Internet Gyms Are Back. Can They Last This Time?

This is no longer Didi-style "disruption"

Two years into the business, Liu Xiaowei is waiting to start his fourth job — part-time fitness coach at Leke. The company, which calls itself an "O2O platform for sports and fitness services," is the third internet fitness service Liu has worked for.

In 2015, after three years of martial arts training, Liu finished a three-month course at a training school, earned a "Beijing Bodybuilding Association Senior Personal Trainer" certificate, and took a job at a personal-training studio in Beijing's CBD, beginning his career as a coach.

That year, studios like his were multiplying across Beijing. Unlike the big chain gyms — often 2,000 square meters, packed with treadmills, ellipticals, barbells and the rest — the studio where Liu worked covered a few hundred square meters and sold nothing but personal-training sessions.

His sessions went for 300 yuan each, 60 minutes a session. But a customer who booked through an app called Ranjianshen paid half that. Neither the gym nor the coach lost a cent; the internet company covered the difference.

In the first half of 2015, internet companies moved into the fitness industry behind the slogan "disrupt the annual membership." The most active were Quancheng Relian, Xiaoxiong Kuaipao and Ranjianshen, which together raised more than 100 million yuan in six months. They signed up gyms of every kind and let users pay 99 yuan a month to walk into any partner facility as often as they liked.

Liu Xiaowei didn't have to think much about any of it. The people the internet companies needed to win over were gym owners, not coaches. He told QDaily that his pressure came from sales: 30 classes a month before he earned commission, plus a company rule that coaches hand out flyers between classes, which Liu felt was "beneath him."

From beginning to end, Liu never once dealt with Ranjianshen. The other "internet fitness services" worked the same way. This time is different.

Internet companies have already failed at running gyms once

Six months later, Liu left the studio and worked for a while as an independent personal trainer, lining up his own students and renting space himself, session by session. Self-sufficient, in his words, but also "a lot of hassle." Before long he moved to the gym of a high-end hotel.

The last wave's "disrupt the annual membership" slogans disappeared at about the same time. Partner gyms started turning Quancheng Relian users away at the door, then pulled out of the partnerships, then banded together to publish a statement calling for a boycott. The three main players either shut down or changed business: Quancheng Relian's app has been pulled from the app stores; Ranjianshen switched to building club-management software; Xiaoxiong Kuaipao stopped working with outside gyms and now runs its own.

The absurdity of the "99 yuan a month, unlimited" offer was this: the internet companies bought class passes from gyms in bulk — passes meant as trial offers to pull in new customers — and resold them as monthly memberships. The platforms were fighting the gyms for customers while living off the gyms' floor space.

Two years on, another crop of internet companies has set out to "remake the gym." This time they work in an entirely different way. Instead of borrowing traditional gyms' space and coaches, they open their own locations, buy their own equipment, hire their own coaches, and carry their own profits and losses.

Leke calls itself a coach platform, with 150 locations nationwide; a coach can register and then teach at any of them. Guangzhuquan runs and franchises small gyms around the country and sells a 99-yuan monthly pass. SuperMonkey's main offerings are 24-hour self-service "fitness pods" and group classes sold by the session.

What they have in common is size: a location runs about 300 square meters. The story that comes with it is that a small location can run on a lean team with no salespeople, and sell monthly and per-visit passes instead of annual memberships.

Capital has come in too. Leke, Guangzhuquan and SuperMonkey have raised close to 200 million yuan between them so far. Zhitouyun, which analyzes startup-investment data, published a report in May of this year counting 38 fitness-related funding deals in 2016. In 2014 the number was 7.

In the new startup story, traditional gyms take a beating all over again: expensive annual passes, pushy salespeople, unmanageable operations…

Liu Xiaowei also changed jobs after a year, joining his third employer, Renmajun, in Shanghai — another company that runs an internet platform and its own gyms.

His numbers weren't good enough, and that job lasted only about six months too. He went back to Beijing, where he now coaches part time for Leke while preparing to interview at SuperMonkey. After running the figures on his phone, Liu said: "The income is about the same as before, maybe better, and I don't have to sit around the gym all day or carry a quota."

From platforms to their own small venues: internet companies want to lower the price of entry

Zhang Lin, 25, is a SuperMonkey user.

