grunting and dropping weights. The brothers and Rondeau, who now serves as Planet Fitness’ chief executive, hit upon a concept.

Planet Fitness’ tag, “judgement free zone” is true to form. One of their locations located in Columbia, South Carolina is flanked by an Advance Auto Parts and a cash advance shop. Across the street is a Walmart. There was no pressure at the front desk to join; the only ask was to fill out a short form and wait for an email that contained the necessary information to become a member.

Part of the appeal is its $10 a month basic membership fee – which hasn’t changed – that Planet Fitness primarily collects through electronic funds transfers. It’s cheap enough that people may not always notice, or care. And that apathy shows up in Planet Fitness’s investor day transcript: 50% of its members haven’t used a club in a 30-day period.

The trouble is its lofty valuation. Its enterprise value of $8.6 billion is 20 times 2023 EBITDA, according to Refinitiv, a more than 40% premium to studio chain Xponential Fitness (XPOF.N). Still, with solid and regular profits and a reasonable amount of debt, Planet Fitness has staying power, even if shareholders lose their shirts while its valuation comes in line.

THE WINNER

Xponential is the underdog – and likely winner. The $1.2 billion fitness roll-up has 10 different brands that include Club Pilates and Pure Barre, a brand whose workout includes micro, ballet-type moves, for those who want to exercise more discreetly. Rumble, a studio offering 45-minute classes swapping between floor routines and boxing, offers punchbags lined up on a grid, though slightly offset from each other so exercisers can punch in relative peace.

The company is franchised, like F45, which is better than owning equipment outright. But it has something that most other workout offerings don’t: variety. The portfolio of brands, which also includes YogaSix and Row House, offers Xponential a hedge against fads and whims. Led by CEO Anthony Geisler, it is expected to grow earnings sixfold to $52 million this year, according to Refinitiv.

Even more important to an investor is that its operating cash flow is solidly positive and projected to continue to grow at a double-digit rate over the next two years. It suggests that it has figured out the regime for fitness finance success: diversity and no assets. The company’s stock price validates this: it is up almost 90% since it went public, around the same time as F45.

FEELING THE BURN

Gyms may have come back in full force. But the full recovery still has some way to go, and a huge risk stands in the way of the success of the industry. A squeeze of consumer wallets under an inflationary environment could drive gym-goers away from luxurious studio classes such as Barry’s to low-cost options like Planet Fitness.

But many of the fitness companies have a large fixed cost structures and are highly leveraged. Credit-rating agency Moody’s branded loans issued by seven fitness groups as so-called junk: Equinox, Life Time, Fitness International, Patchell Holdings, Bulldog Purchaser, Pinnacle Bidco, and United PF. The lease-adjusted net debt of Equinox, the privately owned luxury gym group, is estimated to be nearly 12 times its EBITDA this year, Moody’s analysts reckon. The dogged fight for attendees suggests many of these participants will be benched, and in some cases, even booted from the team.

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Column by Karen Kwok in London and Jennifer Saba and Amanda Gomez in New York; Editing by Lauren Silva Laughlin and Sharon Lam. Additional reporting by Jonathan Guilford.

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