The Peloton threat: Gyms have a plan to get Americans working out again

Key Points

• The at-home, internet streaming-based fitness sector has boomed during the pandemic, with companies like Peloton seeing their stock price surge, and its earnings this week showed that demand for its bikes remains strong.
• Major workout brands like Equinox, SoulCycle and Planet Fitness were forced to accelerate nascent digital efforts including apps during Covid-19 shutdowns.
• But physical gyms are part of their future, with a lot more touchless temperature checks, sanitizer and cleaning technology.

At-home workouts have exploded as the coronavirus pandemic shifted wellness routines from gyms and parks to living rooms and balconies. The latest proof: the blowout earnings from at-home bike and streaming fitness subscription company Peloton Interactive, which crushed earnings estimates this week and said it expects demand to stay strong into 2021.

For the $94 billion fitness industry to stay afloat amid the widespread closures of core bricks-and-mortar studios and gyms, it's has had to pivot, relying more heavily on virtual connectivity for community and revenue. For studios operating in New York and New Jersey, the time to reopen has finally come. Governors Andrew Cuomo and Phil Murphy have approved the reopening of fitness studios.

Regardless of state approvals, fitness brands like Equinox — which closed all club and showroom locations in mid-March — are not rushing back into studios, according to CEO Harvey Spevak, who cited the group's "high standards" in his plan. Equinox has relied on the company's team of medical and infectious disease experts, in coordination with local health officials, to determine when best to reopen.

And that's during a period of time when the financial repercussions of remaining closed have been brutal.

"This has been six months of largely zero revenue," Spevak said in a CNBC interview on Friday morning. "When you have zero revenue, and you have almost 20,000 employees that you're taking care of, obviously, the math speaks for itself ...  you're going to lose money, which is the first time in company history."

In the interim, Equinox launched Variis, an online platform for Equinox members seeking virtual workouts. Pre-Covid-19 plans had included a phased rollout of the app, but the unscheduled studio closures heightened client interest in online offerings and thus expedited the Variis launch timeline.

Classpass, a fitness platform partnered with over 30,000 gyms, studios, spas, and wellness centers, saw 95% of its revenue dry up by April of this year as gym traffic largely ceased and partners shuttered their physical spaces to wait out the pandemic. The Classpass app is attempting to fill the void, with live and on-demand virtual offerings to satisfy its endorphin-craving members.

Planet Fitness' studios around the country closed alongside those of its competitors, but two months later, CEO Chris Rondeau reopened four studios to members. Today, nearly six months after the initial nationwide closures, Planet Fitness has reopened about 1,500 of its 2,000 clubs. It instituted a mask requirement for all members on August 1.

"I don't think there's much to worry about as long as you clean before and after with the solution that's approved by the government to kill the Covid virus," Rondeau told Jim Cramer on "Mad Money" back in May. 

Three months later, Rondeau told CNBC in an August interview, "We've logged 45 million workouts in the stores that have been open since May 1, and only 137 cases of somebody reporting back to us that they had the virus while working out."

Highly encouraged cleaning, as well as temperature checkpoints, socially distanced machines, and touchless check-ins are all commonplace in gyms' plans to reopen, regardless of the timeline.

In the new normal at Equinox, for example, capacity will be greatly reduced. To maintain social distancing, members must reserve workout time in advance. Once they arrive for their scheduled sessions, they'll be checking in with a health declaration form, a touchless temperature reading, and a face mask. Floor signage throughout the studios will delineate appropriate spacing between members throughout their stay.

Studios within the Equinox clubs will all feature HEPA filters to ensure safe air quality, and the cleaning teams will be using electrostatic backpack sanitizing sprayers in every space. SoulCycle, a subsidiary of billionaire Steve Ross's Equinox Holdings, will likely follow the same protocols, although their indoor spin studios remain closed.

Return of China's fitness market after Covid

American fitness companies mapping out a reopening strategy are watching their international counterparts closely. For gyms in China, the path to full reopening has been a gradual one. First, China reopened above-ground gyms, then gyms underground, and finally underground swimming pools. After a brief gym reclosure in Beijing amid a Covid outbreak, fitness centers in China are back to business. 

Mark Mastrov, 24 Hour Fitness founder and CEO of UFC Gyms, says that the fitness community is heeding lessons learned by Chinese business owners. "They did a really good job with spacing," Mastrov says, referring to floor markings and treadmill layout. Another strategy that seemingly worked for China: a delay in resuming group fitness classes. "They learned what members respected and liked, and what worked for them," Mastrov said.

For some fitness studios, following this reopening roadmap has involved adjusting signature workouts. Barry's Bootcamp is a high-end, high intensity workout that has over 100 studios across the U.S., Canada and the U.K. The Barry's business centers around a signature routine that involves swapping sweaty stations mid-workout with fellow classmates. As the company plans reopening their "red rooms," they've restructured their 21-year-old workout to accommodate a safe and socially distanced fitness experience — from home. To boost revenue, Barry's is selling equipment to construct the "red room" at home; weights, mats, resistance bands, benches, even foam rollers and massagers are available on the company site. 

