“Welcome to the family.” A phrase heard more often during a marriage celebration than a fitness class. But this is how my Peloton instructor greets a new joiner from the US, as they log into our virtual work-out. During my 20-minute trial session at one of the company’s London ‘showrooms’, I see that physical exertion is really only part of Peloton’s appeal. It also conjures a sense of community and competition – no mean feat for an at-home exercise brand.
Now, Peloton hopes to extend that community to new shareholders. On 27 August 2019, it filed for an initial public offering (IPO) with the US’s Securities and Exchange Commission (SEC). The purveyor of high-end indoor exercise bikes and treadmills, along with digital subscription packages, plans to float on Nasdaq – raising $500m (£410m). Once listed, its market capitalisation could be huge. As a private entity, it was reportedly last valued at $4bn.
Selling happiness
“On the most basic level, Peloton sells happiness,” explains co-founder and chief executive John Foley in a letter accompanying its registration statement. That’s because “exercising creates endorphins and endorphins make us happy”. But Peloton’s breed of happiness comes with a hefty price tag. Each bike costs £1,990. For an extra £39 a month, ‘members’ gain access to its library of online classes.As I experienced, these are led by real-life teachers, and streamed directly to participants via touch-screens attached to their machines.
Notwithstanding the significant capital outlay that it demands from its customers, Peloton’s offering has proved to be popular thus far. As of June 2019, it counted more than 500,000 “connected fitness subscribers” –up from just over 100,000 two years earlier. It has also sold 577,000 connected fitness products since its inception in 2012. Looking ahead, it identifies a serviceable, addressable market of 14m products.
Growing, and changing, fitness industry
The scale of that potential opportunity is perhaps unsurprising in the context of an expanding health, fitness and ‘wellness’ industry. The International Health, Racquet and Sportsclub Association (IHRSA) found that global health-club industry revenue reached $94bn in 2018, with 210,000 clubs serving 183m members. According to the Global Wellness Institute (GWI), the broader wellness industry – spanning fitness, mind-body and weight loss among other areas – was worth $4.2 trillion in 2017.
Moreover, fuelled partly by technological innovation, exercise is evolving. Like so many other aspects of our lives, we now expect a degree of flexibility and convenience in our fitness routines – facilitated by greater connectivity and inventive approaches to training. That is one reason, perhaps, why many boutique or specialist studios have cropped up in recent years – offering the likes of cardio, spin and yoga classes throughout the day. Barry’s Bootcamp, SoulCycle and 1Rebel are just three examples. By offering digital workouts of varying lengths – which span activities from cycle to meditation – Peloton arguably takes flexibility and convenience to the next level.
However, would-be investors should take heed; Peloton carries significant risks. Among these is the fact that fitness can be prone to transient fads, although the company claims that 92 per cent of the connected fitness products it has sold still had an active subscription attached in June.
Not a risk-free ride
Beyond its considerable cost, Peloton presents another practical issue. Its bikes measure four by two feet and weigh more than 60kg, an issue given shrinking urban living spaces.
My assumption that Peloton’s wares are best suited to senior businesspeople, large-house owners and/or stay-at-home parents doesn’t entirely correspond with the company’s data. In an indication that it is broadening its customer base, its fastest growing demographic segments include those aged under 35 and those with annual household incomes below $75,000.
This might have something to do with Peloton’s zero per cent financing option. It also has a digital-only package for £19.49 a month, whereby customers can access classes via its smartphone app, using any machine. This had 102,000 subscribers at last count. But, on its own, the digital option arguably faces competition from the likes of cycling and running app Zwift – which is cheaper, and which “mixes the intensity of training with the fun of gaming”.
Revenues up; losses widening
On to Peloton’s historical financials. True, the top line grew at an impressive compound annual rate of 105 per cent over the two years to June 2019, reaching $915m. But operating losses widened during the same period from $70.7m to $202m, knocked by the rising cost of generating revenue, including soaring sales and marketing expenses. It’s hard not to draw comparisons here with other hyped-up, but lossmaking tech unicorns that recently IPOd, such as Uber (US UBER) and Lyft (US:RIDE).
