Considering a Fitness Franchise? Maybe try Virtual First

Going Virtual

A few years back, one of my friends decided he wanted to create a franchise location for a boutique fitness gym (a national boxing brand) here in Austin.  He’s a senior software developer, but he’d always been into fitness.  I remember him telling me that it was going to be great, because he could just work from there remotely, and the business would run itself.  I told him that’s not how businesses work.

Fast forward a year, he’d spent over $100K, and it was a continual struggle to find and replace members as they churned.  In the end, he sold off the business for pennies on the dollar to a more experienced fitness franchise manager.  And he’s not alone.

Last month, Bloomberg published an article titled: How the Biggest Boutique Fitness Company Turned Suburban Moms Into Bankrupt Franchisees.  Unsurprisingly, it was kind of negative, and it focused on the largest franchise holding company - Xponential Fitness.  Some quotes from the article:

  • “On Samantha’s due diligence calls with Xponential’s team, she says she was reassured that the business practically ran on autopilot and that she could keep her corporate day job. But in 2022, soon after buying the franchise, she attended Xponential’s annual conference in Las Vegas and learned many of her peers were bleeding money, just as she was.”
  • “More than 30 former and existing franchisees … say Xponential deliberately misled them and their peers about the strength of the individual franchises prior to signing the agreement.”
  • “Today many of the company’s franchisees—some of them once the brands’ biggest enthusiasts—have either declared bankruptcy or lost their retirement savings.”

Fuzzy Panda Research, a short seller of Xponential’s stock, published a research paper in the Summer this year with some equally negative assertions:

  • “>50% of XPOF studios never make a positive financial return.”
  • “We discovered >100 franchises for Re-Sale at a >75% discount to initial cost.”

The problems aren’t unique to Xponential.  Earlier this year, newspapers in Australia reported that 10% of F45 locations in Australia were for sale, and I knew some of the executives at Club Sports Group who just over a year ago were focused on a rollup play of buying out underperforming F45 franchises to then run them more professionally.

So how do franchises work, and how can it be this broken?  

A franchise company focuses on selling an upfront license to an entrepreneur to create a location, and then also receives annual royalties.  These up front and ongoing fees have limited correlation to how the franchisee is doing financially in his/her own business - the owner of that Cyclebar can be losing money hand over fist, but Xponential is still making money on the location as its Cost Of Goods Sold (COGS) and overhead or maintenance costs are very low.

Set up costs for boutique brands are very high - F45 averages $250K, Xponential lists its set up costs as “at least $158K” but this model from FinModelsLab puts the range at $465K to $1.3M once all other costs are accounted for.  To help with these setup costs, F45 organized a giant $150M credit facility in 2022 to finance its own franchisees for their setup costs, and the failure of that credit facility as interest rates began to climb was a key driver behind the F45’s overall growth slowdown and ultimately fall from grace.

The reality is that most gyms and boutique fitness studios fail.  According to IHRSA (the professional organization for gyms and health clubs), “With a studio failure rate of 81%, the deck can seem like it’s stacked against you.”  Yes.  Yes it does.  I don’t know anyone who thinks that running a boutique fitness studio is a ‘lifestyle business’ - it’s a continuous hustle, it requires specialist skills, and you have to be passionate about it to keep going.

So what else could you try?

If you are truly set on doing an in-person fitness business, it might be worth considering buying an existing business from someone else rather than starting one from scratch.  Just as there are secondary markets for timeshare holiday condos, there are similar marketplaces for buying and selling businesses, often at steep discounts.  For example:

Another option is digital.

Trying to do digital first can be a great way to put a foot in the water.  Here are some of the reasons why:

  1. Lower Startup Costs:  The setup costs for a digital fitness business are an order of magnitude less than a face to face one.  You need some software, like Tribe, and some cameras etc.
  2. Lower Financial Commitments:  Rather than signing long-term property leases, you main ongoing costs will be the software (that you can cancel at any time) and advertising (that again do not typically require long-term contracts or commitments).
  3. Ramp to In-Person:  If you focus your catchment area on a geography rather than ‘the whole internet’, you can build a member foundation for a physical location before you open one up.  You can enhance that further with popups and boot camps to again get into a hybrid mix of online and in-person before committing to a commercial lease.  There are even places like Maverick that have studio space to rent to fitness entrepreneurs on a per class basis, and PeerSpace (a commercial space equivalent to Airbnb) currently lists 17,630 spaces across the US available to rent on an hourly basis for fitness classes.

Digital and in-person do have many differences, but some core elements (like client acquisition, managing talent / content, etc) do have similarities.  What’s more, intentionally designing digital into your concept from the start can give your members more flexibility while maintaining a premium feel and minimizing operating costs.

At Tribe, we have always had a focus on hybrid or omnichannel models in fitness (combining digital and in-person together), but we have found that a high percentage of our customers start off as digital first.  Unlike other options you might see that just launch Zoom meetings or play video clips, at Tribe we have taken a no compromise approach on giving fitness entrepreneurs a platform and member experience that’s designed specifically for fitness.  We actually partner with Zoom, and are their only case study in fitness.

Reach out to us, and we can talk through what being digital first might look like for you.

Justin Marston

Thinker, writer, innovator, runner, Star Wars fan

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