After her mortgage and everything else, Zhang, who works in Shenzhen, has "2,000 yuan a month to spend freely." A fitness class her company put on convinced her she should "keep it up," but a gym that fit her budget was hard to find.

She had bought an annual pass at a big chain gym once, for 2,000 yuan. She went three times in the first month, then traveled for work for three months, and eventually sold the pass.

SuperMonkey was a middle path. No annual pass, group classes at a bit over 60 yuan a session, and a 500-yuan stored-value card.

There are two things to choose from. Group classes are held at "full-service" locations with a studio and basic equipment. The small "fitness pods," converted from shipping containers, run 24 hours; users scan a code to get in and use everything on their own.

Zhang tried a fitness pod once and came away a little disappointed. The group classes appealed to her more. After a few of them she said, "The atmosphere is great, it's a happy hour. A lot of the coaches have real personality."

She did think the space was small — "in some classes there isn't room to move."

This is the basic strategy of the new fitness companies. Guangzhuquan and Leke are also using smaller spaces and a lower price of entry to pull users in.

SuperMonkey sells classes through its WeChat official account, priced between 60 and 150 yuan. You get an entry code when you book, show up at the location at the appointed time, and take the class with a dozen or so other people.

Guangzhuquan's monthly pass costs 199 yuan; you can also buy a pricier quarterly, half-year or annual pass. All of that happens online as well.

Walk into one of its locations, though, and the difference from a big club is obvious.

Guangzhuquan's location near Beijing's Sanyuanqiao is one floor below ground in an office building, about 300 square meters. All the equipment you'd expect is there, but there is little open floor — machines sit close together, the shower room is small, and at peak hours you may have to wait.

SuperMonkey's group-class studios are there to hold classes and nothing else; they don't carry much equipment. More awkwardly, none of its locations have showers.

Founder Liu Shuting told QDaily that showers would double the cost per user.

Young people who have just started exercising and don't ask much of a gym are exactly who the new internet fitness companies are courting. In a response to QDaily, Leke said its biggest group of users is beginners and novices — "college students and white-collar workers, typically."

That is not quite the crowd the big chains serve. According to figures the chain Qingniao Fitness gave QDaily, its users average 35 to 45 years old, seven or eight years older than users of newer gyms like Guangzhuquan.

Which fits the plain logic that you get what you pay for.

Traditional chain gyms are bigger, and most of their profit comes from personal training

Yu Xiang still remembers walking into Physical's flagship Shanghai club seven years ago — a gym so big it had "seven floors. My jaw dropped."

He had come to look for a job. After two years as a personal trainer in Qingdao, Yu felt he needed to grow. Physical matched what most people had pictured for years when they heard the word gym: enormous floor space, expensive equipment, annual passes costing thousands of yuan, and a name that usually ended in "club."

Upscale gyms reached China in 1996, when the first Will's Fitness opened in Shanghai. Around 2000 came the chains: Qingniao Fitness, Physical, Hosa Fitness, Impulse and others.

By 2016 there were 10,000 fitness clubs in the country and the industry was worth 30 billion yuan, according to a report from the General Administration of Sport and Nielsen.

Before he bought Qingniao Fitness in 2015, Bian Guangming worked at the General Administration of Sport. He remembers gyms having "explosive growth" in 2013, driven mainly by "the post-80s and post-90s generations growing up — the [fitness] penetration rate among them was already high."

But the way gyms make money hasn't changed in 20 years: put capital into a space and equipment, then sell more annual memberships than the space can hold, and use the cash to cover costs still to come.

Every gym is betting that its members won't show up much. The Economist, citing a report, found that 60% of members give up in their second month; IHRSA, the global trade body for the fitness industry, puts annual member turnover as high as 45%. A traditional gym can take in new members quickly without paying for the wear those members put on the equipment over time.

Which is why a gym has to be big enough to catch enough traffic.

"An investment that size has to come back in one lump. A 1,500-square-meter location costs us 5 million yuan up front, so prepayment is the reasonable model," Bian said. A well-run Qingniao Fitness location can earn that back in nine months.

Not many people go to gyms at all. Chinese gym memberships total 15 million, or 1.15% of the population. In the United States the figure is close to 40%. That is part of why gyms won't be replacing big venues with dense little ones any time soon.

