Stoa Daily Challenge #10
Help Shivaram C — the VP-Distribution of India's largest fireworks manufacturer — restructure their distribution plan amid Diwali ban rumours.
Now, to today's issue.
In 2016, Mukesh Bansal and Ankit Nagori founded cure.fit (now rebranded as cult.fit) with the following mission statement:
"Life is too short to waste time thinking about joining a new gym or picking the right fitness routine. A healthy lifestyle is a constant effort that shouldn’t become a monotonous routine or a bland diet. And it doesn’t have to be, thanks to cure.fit. cure.fit brings all aspects of fitness – exercising, diet, mental health and medical/lifestyle care – under one roof."
This roof was their tech infrastructure and app that served as a gateway to all their offline offerings. The app provided class schedules, workout plans, attendance management and helped the company manage the flow of customers and avoid overcrowding at gyms and fitness centres.
But it wasn't until early 2020, when the company was whacked by the pandemic and realized the true potential of the tech it had and the inherent risks associated with running its own offline fitness centres across cities.
The company had to shut down most of its centres or make them semi-operational due to the heavy fixed costs like rent and maintenance involved in running its own gyms. It also had to lay off over 1500 employees.
On the other hand, when the country was locked down and people were stuck in their homes getting bored and unfit at the same time, the culture witnessed an increased focus on wellbeing — both physical and mental — and many took to online health and fitness apps to stay fit. The lockdown drove a massive surge in demand for virtual classes for yoga, HIIT and cardio workouts, Zumba, aerobics, and pilates with fitness influencers live-streaming workouts for their home-bound audiences.
With its existing tech infrastructure and being a digital-first company, cult.fit decided to pounce on this golden opportunity to launch digital fitness content.
"All of our customer interactions were through the app even in the offline world. They will buy online, book classes online, manage their health statistics on the app so we had tonnes of content already on the app for fitness, mediation etc. Our telemedicine offering was also there. It was a matter of repackaging and enhancing it a bit and changing the app orientation to be digital first but lot of the building blocks were already there. That certainly helped us to move very fast and pivot," said Mukesh Bansal in an interview with Entrepreneur.
Now that the company is eyeing a potential IPO in the next 12-18 months, the primary focus of the business is to turn profitable before that, so as to maximize its IPO valuation. As of March 2022, their revenues have fallen significantly and the company was making a loss upwards of ₹600 crores, so that's a major concern.
In a bid to turn profitable, the company has acquired F2 Fun and Fitness, the Indian franchise owner of Gold's Gym.
This allows cult.fit to have Gold's Gym centres as a part of its primary Cult Pass offering — which allows pass holders access to high-quality gyms across the country, along with the company's digital content and offline classes.
But why is cult.fit deciding to go big on partnering with existing gyms than building its own offline gym network?
The answer has to with the pros and cons of vertical integration in business versus focusing on core competencies and outsourcing everything else.
In business, vertical integration is when a company decides to own the entire value chain. For a company like Apple, it would mean designing and fabricating its own hardware, software, product/service delivery and customer service.
What vertical integration really does for a business is:
- It makes the business less dependent on other vendors as it now owns the end-to-end supply chain. As long as a company relies on other vendors for a part of its value chain, the vendors hold power over the business and can eat into its profit margins. Just like Apple with its own advertising platform and policies is currently eating into Facebook's profit margins because it controls the hardware and software ecosystem a large chunk of Facebook's users use to access the platform.
- It makes operations more efficient and streamlined and reduces transportation costs, transaction costs, and B2B marketing costs.
- It offers the company better and stricter quality control over the entire process as everything is managed within the company.
- It eliminates middlemen and the markups they charge for their services which helps the company increase its profits and reinvest them back into their product.
But there are some downsides with vertical integration too, such as:
- You have to invest significant capital and R&D in building parts of the supply chain that aren't currently your core competency. These investments will only pay on a long time period and your business needs to survive till then in order to earn RoI on them.
