#19: Aarti Kapoor of Goldman Sachs

In this episode, Joe spoke with Aarti Kapoor, an investment banker at Goldman Sachs covering Consumer & Retail clients, including high-growth health, wellness & lifestyle companies.

This conversation covers the evolution of wellness, the filters Aarti uses to evaluate deals and markets, and the impact of digital and connected fitness on the future of the industry.

There are a ton of incredible insights here that will be especially valuable to operators and executives across the fitness and wellness industry.

Check out an overview of the conversation below or listen to the entire episode for more.

What makes a business in this space worth backing? 

AK: Sustainability and longevity are really important. It’s something I spend a lot of time thinking through. 

We look for companies with sustainable and attractive business models in market segments here for the long term — the kind of businesses that have the right longterm megatrends behind them. Ultimately, the confluence of a great business model and good market dynamics will garner the most institutional investor interest, which means we can get a deal done.

What new verticals are emerging? 

AK: The consumer looks at wellness as health as multi-dimensional. Beyond fitness and eating better, there’s a huge mental component. And, given all the physical activity they’re doing, there’s a restorative component. 

As a result, we’ve seen industries like mental wellness, physical recovery, and the sleep economy begin to gain traction in the last couple of years. 

In the mental wellness world, mindfulness gained traction through Calm and Headspace, and the de-stigmatization and democratization of therapy with businesses like the Talkspace. Sleep is also top of mind. And when you think about the total addressable market, it’s huge. Recently, we saw the Casper IPO, with the company raising $100M in public markets to take the sleep economy, which is estimated at $80B in the US and over $400B globally. 

I’m excited about female health, too. Consumers are getting married later and have more of a need for fertility support. So there are a number of emerging verticals that are just getting started as consumers think about the multifaceted nature of health and wellness. 

How do you assess new opportunities? 

AK: A number of factors will ultimately dictate whether or not there will be institutional interest in an IPO, acquisition, or equity raise.

Using boutique fitness as an example, there are several parameters. First and foremost, brand is how you differentiate yourself in a crowded market. Thinking through brand equity and brand affinity from the consumer, there has to be a stickiness factor. Today’s consumer cares about authenticity, so the brand principles need to be clear and reflected in the day-to-day.

The strength of the actual product or service is imperative as well. Is there strong programming and a high quality experience for the consumer? Is it consistently replicable? Is there a fad risk around the specific modality? 

Next, we think about unit economics. How productive are the units from a revenue and margin standpoint, and how uniform is the unit economic performance? When we look at comparable studios within a portfolio, do they perform similarly or not? That portfolio complexity really detracts from how attractive a company might be.

In addition, there’s proof of concept. We’re in a fragmented market with a number of subscale brands with 1-3 locations in their home market. The biggest hurdle has been seeing if they can scale to other markets and compete effectively there.

Thinking ahead to the growth opportunity, it’s defining the total addressable market—who is the end consumer and how broad can that market be? 

Other factors include operational infrastructure and management team. 

While there may be hundreds of companies in the space, when you put them through these filters, the list of brands that are attractive to institutional investors narrows very quickly.

Is scale a factor? 

AK: Scale comes up in every conversation and is a huge area of focus. It’s a multifaceted answer and there are multiple components of scale, but I’d ultimately say it is financial scale, which is dollars, and it is geographic scale, which is footprint, and both are incredibly important.

There are probably two ways you can look at scale. One being business scale in terms of geographic footprint, and then there’s financial scale. 

On the geographic footprint side, the vast majority of boutique fitness brands have tens of locations, if not fewer. So, to be in the 75-100 unit mark for owned and operated businesses, and several hundred unit mark for franchise businesses, that really indicates scale. But there’s no magic number and it’s a combination of unit count, the types of markets you’re in, and geographies.

And we work with multiple buckets of investors, and the definition of scale varies depending one what they’re looking for. There are growth equity players who invest in smaller high growth businesses, buyout investors that may look for more mature businesses, and strategics that span a wide range of sizes. 

How do you approach emerging verticals? 

AK: With more established verticals like fitness and nutrition, there are so many precedents of successful brands that you can look at to identify what allowed them to grow and be successful businesses. Unfortunately, that doesn’t really exist in emerging verticals because they have only been around in this new form for a couple of years and there are so few players of scale.

So, there’s still a lot being figured out, but the filters are similar to what we identified for something like boutique fitness—brand strength, strength of the product or service and replicability of that, the economic model, total addressable market, and white space.