As with banks and their towers, a gym's size and polish are also the work of convincing customers it won't run off with their money. Big gyms close anyway.

In 2011, a wave of closures hit Beijing: five Qingniao Fitness locations shut for three days, and Zhongti Beili went dark without warning. In July 2016, California Fitness, which claimed 100,000 members, collapsed, closing all 16 of its locations in Hong Kong, mainland China and Singapore.

Getting people through the door is only the first step. Then the gym has to sell them a membership.

Walk in, and a "membership consultant" arranges the card; after that a coach sells you round after round of personal training. Nielsen's 2016 report found that a third of annual-pass holders buy personal-training sessions.

Personal training is the most profitable line. Qingniao Fitness takes 40% of its revenue from personal training and 50% from memberships. People who work out in China also tend to earn more than average. Nielsen's 2015 China Sports Population Survey found that households of sports and fitness enthusiasts earn 10,699 yuan a month on average, 36% more than households that don't exercise.

Yu Xiang has no quarrel with how traditional gyms run today; nine years in the business have made him comfortable with it. He now manages a personal-training team of fewer than 10 coaches at a small studio.

In 2010, just after joining Physical, Yu hit "100,000 yuan in personal-training sales in a month" during the pre-opening sales period.

"However good your expertise is, if you can't sell it to a member, why did you learn it?" Yu said. Coaching, as he sees it, is a service business built on trust between people. "My longest-running student has stayed with me for nine years."

What the internet gyms want to take from traditional gyms is also personal-training revenue

Liu Xiaowei is Yu Xiang's opposite: what he hated most about the job was having to sell.

At the high-end hotel gym in Beijing, the training came in two steps. First you pestered the member. When repeated persuasion failed, you moved to "attack and threat" — telling them their form was wrong, that they were risking injury.

"I thought that was too low. I'm not a doctor, I can't make that call," Liu said. "Personal training should get a member to the point where they don't need you, not keep them dependent forever."

Six months later he quit and went to Shanghai, where "staying in touch with members" was written into the job description. Coaches at that studio had to ask their students what they had eaten at each of their three meals — "and if they were in a bad mood, you had to say something encouraging."

Liu found it "thoroughly off-putting" and "a waste of time, like an escort service."

The General Administration of Sport's 2016 report on fitness coaches' careers found that 75% of coaches carry a sales target, averaging 35,401 yuan a month. Seventy percent have changed jobs at least once, and a third of those move on in under a year.

"Fitness coaches mostly see themselves as practitioners of a profession, while fitness clubs treat them more as salespeople who have to bring the club money," the report said.

The new wave of internet gyms is trying to take some of that sales pressure off coaches and win them over.

Liu Xiaowei's contract with Leke says plainly that a coach may not pester students into buying classes; a coach who draws a complaint can be fired.

Guangzhuquan told QDaily that to keep good coaches it runs a "coach partner system": a coach who performs well at a physical location can serve as store manager and share in the profits.

Leke has a similar partner incentive, with a ladder from coach to star coach to instructor trainer.

SuperMonkey puts a "coach agent" in every city to deal with coaches; the coaches are the company's "talent." It also offers scholarships for professional development and interest-free loans.

What a coach cares about most directly, though, is probably still the money. A personal-training session with Liu Xiaowei at Leke costs 180 yuan, and he keeps 120 of it. Under his old club's terms, a 300-yuan session left him "less than 100 yuan."

That math satisfies him for now. In his previous jobs, pay was a base of 2,000 to 6,000 yuan plus commission on classes taught, usually about 20%, with "40% already considered good." Leke goes to 80%. The same number of classes earns him more, and he doesn't have to sit around the gym waiting for students.

A coach's pay is no longer tied only to selling classes, either. Liu Shuting said SuperMonkey cares more about a coach's "all-round ability" and doesn't set a numerical sales target. What matters in the review is "how many kinds of classes you can teach" and "the repeat rate — how many people keep coming back to your classes."

Once the coaches are on board, the internet gyms use online booking and class sales to take personal-training revenue away from the big traditional gyms.

"Eighty percent of our users also hold an annual pass at a big gym," Liu Shuting said. "Someone said an annual pass elsewhere is really a shower pass — after all, we don't do showers."