- For vertical integration, a business might have to take on significant debt. And taking on such debt only makes sense when the business is building an infrastructural moat that will keep new players from coming in. The telecom and power industry are great examples of businesses where it makes sense to take up a lot of debt upfront to invest in building an infrastructural moat. The company's future earnings should allow it to repay this debt back or the investment simply will not make sense.
In contrast, focusing on core competencies and outsourcing everything else in the value chain makes sense when the risks in vertical integration far outweigh the benefits.
In the context of cult.fit, let's see how we can think about their current strategy of acquiring existing gyms rather than building their own:
1. Company mission and values
The company has always prioritized tech as a core competency and differentiator. To quote Ankit Gupta, Head of Product and Engineering at cult.fit:
"Technology is the backbone of our live fitness offerings. From live sessions to pre-recorded classes, live class rankings, energy meters, and performance reports – our backend tech and powerful AI mechanism are largely responsible for managing the platform and handling daily traffic. We have been continuously working on improving our platform to ensure that the workout experience for users is as seamless as possible especially as more people have adapted to online fitness in a large way owing to the pandemic.
Beyond posture correction and rep counting, we are using AI to create customised workout plans for our users. Our tech DNA has been a major catalyst in our evolution. As a digital-first company, we constantly endeavour to push the boundaries of what tech can do to create a highly differentiated user experience in fitness and wellness, and our products are a clear example of that."
So, tech is a part of the company's DNA, more than running physical gyms.
2. Reducing risks associated with physical real estate
The Covid-19 pandemic was a wake-up call for the company, making it aware of all the risks involved in owning and operating its own gyms.
With owning gyms, the company has to constantly haggle with landlords and work on reducing rents, which are fixed costs, independent of the footfall or the revenues the company is earning from that location. Also, the service staff operating these gyms acts like a major cost center for the company, which are again, fixed operating costs.
So, focusing on building a digital roof for fitness and signing up existing gyms with its partner program allows cult.fit to let go of these fixed costs and actually focus on what it is good at: tech, fitness content, and brand marketing.
3. Doubling down on core competencies
Under the Franchise-Owned and Franchise-Operated (FOFO) model that cult.fit offers as a part of its partner program, existing gyms can take up a Cult franchise license to operate a Cult Centre, a Cult Gym, or both.
What this does is it allow cult.fit to benefit from the local expertise and knowledge of regional markets that these gym owners have, while expanding the value proposition of Cult Pass.
If a Cult Pass owner is in a new city and does not find any gyms signed up with cult.fit, then the pass loses a lot of its value. The more gyms that are accessible to pass holders, the better its value proposition gets.
But why would gym owners sign up with cult.fit?
- cult.fit invests in these gyms by helping them design a much better brand and service experience, and
- it supports these partners with marketing and distribution to increase the number of people visiting these gyms, which the gym owner can use to upsell value-added services.
So, it creates a win-win situation for both Cult Pass and its gym partners. The company currently offers two plans for gym partners on its website:
If cult.fit decided to take the vertical integration approach, it would have much tighter control over the entire brand experience, no doubt.
But, this would require the company to make huge upfront investments in real estate which has high fixed costs, needs a lot of regional knowhow, and has thin margins controlled by landlords.
These investments would also mean delaying profitability for the company for another few years, which it would see as undesirable, considering its IPO ambitions.
By cutting costs on running their own gyms in the short term, the company is making sure that the amount of money their offline business is bleeding is manageable and they have enough runway and fuel in the tank to survive the next few years.
Meanwhile, focusing on creating a digital ecosystem that provides access to both fitness content and fitness infrastructure allows the company to leverage its technological and marketing strength and piggyback on the goodwill of reputed brands like Gold's Gym.
This also helps the company quickly increase Cult Pass's value proposition for its users while outsourcing the headaches involved in running and maintaining a gym to people who are already running them.
If the company wants to show profit on its balance sheet on short notice, it feels like a smart strategy. What do you think?