SoulCycle

Could they bring a wind of change to the fitness industry?

2018.10

SoulCycle: Could they bring a wind of change to the fitness industry?
SoulCycle
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I. SoulCycle Creating a New Life Style

SoulCycle has turned spinning, once thought of as a boring exercise, into a social phenomenon.

  • SoulCycle has become a highly successful franchise. As of 2018, there are 82 studios in major cities across the US. The co-founders – Ruth Zuckerman, Julie Rice and Elizabeth Cutler – established SoulCycle with the goal of creating a new lifestyle brand. Specifically, the co-founders sought to energize and motivate people to spin by offering a workout environment that was focused. They wanted to be more than a simple health and fitness club by inspiring people to buy-in to the spinning lifestyle.
  • Prior to co-founding SoulCycle, Julie Rice had moved to NYC from LA and was missing the after-work hikes and jogs that she had enjoyed on the West Coast. She wanted to hang out, talk and have fun while working out, but she couldn't find opportunities in NYC like she had in LA.
  • Similarly, Elizabeth Cutler had moved to NYC from Colorado before the creation of SoulCycle. Cutler had difficulty finding the type of good exercise sessions she wanted, and her post-birth weight gains made her hesitant to go to an ordinary fitness center.
  • Ruth Zukerman first tried spinning in 1996. After the spinning instructor at her Reebok gym suddenly quit, Zukerman took over the spinning classes, running them for the next 6 years. Rice and Cutler, who wanted to open a fitness studio that better met their needs, teamed with Zukerman to found SoulCycle.
  • At the time, the spin bike was just a boring piece of exercise equipment found at ordinary fitness centers. The SoulCycle team set out to reinvent what this exercise machine could do, however, by creating an exercise program that was challenging, yet exhilarating. With Zukerman’s enthusiasm for exercise and superb coaching skills, Cutler and Rice were confident that their business model would succeed.
  • With an initial investment from Cutler, the team founded SoulCycle in 2006, opening their first studio in the Upper West Side of NYC with 33 spin bikes. The first studio was small, with no shower facility and only a glass wall to separate the entrance from the studio. It was completely different from the classy and luxurious atmosphere they envisioned. Even despite reimagining what the spin class might look like, getting people to pay extra money to ride bikes inside for 45 minutes, especially when the spin bikes could also be found at your average fitness center, seemed impossible.
  • During the early days of their business, the three co-founders did everything themselves, including laundry, cleaning the facilities, and maintenance. In order to advertise SoulCycle, they handed out pamphlets and asked their friends to wear t-shirts with the SoulCycle logo. The team believed that the core competitive advantage of SoulCycle was a passionate coaching staff and the unique culture created by their customers. In time, their hard work paid off and SoulCycle started gaining popularity and recognition for their special classes and culture. As more and more young professionals wanted to experience SoulCycle and its new concept of spinning, the company started to become a cultural phenomenon.
  • Celebrities including Lady Gaga, Katie Holmes and Bradley Cooper became avid SoulCyclers. Chelsea Clinton hosted a fund-raising event in a SoulCycle studio to support the victims of an earthquake in Haiti. This celebrity support helped SoulCycle to become all the rage in NYC. In fact, SoulCycle was so popular that people living in NYC started to develop FOMO (Fear of Missing Out) if they had not yet been to one of the classes. Within 6 months, SoulCycle far exceeded its BEP (breakeven point).

Although Zukerman, a co-founder and popular instructor, left the company, SoulCycle continued growing explosively with an eventual investment from Equinox.