The IPO filings outline something even more concerning. “In the course of preparing our financial statements for fiscal [year] 2018, we identified material weaknesses in our internal control over financial reporting. The material weakness had not been remediated as of 30 June 2019.” As a private company, Peloton said, the weaknesses in question arose because it lacked the business processes, systems, personnel and related internal controls necessary to satisfy the reporting requirements of a public organisation. It has, and is, taking steps to fix this. But any failure to develop or maintain effective controls could lead to the restatement of prior-period financial statements.
For now, we await more news from Peloton. Back in May last year, SoulCycle withdrew its own IPO registration, citing market conditions. But these are different companies, and different times.
UK investment landscape
In the context of a growing and changing exercise industry, investors may well question what to pedal towards – and away from – in the UK. It’s fair to say that the stockpicking landscape this side of the pond is rather sparse. But it wasn’t always so. Some will recall the last time that there was an abundance of fitness-related opportunities on the London bourse.
In the 1990s, various mid-market gym companies enjoyed success as plcs – including Esporta, Fitness First and LA Fitness. But these delisted in the early 2000s – with some experiencing financial difficulties. LA Fitness was purchased by private equity firm MidOcean Partners in 2005. In 2014, it entered into a company voluntary arrangement (CVA) and a restructuring process. The following year, it was bought by Pure Gym.
Low-cost operators
The latter deal points to another phenomenon that has emerged over the past decade or so: low-cost gyms. Pure Gym offers affordable membership fees and no-contract monthly packages. Again, these are qualities that hint at an expectation of flexible fitness among present-day consumers.
Pure Gym announced its intention to float in London in September 2016. But this didn’t come to fruition, with management citing challenging IPO market conditions. In November 2017, the company was purchased by Leonard Green and Partners. It follows that Pure Gym’s closest peer – low-cost player Gym Group (GYM), which floated in 2015 – is the UK’s only publicly listed gym company.
The UK health and fitness sector isn’t a bad place to be doing business, though. Indeed, industry expert The Leisure Database Company (LeisureDB) found that the number of fitness facilities here rose from 7,038 to 7,239 over the 12 months to March 2019. The total market’s value rose by 4.2 per cent to £5.1bn.
A report from PwC – commissioned by Gym and drawing partly on LeisureDB data – notes that “[t]here has been significant innovation in the market as operators have invested in their propositions…and new formats have emerged, starting with the emergence of low-cost gyms in 2010-11 and most recently boutique gyms”.
Mid-market gyms have been “particularly impacted by an increasingly polarised landscape of lower- and higher-cost options”. Low-cost gyms “have been the most significant driver of market growth”. Between 2012 and 2017, low-cost gyms’ market share climbed from 3 per cent to 12 per cent. PwC estimates an overall opportunity for 1,200 to 1,400 low-cost gyms by 2026 – up from 683 currently.
But when juxtaposed with the boutique and tech-driven at-home fitness alternatives out there, is Gym’s position sustainable?
Gym’s chief executive Richard Darwin notes that boutique concepts, including high-end gyms such as Third Space, or class-specific offerings – have primarily developed in London, where there is a dense population and a demographic willing to pay higher prices. Gym doesn’t see such concepts as direct competitors. Some can charge as much as £150 a month, against Gym’s average of £18 a month. He says: “Can they really actually take something that is offered at quite a premium price in London and offer it in other cities – I think that’s where it can be more difficult for those boutiques overall.”
Mr Darwin doesn’t see Peloton as directly competitive with Gym’s affordable offering either. “Our belief is home-based fitness is complementary to location-based fitness, and so the two will develop together,” he argues.
Meanwhile, not being locked into a lengthy contract appeals from a consumer perspective – it is one fewer thing to worry about when moving house. However, it doesn’t scream ‘retention rates’. That said, as Gym’s network grows, there is a better possibility of it having a site close to where each consumer ends up. For the half-year to June 2019, Gym’s revenues rose by just over a quarter to £74m, with pre-tax profits up 80.5 per cent to £5.6m. It had 166 gyms as at 29 August. Pure Gym had 238 as of June.