Like Equinox, Barry's is prepping for the return of indoor fitness with its own advisory team of health-care experts. This week, Barry's announced it's offering "open gyms" in some cities, encouraging clients to sign up for on-the-hour appointments to use studio facilities in a format less structured and less crowded than its signature class. 

Working out vs. working in

Whatever gyms and studios may look like when they reopen, their businesses will certainly be closely integrated with virtual and outdoor offerings.

Peloton, whose business model has always been virtual and home-centric, is well-positioned for success throughout the coronavirus crisis and beyond, according to analysts.

SoulCycle built a cult-like following from its crowded in-studio experience, but the company recognized opportunity in the at-home workout space before the pandemic. In 2019, Soul teased its at-home bike, in many ways a direct competitor to the Peloton spin bike, and just days before the WHO declared a pandemic, the company released details of the at-home offering. In May, bike deliveries began.

Ruth Zukerman, co-founder of SoulCycle and Flywheel, recently told CNBC's "Squawk on the Street" that at-home working out is "here to stay."

Even though video technology remains somewhat "clunky," she said the experience is much closer to bricks-and-mortar in being able to create a community than many anticipated, and physical gyms are in danger. "With at-home and online, it's kind of a win-win. Instructors get to be paid more because there is no overhead, there are no high rents, and users get to pay less. ... We're going to lower prices because we want a wider reach."

In an interview with "Squawk Box" Friday morning, Peloton CEO John Foley echoed Zukerman's confidence. "When you have a choice of working out at home, why would you travel?" He expects the at-home fitness industry to keep growing post-Covid, and his own company along with it. Peloton reported that its exercise equipment sales were up 200% in the last quarter. 

Driven by necessity, Barry's Bootcamp began hosting free classes on Instagram Live twice a day, and soon afterward it launched a virtual paid experience.

24 Hour Fitness founder Mastrov said most fitness brands have launched a free virtual offering during the nationwide isolation mandates. "More and more competitors enter the at-home space every day," he said.

SoulCycle has historically packed 30-60 spin bikes in a room, each about a foot apart. For now, those studios remain closed in favor of SoulOutside, a socially distanced, silent disco spin experience en plein air. Interest, even in former Covid hotspots like NYC, is high, with waitlists for every offering in the next week.

Zukerman said with reopenings requiring limited capacity, and measures like masks worn during workouts, she also has doubts about the experience in gyms. "It's a completely different experience now."

With so many free offerings online, though, she said pricing online classes is tricky, and she has focused on curating an instructor list of those who already have a following and whom users will pay to take classes with, as well as offering weekly community events on Zoom to complement classes and where users can discuss everything from broader health and wellness trends to Netflix. "At the end of the day people just want to connect, and during a pandemic, connect more than ever," she said.

The future of fitness

According to Mastrov, pent up demand for in-person fitness will likely overshadow the pandemic-prompted home routine for gym goers.

"We've always had those digital offerings, and they're usually free," he told CNBC. "You need to supplement it with community in some way."

Isolation orders may have increased the appetite for virtual workouts, but interest in the space was mounting before this March. In a 2019 survey, the International Health, Racquet, and Sportsclub Association (IHRSA) determined that the biggest trend of the year was fitness tech.

For now, studios are watching closely as U.S. jurisdictions allow gyms to reopen. Florida's fitness studios welcomed gym goers back in late May, but two months later, under increasing pressure as state-wide Covid cases rose, Miami-Dade Mayor Carlos Giménez closed gyms in his jurisdiction down. He reopened them a day later. 

Mastrov operated 24 Hour Fitness through the SARS epidemic, and he recalls that restoring consumer confidence was key to recovery. While gyms and fitness studios may be shuttered for now, he expects a resurgence after the pandemic subsides. "I think it's going to awaken a lot of people to health and wellness in the months and years ahead," he said.

Planet Fitness CEO Rondeau told Jim Cramer back in May, "People will have a renewed awareness and appreciation for the importance of health and fitness. When you look at some of the obesity and fatalities out there, it's important that people are exercising and taking care of their health. I think this could create a wellness boom here and in the years to come."

Spevak told CNBC on Friday that the Peloton also demonstrates the demand for fitness is accelerating, but not all companies will be winners. "There are going to be some that aren't going to survive physically, that will be an opportunity for us to grab some market share. But ultimately, the physical and digital coming together on the other side will be very successful," he said.

Since opening in New York, Equinox unit membership sales are 150% of where they were on a comparable basis for the first 10 days of September relative to last year. "That clearly suggests that there is a lot of demand for our physical offering, but there are some people that also want the digital complement, so they're going to go back and forth. And over time, we think that's the future of what consumers want and we're going to be well positioned to do that," Spevak said.

"We will all miss the live experience, and down the road there will be room for both, but I just don't think at-home is going away," said SoulCycle's Zukerman. "People seem to love the convenience. I've heard from our riders they are not giving this up. They love the fact that they can take their favorite instructor if the time is convenient for them and they don't have to travel across town. Everything is right there in their own living room and they're showering in their own shower, and they love it."