One to Zero — Value Migration and the Modern Fitness Brand

Andrew Wolohan
Jul 2, 2019 · 8 min read

In a recent email exchange, one of the Founders in our portfolio noted that the market (whether private investors; or the public market) is increasingly ascribing value to intangible assets not accounted for by traditional book value.

In the fitness category, specifically, brand value has been transformed over the last decade — with several major factors as catalysts:

  • Rise of boutique fitness as a mass-appeal category
  • On-demand platforms streamlining content distribution and consumer access
  • Emergence of instructors, across workout formats, as highly influential personalities

The most obvious impact of these trends has been on consumer behavior — and variety of workout formats that consumers now have access to. But the corollary impact on how value is ascribed to the brands delivering these experiences is equally, if not more, striking.

Phase I: Rise of Boutique Fitness

Companies like Soulcycle (and, later, Flywheel), Orangetheory, and Barry’s took the group-based workout format and popularized it for the masses. These concepts (and the long tail of boutique fitness concepts they in turn inspired) introduced a community-based element to fitness — validating consumer willingness to pay a premium for a novel workout experience that traditional brick & mortar gyms lacked.

The access point for the experience, however, remained on-site — for consumers to access their favorite class or instructor, they still had to travel to the studio’s physical location. It follows that during this first phase, brand value remained tied largely to driving customer visits on-site — acquiring new customers and driving repeat purchases via in-person visits.

The popularity of the studio fitness model, in turn, gave rise to Classpass — further increasing the number of workout options availed to consumers. While Classpass subsequently fell out of favor with many studios, they deserve credit for being an early-mover in democratizing boutique fitness, aggregating supply (gyms/studios/classes) and demand (consumers) to improve accessibility. Yet even amidst Classpass opening boutique fitness into a marketplace, access wasn’t truly democratized — the access point for the workout formats remained unchanged, with on-site physical location key to the offering.

Outcomes of Phase I

Phase I validated the demand for community-driven experiences delivered via on-site offerings. A related (though equally important) development during this time was the emergence of fitness instructor as influencer. Studios such as Soulcycle (majority-owned by Equinox since 2011) and Orangetheory proved that the instructors leading these courses — coupled with the community-driven aspect enabled by a group-based format — were a crucial retention hook, driving brand loyalty and repeat visits.

From the end customer perspective, decision criteria shifted. Was a loyal customer of [Soulcycle; Orangetheory; etc.] willing to pay for a premium experience to access the studio’s location, amenities, and equipment (in essence, the “physical assets”); or alternatively, to access their favorite instructor curating a unique experience surrounded by a community of like-minded individuals (the “intangible assets”)?

In this new paradigm shift, the former (physical assets) became a commodity; the latter (intangible assets) became the “moat” on which defensibility hinged — and where value of the brand ultimately migrated to.

Phase II: On-Demand / Anywhere

On the heels of the boutique movement, Peloton emerged to bring the studio cycling experience into the home — disrupting the Soulcycle and Flywheel models — with instructor-led content now accessible outside the confines of studio locations.

via Pitchbook

Peloton’s success, over time, has inspired others to pursue the untapped potential of the at-home fitness market. Tonal (strength training)*; Mirror (multi-format); and Hydrow (rowing) are a few examples that, taken collectively, represent an “unbundling” of the at-home fitness experience.

While Phase I marked the beginning of brand value migration from tangible/physical assets towards intangible assets, the emergence of on-demand platforms further validated it. That Peloton was/is vertically integrated with a hardware component is beside the point — Peloton’s hardware element simply creates an “endowment effect” (and at $1,995/bike and $3,995/treadmill, a non-trivial one!) around both its equipment and content subscription ($39/mo.). Not surprisingly, the subscription-based offering (and strong user retention leading to a built-in captive audience) is where Peloton derives its true brand value.

Outcomes of Phase II

It’s interesting to consider that the rise of on-demand content (and displacement of physical location) hasn’t commoditized instructor-led experiences or the personalities that drive them. If anything, individual personalities have moved front-and-center to the experience, as brands have taken a fundamentally human-centric approach to building content.

Instructors’ own ability to build/retain loyal user followings directly (primarily via social channels), coupled with greater audience demand for relationship-driven interaction with those same instructors, has generated a flywheel effect for instructor influence/reach — essentially, enabling the instructor as a sort of “micro-brand.”

Typifying this movement was Kayla Itsines — after initially using Instagram as a lead-gen tool for personal training sessions (and, later, e-books), Kayla launched the “Sweat” app in late 2015, landing on a subscription-based model for content delivery. Sweat brought in an est. $77M USD revenue in 2018.