With some of these earlier stage verticals, there’s not so much urgency from our side and we are taking a bit of a wait and see approach. We’re following the market closely and paying attention to trends, but we don’t need to jump into transaction activity or try to create a market that doesn’t yet exist. We’re still waiting to see how some of these players grow, evolve and scale.

Is fitness and wellness a luxury good? 

AK:  Businesses across health and wellness verticals are becoming more accessible with time, and it’s something you can think about in a couple of ways. There’s the financial access point and the geographic access point.

Boutique fitness has become a lot more accessible in both ways. We’ve seen success with studios scaling to tier two markets. Brands like F45, Orangetheory, Pure Barre, etc., have several hundred or in some cases over a thousand locations and have been successful in tier two and even “tier three markets”. 

The value segment of fitness is also important and has been very helpful in making fitness accessible. For example, the Planet Fitness business model—at $10 or $20 a month and with nearly 2000 locations—is both financially and geographically accessible.

And then there’s digital. Some streaming models are extremely affordable and the at-home fitness market is really at the epitome of convenience.

Five years ago, health and wellness seemed like it was reserved for certain socioeconomic status. But, now we’re seeing an expansion either by default because businesses are scaling, or from a deliberate effort by businesses to become more accessible.

What’s the outlook for brick and mortar fitness?

AK: Overall I’d say the outlook for gyms is still very bullish. There’s room for multiple business models, but there is a shift in mix taking place, which we’ve seen notably over the last several years. But, the pie is growing and that’s a great thing.

Historically, mid-tier gyms owned the landscape, but as consumer preferences have evolved, it’s resulted in a bifurcation of the market. There’s the value segment like Planet Fitness, the high-end gym model like Equinox, and boutique fitness, and each segment does well on its own for different types of consumers. 

The mid-tier is getting squeezed and most of the players here are being forced to reinvent themselves and consider different business models to adapt to consumers. 

The good news is there’s room for multiple segments. For example, the value consumer is very different from the boutique fitness consumer, so there’s room for both the high and the low end to exist. Unfortunately, mid-tiers do need to reinvent themselves in order to stay relevant. 

What about digital and connected fitness?

AK: There’s a ton of opportunity for long term growth and it’s been exciting to follow because this innovation we’re seeing is happening real time.

I think digital models have the greatest ability to scale and become the most accessible to the end consumer. The total addressable market is the largest, and you’re catering to those who only want to work out at home as well as those who supplement a brick and mortar workout with digital workouts at home. 

There are different consumer psychographics and demographics, and room for multiple models to cater to all of these. You have the streaming model, which is more financially affordable, and the connected fitness model, which comes with equipment and streaming content and offers the consumer something enhanced and different. 

There’s also the question of digital putting brick and mortar fitness out of business. But, consumers care about experiences versus things, and that shows up in the numbers when you look at spending on services and goods over time. It’s also more challenging to replicate community digitally versus in person, so I don’t think digital is going to entirely replace it. 

There’s still a lot to be figured out, but there’s a ton of innovation happening and I’m really excited to see where the next couple of years in digital take us.

Will the industry be vertically integrated? 

AK: There is absolutely room for vertical integration and whoever can crack the code on that will make a lot of money doing so. I think the reason it hasn’t happened yet is a combination of management priorities and the fact that many different verticals are still subscale.

For one, it’s a matter of priorities when it comes to risk assessment to see what growth is on the table that can be executed on, versus what growth comes with some risk. That said, when there’s less growth opportunity on the table, I do think management teams will be more innovative because they need to continually find ways to drive growth of the businesses they’re leading.

And then there’s the fact that not all verticals in health and wellness have clear winners of scales. There are a couple of really scaled players in fitness and nutrition, mental wellness, and sleep and recovery, and all the other verticals we’re talking about as emerging. These businesses need to mature further and then they will be better targets for vertical integration.

**Note: Aarti’s answers have been edited for brevity and cohesion. 

About Aarti Kapoor:

Aarti Kapoor covers Consumer & Retail clients at Goldman Sachs in the Investment Banking Division in New York. While active across all major industry verticals, Kapoor specializes in covering high-growth health, wellness & lifestyle companies – an area in which she has received significant recognition from publications spanning Forbes (“30 Under 30”), Business Insider (“Rising Stars of Wall Street”), Bloomberg, Yahoo! Finance, espnW, and more. Prior to joining Goldman Sachs, Kapoor spent 9 years in Consumer & Retail investment banking at Moelis & Company, after starting her career at Citigroup in New York. Kapoor graduated with a BA Honors in Economics from Harvard University. Outside of the office, Kapoor is a fitness & wellness junkie, foodie and travel enthusiast.

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