  • SoulCycle opened three additional studios with the profits from its first studio. However, as the company grew, the relationship between Zukerman and the other two co-founders became strained. Zukerman was a popular spinning instructor and was actually the one who originally connected Rice and Cutler. After a while, Rice and Cutler felt as though Zukerman was starting to put herself and her fame as a phenomenal instructor ahead of the customers. The two consequently parted ways with Zukerman.
  • After Zukerman left SoulCycle in 2009, she founded Flywheel, a competing spinning studio, the next year. A group of customers loyal to Zukerman moved to Flywheel, sparking a fierce competition between SoulCycle and Flywheel. The intensity of competition between the two companies and their members was so great that people compared it to the relationship between the fans of Angelina Jolie and Jennifer Aniston.
  • In 2011, Equinox, a luxury fitness chain, grew an interest in SoulCycle. Melanie Whelan, an Equinox executive responsible for new business development, visited a SoulCycle studio to experience a class herself. On the visit, Whelan met with Rice and Cutler, who happened to be working at the counter. The class itself was a totally new experience for Whelan. What was even more surprising for Whelan, who was pregnant at the time, was a welcome gift package she received from the two co-founders that contained baby clothes and a letter. Whelan experienced first-hand the special care SoulCycle gave to their customers. With enthusiastic backing from Whelan, Equinox invested approximately USD 20 million and acquired 75% of SoulCycle.
  • After acquiring the majority of the shares in SoulCycle, Equinox tasked the two co-founders with continuing to run the company. Cutler leveraged her experiences in the real estate industry to purchase property for SoulCycle studios and develop the business. Rice oversaw human resources. The two had equal authority and duties. 6 months later, SoulCycle brought on Whelan from Equinox as the new COO (Chief Operating Officer) to help with investment, team organization, and real estate strategy. Empowered by the Equinox investment and the talent Whelan brought to the table, SoulCycle expanded outside of NYC, opening 36 studios in 6 cities across the US and recording over USD 100 million in revenue.


II. SoulCycle’s Strategy

With special instructors, SoulCycle redefined spinning as both an exercise program and a business.

  • A typical SoulCycle class consists of a 40-minute ride and a 5-minute stretching session. The instructor provides careful coaching to the members so that they feel emotionally supported throughout the physically demanding class. To help participants feel relaxed, yet ready to go, the class takes place in a dark room with a few candle lights. The instructor prepares exciting music and dance moves before the session and leads the class in the very front bike. The instructor teaches the class by both riding with the students and walking around the classroom to motivate the students.
  • To help people know what to do during the class, members are supposed to follow the motions of the instructor and the other members in front of them. The bikes toward the front of the class near the instructor are, therefore, reserved for the best riders. The wall of the studio explicitly says that anybody who wants to ride alone should not ride in the front, because an individual’s energy level is directly related to the riding quality of those nearby.
  • The SoulCycle business model is built on recruiting talented instructors and reducing employee turnover. Instead of hiring fitness instructors with group training experience, SoulCycle looks for people who can build meaningful relationships with others. This would include, for example, Broadway musical actors, cheerleaders, dancers and others who have the potential to grow into great instructors. All SoulCycle employees are obligated to attend classes, and many have made the transition to the role of instructor. SoulCycle customers can also apply to become an instructor.
  • Ordinarily, SoulCycle hires instructors through auditions. The applicant, after a three-minute self-introduction, conducts a rehearsal ride with the music of his/her choice. Once hired, new instructors attend a training program at the SoulCycle College, which lasts 8 weeks. The training program teaches them everything related to the job, from simple things such as making playlists and using equipment to the more administrative work, including how to organize basic training programs, class hours and scheduling. Also, the instructor training teaches prospective instructors how to be emotionally supportive both in and out of class so that they can form strong relationships with customers.
  • Each instructor has his/her own style. Some instructors run high-intensity classes without much break. Other instructors create a warm atmosphere, emotionally connecting with members during the class. SoulCycle strives to assign instructors that match with the customer’s characteristics, area and hours. Furthermore, the company website has detailed profiles of all instructors, including their favorite music and coaching styles, to enable members to find the instructor that matches their interests.
  • Although SoulCycle instructors are not allowed to work at other fitness studios, they receive relatively high wages. An experienced and popular instructor would run about 15 to 20 classes in a week, earning 150 dollars per class. This helps maintain class quality, as instructors don’t need a secondary job to [1] make a living. Further, providing instructors with good pay ensures becoming a SoulCycle instructor is a long-term, full-time career, not a short-term, part-time job.

SoulCycle co-founders wanted their company to be a community that brings a wind of change to the fitness industry.