Instagram has proven an effective channel for instructors to build and retain captive audiences directly.

As content moved decentralized, physical location (and customer proximity to that physical location) grew less important. The individual personalities (and platforms on which they resided) curating the workouts grew more important. It follows then, that brand differentiation in the fitness space has followed this same trajectory.

What’s Ahead for Brick & Mortar

This it not to say that brick-and-mortar is dead. Consider Peloton and Tonal, both of which have launched physical locations, enabling consumers an additional access point to interact with their respective products. This follows a playbook similar to that of other D2C brands like Warby Parker and Casper — whether in the case of Warby (glasses) or Casper (mattresses), both leverage physical stores to drive traffic and awareness. Similarly, on-demand platforms (in this case, Peloton & Tonal) are backward integrating into brick-and-mortar. The distinction in the case of all these brands, is that location is a means to extend brand value that’s already in place — brand value is not beholden to location.

Meanwhile, there will be continued success in the on-site boutique studio market, for those able to stand out. Brands like Brooklyn Boulders, Rumble Boxing, and others offering unique experiences tied to location, aren’t going away.

On the other end of the market, Planet Fitness has executed well over this time period, largely by doubling down on its core strategy of low-cost, no-frills gym memberships. Over the last two years, Planet Fitness (PLNT) stock has appreciated ~200%, compared to ~20% appreciation for the S&P 500 during the same time period.

Over the last two years, Planet Fitness (PLNT) stock has appreciated ~200%, as compared to ~20% appreciation for the S&P 500 overall. 06/26/19. [Source: Yahoo Finance]

Does Planet Fitness’s performance run counter to the notion of brand value migrating to intangible assets? Ignoring its financial performance and store-level economics (physical location is undeniably important here), Planet Fitness is differentiated primarily on the strength of its simple value proposition — low-cost offering targeting a broad-based demographic. The company has built considerable brand equity on a strategy well-aligned with its large base — a moat that (so far) has withstood the threat of emerging competition on all sides.

The fitness category in aggregate is certainly large enough to support continued growth in on-site activity / participation.

One to Zero: Nautilus vs. Mirror

In a recent post examining brand value at-large, author Joshua Brown argues that for present-day businesses, intangible assets such as IP and brand ubiquity are more highly valued by investors than are physical assets captured by traditional metrics like book value:

In the battle for capital right now, the brands and intangibles and user bases and networks are winning by a landslide against the things that used to be important. And the companies that are rich in those old fashioned things, like Walmart, Disney and McDonalds, are spending all of their time and attention to transform themselves into the spitting image of their upstart competitors. Disney wants to look like Netflix, Walmart wants to retail like Amazon, McDonalds wants to be as habit-forming and celebrated for its freshness as its former protege Chipotle is.

To illustrate this point in the fitness space, consider one such incumbent (Nautilus, Inc.) and one upstart (Mirror). Both Nautilus (founded 1986) and Mirror (2016) compete for customers in the at-home market. While Nautilus also has a B2B component, a significant portion of its business is sold direct, including the Bowflex brand. Per Yahoo Finance, Nautilus trailing twelve months (TTM) revenue is $366M; yet without any meaningful subscription-based revenue, margins are compressing — net income swung to a loss in Q1 2019. With a current market cap of ~$68M, this places a <0.2x multiple on Nautilus’s TTM revenue. While certainly not apples-to-apples, median revenue multiple (EV/2018 run rate revenue) of public SaaS companies tracked by Bessemer’s Cloud Index is currently 9.9x.

Conversely, take Mirror. The company offers a $1,495 full-length mirror + $39/mo. subscription, bringing live and recorded content on-demand into the home. Mirror also deserves credit for launching a smart marketing campaign, working with celebrity influencers (Alicia Keys, Kate Hudson, Jennifer Aniston, e.g.) to generate buzz around the product. The company achieved a $200M valuation (post-) from investors, prior to launching, in 2018 — roughly 3X Nautilus’s current valuation (Mirror has since raised additional capital and commenced order fulfillment and shipping units. Latest financing detailed below.)

via Pitchbook

The point of this is not to fixate on Mirror’s valuation as being high/low or fair/unfair — but rather to highlight the disparity between how the market values one product company versus another. For Nautilus, the company’s advantages in physical assets (upfront revenue; distribution network; units in homes throughout the country) accumulated over 30+ years of operation are now heavily discounted / valued lower than ever; particularly against the digitally native vertical brands (and user bases / networks they attract) emerging to take their place.

If you’re building a company in the fitness space, I would love to hear from you. Email me at

*Our company is a small investor in Tonal.

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Andrew Wolohan

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early-stage VC @TechNexus

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