LULULEMON, PELOTON AND THE RISE OF DIGITAL FITNESS

©Mirror

Overall, the fitness industry has already been experiencing the massive growth of digital fitness, out-of-studio experiences and connected fitness. Notable platforms, such as Peloton and Mirror, have created enormous awareness, brand recognition and loyal followings. While they offer solutions that are able to fully replace the in-studio experience, they are often supplemental to the physical studio or gym experience. Consumers still desire physical human interaction but often schedules, travel and other issues impede their ability to get to a physical gym. Today’s new connected fitness experience is about combining training, social interaction, gamification and many forms of engagement for the consumer.

Lululemon has recently agreed to acquire Mirror for USD 500 million, just months after it backed the fitness startup in a funding round led by the venture arm of Steve Cohen's hedge fund, Point72, along with backers including supermodel Karlie Kloss, Lerer Hippeau and Spark Capital. The athletic apparel retailer also has a content partnership with the startup, offering classes from its global ambassadors on the Mirror platform. The New York-based company is the developer of an interactive workout platform that offers live and on-demand classes from a wall-mounted screen. The mirror-like device is meant to serve as an at-home gym alternative, giving users access to weekly live classes, thousands of on-demand workouts and one-on-one personal training, comparing to Peloton’s value proposition.

This is Lululemon's largest-ever acquisition, and may kick-start an acquisition spree in the connected fitness space. It also reflects the company's stated desire to be more than just an apparel retailer, the first step of which was offering in-store yoga classes. Connected fitness has certainly become a popular sector for startup investments, supported by an increase in demand for at-home fitness companies like Mirror and Peloton since the outbreak of the COVID-19 pandemic. Sales for at-home fitness equipment has soared, and gyms have also started renting out their spin bikes and other equipment to bring in revenue while they have remained closed. And with many people staying home, it’s not a far stretch to say there’s also likely been more people in athleisure or comfort-wear, like what Lululemon offers.

“In 2019, we detailed our vision to be the experiential brand that ignites a community of people living the sweatlife through sweat, grow and connect,” Lululemon CEO Calvin McDonald said in a statement. “The acquisition of Mirror is an exciting opportunity to build upon that vision, enhance our digital and interactive capabilities, and deepen our roots in the sweatlife. We look forward to learning from and working with Brynn Putnam and the team at MIRROR to accelerate the growth of personalized in-home fitness.”

In the 13 years since its IPO, Lululemon has grown into one of the biggest athletic apparel brands in the world, leveraging its must-have yoga pants and other trendy workout and leisure attire into a market cap of nearly USD 40 billion. There are obvious parallels between Mirror and the better-known Peloton brand. For both, the point of entry with customers is a piece of pricy hardware: Peloton charges USD 2,245 for one of its stationary bikes, while Mirror sells an interactive, wall-mounted screen for USD 1,495. Both companies then charge a monthly fee to stream a suite of live and on-demand workout classes.

Investors were already excited about both companies before social distancing and shelter-in-place became part of our everyday lexicon. Venture capitalists valued Mirror at USD 300 million last October and Peloton's stock had stayed relatively steady after an USD 8.1 billion IPO in September 2019. But the pandemic seems to have unlocked the promise of even more value. Lululemon is paying a 67% premium to Mirror's last private valuation, and Peloton's stock has climbed 200% since March 13, taking the company's market cap to nearly USD 17 billion. Another VC-backed player in the space, Tonal Systems, was in talks this spring to raise new funding at a USD 250 million valuation, which is up from a USD 185 million figure last year.

It is a very different story for startups who bet on the other side of the fitness market. Instead of encouraging in-home workouts, companies like ClassPass and Gympass raised significant capital on the promise of sending customers to as many different gyms as they could. Both approaches aim to disrupt the traditional membership model, charging users for access to a huge range of different workout facilities rather than a single gym.

As gyms are starting to reopen their doors again and we are slowly re-entering into our normal life, it will be interesting to follow the development of both concepts. While the current boom for in-home solutions may retreat a bit as virus restrictions ease, the acceleration of digital fitness will be sticking around as a core part of daily programs. At the end of the day, similar to other industries, e.g. the mobility sector, the business model to succeed, will be the one that is offering the most holistic ecosystem and consumer-centered experience across online and offline channels.