  • Data released prior to IPO showed that SoulCycle had nearly 3 million ridings in 2014. In other words, SoulCycle had over 30 customers per class. Online reservations open on the noon of every Monday, and devoted customers often have to compete to book classes with the instructors they wanted. Over 30% of the classes during the week are fully booked within 15 minutes of reservations opening up on Monday.
  • The price for each class is different depending on the region. Roughly speaking, each class costs USD 34. If one buys 10 classes as a package, the price is discounted to USD 32 per class. However, since class packages expire three months after purchase, only a limited number of customers buy classes using this option. SoulCycle prefers to sell its classes on a class-by-class basis, similar to yoga studios. The co-founders believed that allowing the customers to make their own decisions in terms of instructors and class attendance not only motivated the customers, but also enhanced their loyalty to the company.
  • To get their money’s worth, customers actively and passionately engage with the classes. Some customers buy the expensive SuperSoul package, which offers certain privileges like early class registration and guaranteed priority assignment on waiting lists. Several customers have expressed their interest in special memberships and discounts for frequent customers, but these do not currently exist.
  • SoulCycle was a huge success by 2014. Its marketing budget, however, was only USD 1 million. SoulCycle relied on its customers and word of mouth for marketing. Enthusiastic riders actively promoted their SoulCycle experiences with family and friends. In LA, Beyonce and Jay-Z became SoulCycle customers. David Beckham, Selena Gomez, and Oprah Winfrey were among many celebrities who promoted SoulCycle. Michelle Obama used private SoulCycle sessions with her friends and family. In 2014 alone, SoulCycle had over 10,000 appearances on several TV shows and programs. It is a sensation.
  • SoulCycle has also made a lot of money through merchandise. The company sells and rents out the cycle shoes required for riding. SoulCycle also has its own clothing line and clothes can be purchased online or in the studios themselves. With new collections every month and limited edition merchandise offers, SoulCycle gear became a large part of the company’s revenue.
  • SoulCycle wanted to be a different kind of fitness business. Its goal was to be a community that brought change to the industry. The SoulCycle website provides a variety of information for its riders, including inspirational articles, community events and activities for different areas, biographies on instructors, and exercise methods. Some customers view SoulCycle classes as more than just physical exercise – to them, SoulCycle provides a type of mental therapy. It is not uncommon to see riders cry during SoulCycle classes or to hear riders shout and holler out of pure joy.
  • SoulCycle customers truly have created a strong community around the brand and many solid relationships have been formed through these classes. Students like to show up to class early and stay late to chat with each other. This sense of community is a big part of the special experience at SoulCycle. However, because there is a sense of elitism built into the company model, some struggle to familiarize themselves with the SoulCycle culture.


III. Acquisition by Equinox and Intensifying Competition

Equinox assessed the growth potential of the boutique fitness market to be very high and acquired the rest of the SoulCycle shares to run the company directly.

  • The success of the fitness industry is highly dependent on the overall economy. Additionally, the industry is plagued by a pattern of rapid growth and decline in interest for a particular business. Curves, a female-only fitness center, once had over 10,000 studios across the nation, but went bankrupt. Similarly, Bally Fitness was the biggest fitness chain in the US, but succumbed to the same fate as Curves. Crunch Fitness was at one point popular, as was JD Fitness. They all [2]went under.
  • Yet, the boutique fitness market continues to grow. Approximately 40% of the 50 million fitness customers in the US are estimated to be using boutique studios, whose combined forecast annual revenue will exceed 10 trillion. A growing number of people are switching from ordinary gyms to boutique studios in search of a competitive class environment and a sense of community.
  • When compared to other gyms, boutique studios provide bespoke services for 1 to 2 exercises in a relatively small space. Exercise is much more effective when done with a few passionate people in a boutique studio. Hence, customers are willing to pay more. These customers place a high value on regular exercise, even if it means sacrificing the rest of their social life.
  • In March 2015, Equinox offered to effectively buy out the two co-founders at the cost of USD 90 million each. Additionally, the two co-founders would each maintain 1% of the company’s shares, and Equinox agreed to pay them approximately USD 600,000 per year. As the company grew, Rice and Cutler were feeling the need for company management that had more experience running a large business. They were also concerned that spinning would end up on the long list of fitness industry fads that eventually disappeared. As such, the two were looking for an opportunity to reap the benefits of their work, which Equinox provided with its buyout offer. In 2016, Cutler and Rice accepted the offer.

With the continued emergence of new competitors bringing novel business features and concepts, competition within the boutique fitness industry is growing fiercer.