As for keeping users, the new companies haven't solved much

The internet gyms have made buying a class easier by charging by the session. In exchange, they have to keep persuading users to buy the next one.

SuperMonkey's answer is to build star coaches and make people feel "happy," so they form an attachment.

"Users shouldn't be shackled to an annual pass. Give them the freedom to choose and they'll want to come back," Liu Shuting said. "It's like playing Honor of Kings: you finish a round and want another one. That's addiction. We think a product has to get to that point to be right."

A few classes in, Zhang Lin decided SuperMonkey's coaches "really aren't class salesmen." Each time she buys a coach's class, the WeChat official account sends her a QR code that puts her in that coach's WeChat group. Every group she has joined so far has been reasonably lively — "people joke with the coach, saying they're his wife, and it's pretty funny." Zhang sees it as the class atmosphere carrying on; exercise "gets connected to a community."

"Fitness is a heavy-service business — someone has to actually deliver the service," Liu Xin, a contracted elite coach and trainer for Nike China, told QDaily. "Access to a space matters less and less as a gym's core advantage. That approach tries to hold people with something that has no feeling in it."

Liu Xin has come up with another way to tie gyms and users together. Running Cat, which he helped found, is a "digital fitness training studio" built around group classes.

The studio is fitted with a class system of LED screens called Holofit. Besides the coach, the room has a large screen showing the progress of the class and information about each student. Nine projectors overhead throw markers onto the floor — courseware, in effect — telling students where to put their hands and feet.

Holofit corrects form, Liu Xin said, taking over part of the group coach's job and making training more efficient.

He also thinks a flashy way to train brings in foot traffic. The plan for Holofit, a system that cost 1 million yuan to build, is to sell it to more gyms, solving a location's "revenue problem, and then holding on to trainees and coaches at different levels."

All of which still comes back to revenue: a location has to sit somewhere good enough to reach enough people.

The gym business ends up offline in the end. "A gym is a three-kilometer business," Liu Xin said.

This is still a traditional business

Whatever changes in form, the gym as a service has not been remade by the internet.

The internet's role looks more like a channel for finding new users — the job the flyer in a street promoter's hand used to do.

"Every user's Moments feed is our best ad space," Liu Shuting said, adding that 60% of SuperMonkey's new users come by word of mouth.

Technology has raised operating efficiency somewhat. Guangzhuquan's app shows in real time how many people are at a given location. SuperMonkey caps the size of each group class, so nobody has to arrive early to grab a spot.

Add classes sold one at a time, and the new gyms can find the people who will pay for personal training quickly, without first tying them down with a membership card the way the chains do.

That is a problem this wave of internet gyms has solved. The traditional side of the business still doubts the new model has a future.

"The internet is good at concepts of all kinds, but revenue minus cost equals profit. That's the essence of business," Bian Guangming said. Small gyms, he thinks, have made management easier, but they still "haven't solved customer experience or revenue per square meter" — the two core problems. Revenue per square meter is a retail measure: sales generated per unit of floor space.

Going small means less money to open a location. It doesn't mean lower average rent.

After buying Qingniao Fitness in 2015, Bian pushed through changes to raise efficiency: a smart management system, outside capital, new equipment in the stores. "If the core of it is efficiency, then with efficiency equal, the bigger store obviously makes more money," he said.

As for why the last wave of internet fitness services failed, Liu Xin believes the fitness industry simply cannot produce a single dominant internet company the way ride-hailing produced Didi or bike-sharing produced Mobike.

Didi doesn't need to own the cars on its platform. If it did, it would not have reached a $38 billion valuation in five years. Owning fewer assets, then copying and expanding fast, is why internet companies grow the way they do.

A user might want a ride from anywhere, and a driver can pick up a fare anywhere. That is why Didi and Uber hold the most power in the ride-hailing chain.

But in the city where they live, people don't need to work out anywhere at any moment. How far away a gym is usually matters more than which company runs it.

In this startup wave, internet companies run their own locations, which makes them more realistic. It also slows their expansion and returns the fight to location and coaches.

This is still a traditional business.

(Zhang Lin is a pseudonym, at the interview subject's request.)

Cover image from Pixabay