Are We Oversold on Boutique Fitness Franchises?

August 30th, 2019 by Ritwik Donde

Taking a stroll around the Ballston-Clarendon area in suburban Arlington County, I was thrilled to find that new Orangetheory Fitness and 9Round franchises were going to open shortly. This was in a market where we already had a thriving One Life Fitness and a Gold’s Gym locations.  Fast forward several years later, one of the four fitness centers has now closed permanently. In a market where there are lot of millennials, college students, and significant residential infrastructure growth, why would this happen? Prompting me to ask the question, “are franchises oversold in the fitness industry?”

Consider this, FRANdata’s latest New Concept Report for Q2-2019 reported that the Fitness Center industry had the greatest number of new brands that began franchising in the period to date. 15 new franchises came into the market (most of them being boutique fitness concepts), compared to only 6 in the pizza industry (which is considered an extremely saturated market in the United States). Meanwhile, these very new boutique, niche franchises have set very lofty development goals. Take Mayweather Boxing + Fitness, for instance. In just the first year of franchising, it has over 100 franchise locations in development across the United States[1]. Similarly, RockBox Fitness has plans for having 200+ units by 2024[2]; Blink Fitness plans for 300+ gyms in the next three years[3] and STRIDE, another new boutique fitness concept, is projecting to have 200+ franchised locations sold and 100 studios open within the next year[4].

Such high projections beg the question, are there enough market share left in the fitness segment to allow for a sustainable franchise growth, or are fitness franchises nicking each other’s market share? Assuming the 18 to 64-year old segment is a critical target demographic for fitness franchises, 62% of the U.S. population falls into this category, based on recent Census data[5]. This is a rapidly ageing demographic. By 2050, the share of 18 to 64-year olds will fall to 58% of the population[6]. A markedly significant change to the target customer population for fitness brands. With the total franchise term for fitness concepts ranging from 15 to 20 years, a shift in target customer population patterns can potential raise questions around project unit success or PSRTM for several fitness franchises.

Let’s look at projected unit success from the economic growth lens. According to a recent study based on a survey of millennials about fitness trends[7], growth in fitness is strong now. But analysts are warning of a slowdown if the economy goes into a recession. In the likely case of such a downturn, boutique fitness franchises would be hit the hardest, given their price premium. Consumers are going to be dropping such a discretionary spend from their budget. There are also several new alternatives to gym classes such as POPiN (a free app), Aaptiv (app that gives access to audio-based personal training sessions) or Mirror (a business that helps transforms unused home space into a home gym).

All of these trends raise more questions. Are niche fitness franchises overselling? Is their projected growth sustainable? Are there enough markets with target demographics to sustain franchise business operations for the long term? What impact should we expect on loan defaults? And finally, can a lot of these franchised locations end up like the one of the four fitness centers is now closed permanently in the suburban Arlington market? One way to answer these questions could be through FRANdata’s “Competitive 3-P Analysis”.

[1] Franchising.com

[2] Franchising.com

[3] Franchising.com

[4] Yahoo! Finance

[5] Census Reporter

[6] World Population Review

[7] CNBC

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