  • Flywheel, founded by Zukerman after she left SoulCycle, is SoulCycle’s strongest competitor. With private equity firms investing over USD 100 million in the company, Flywheel is competing against SoulCycle in the same areas and with a similar concept. Flywheel classes are conducted in a bigger space than SoulCycle. Furthermore, Flywheel is working to remove the elitist atmosphere from its classes, as it may drive away certain customers. The bikes in the back of the classroom are slightly elevated to enable everyone to see the instructor, regardless of location. This also allows people to exercise at the location in the room of their choosing, irrespective of their skill level. Flywheel focuses on the exercise, rather than the emotional aspect of the ride. Customers can control the resistance level of their bike pedals and access their individual exercise data through mobile applications.
  • Flywheel is not the only competitor. Various companies have [3] emerged with similar prices and programs. Moreover, high-end boutique studios, with multiple facilities including spas and squash courts, are popping up everywhere. Further intensifying the competition is the rapid rise of specialty studios offering yoga, pilates, crossfit and bootcamp.
  • In 2012, Peloton came onto the scene. Offering indoor bikes equipped with sophisticated technology, Peloton is changing the home fitness market. Called the Apple of the fitness industry, Peloton’s bikes sell at approximately USD 2,000, combined with online live classes at USD 39 per month. Customers are also able to take classes at Peloton’s NYC studio, or do so from home using their Peloton bikes. Each Peloton bike has a 22-inch touch screen, enabling customers to choose and take part in various classes, while monitoring their own exercise progress. Peloton has brought in over USD 30 million and is valued at USD 1.3 billion.
  • Another rapidly growing threat to SoulCycle is ClassPass which allows, at a monthly fee, customers to take classes at a variety of fitness studios in several areas (This is very similar to Korea’s own TLX). Many fitness studios are selling their passes in bundles to ClassPass to attract new customers and maintain their revenue levels. In partnership with approximately 8,500 studios across 50 cities in the US, ClassPass is offering a wide range of classes. Having attracted USD 173 million in investment and facing a market where fitness studios are struggling to secure customers due to increasing competition, ClassPass is expected to continue its growth trajectory. Further fueling this growth is the fact that customers are excited at the prospect of being able to choose the time, place and type of their exercise.


IV. Lessons

There are two lessons we can learn from SoulCycle.

Lesson 1: SoulCycle had three factors of success, including: the active steps the co-founders took to meet the needs of the market; outside investment which allowed for an explosive growth; and management capabilities coming onboard at the right time.

  • The founders of SoulCycle had a need for services which the market did not provide. They established their own business to fill this gap. Calculating expected profits and costs in rough numbers on a napkin at their first meeting, they determined that the business would fulfill their needs while providing a small return to help them make a living. Based on this, they immediately moved forward to create SoulCycle. The co-founders had the skillset needed to the succeed: a passionate and capable spinning instructor (Zukerman), real estate experience (Cutler), and human resources skills (Rice).
  • The co-founders had the clear goal of creating a lifestyle brand that invigorates customers. Seeing their profitability and potential for explosive growth, the founders accepted an investment offer from Equinox to accelerate growth. As the company continued to grow rapidly, Whelan was [4] brought on board from Equinox as the COO. Equipped with various experiences from her work in Starwood Hotels, Virgin USA and Equinox, Whelan had the management capabilities SoulCycle needed to manage its growth. With Whelan as the COO, SoulCycle was able to outmaneuver the competition.

Lesson 2: SoulCycle made itself special by sticking to its unique qualities in the face of increasing competition and several crises.

  • Just as it was growing in size, SoulCycle faced a crisis when Zukerman, a star instructor and a co-founder, left the company to start FlyWheel. Moreover, some customers were complaining about the uniquely elitist culture and party-like classes of SoulCycle. Despite these road bumps, Rice and Cutler changed neither the methods they employed to enhance customer loyalty, nor the special culture and style of SoulCycle classes. This steadfastness set SoulCycle apart from the rest of the industry, especially at a time when many competitors were emerging.
  • Even with ClassPass quickly expanding its presence and the consequent change in customer preferences, SoulCycle did not waver. A partnership with ClassPass would have increased class attendance and lowered the number of unsold classes. It would have been a great opportunity to improve the company’s revenue and profit margins. Yet, worried that such a move might damage the community and culture of SoulCyclers, Cutler and Rice declined the partnership offer. Sticking by their class-by-class sale strategy, the two co-founders further consolidated customer loyalty.

Have a 1:1 debate with your Ringle tutor about SoulCycle as you improve your English skills.

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