Tuesday, April 22, 2014

The Crossfit Bubble

As a student of financial bubbles, I also seem pre-programmed to study the causes and effects of cultural, technological, political, intellectual, and environmental bubbles as well.  A "bubble" can be loosely defined as any function where outputs suffer marginally decreasing returns from inputs.  Put another way, a model cannot be sustained from increased effort and becomes inherently unstable.   Examples in unsustainability are all around us, and while the inputs and outputs may vary wildly through the spectrum of life, the causes and effects are quite consistent.

One example of an unsustainable growth model has to be the branded commodity called "Crossfit". This is an exercise program which emphasizes semi-random, extremely intense workout sessions.  I have tried Crossfit.  It is certainly challenging, but the emphasis here is not to argue about the merits of Crossfit as a training regimen, but rather investigate how sustainable it will be as a cultural and business phenomenon.  I have also attended the Crossfit Games ("The Games") in an effort to further understand the cultural sustainability aspect of Crossfit.

For the sake of Brevity, let me state that Crossfit  is most certainly an unsustainable cultural and economic bubble.

By emphasizing "elite fitness", and marketing the accomplishments of highly trained and physically gifted individuals, it naturally creates a division between patrons who are competing for the Crossfit Games and those who are "merely" there to exercise.  This was demonstrated in the cultural response to "registration" for the The Games whereby anyone with $20.00 to spend could post their results for several "open workouts" that would qualify them for competition.  Many elite competitors found it silly that novice athletes would attempt to qualify for one of the most strenuous contests of human work output on the planet.  But of course, this is the result of Crossfit attempting to grow by exploiting more revenue streams from its members.  A registration fee of $20.00 for, say, 300,00 members equates to $6 Million in profits with a cost basis of a spreadsheet program and associated webpage maintenance.  Not a bad take.

Also, the sheer number of Crossfit gyms (I live in New Orleans and there are now 3 within walking distance) has all the classic signs of a bubble.  Rapid expansion to capture the primary revenue stream of Crossfit (the sale of certification classes to teach Crossfit) has resulted in a glut of Crossfit gyms whose marketing materials state they "forge elite fitness".  If Crossfit wishes to continue this marketing image, and it must be understood that the marketing component creates much of the worth of the Crossfit brand, then diluting this image by catering to a mass audience will only serve to alienate Crossfit's core community.  Becoming the McDonald's of fitness does not enhance their brand.  It is a marketing tightrope walk that is unsustainable.  The core membership will fracture into several different types of branded fitness outlets, and the Crossfit brand will be hollowed out.

Speaking of competition, there is already exogenous competition in the form of athletic clubs and the like as well and endogenous competition in the form of Crossfitesque gyms  Again, this is branded exercise and there are no barriers to entry.  The Games themselves have a new competitor in the National Pro Fitness League.  This is reminiscent of the many "Texas Hold'em Poker" T.V. shows that proliferated in the early and mid 2000s before disappearing en mass.  All of this activity further erodes the branded fitness sector that Crossfit has come to dominate, and this dilution will cause crossfit gyms to compete on pricing alone (the fate of a commodity) and the bubble will burst.

The above analysis does not even take into account the possibility of even further brand erosion once Crossfit enthusiasts understand that competitors in The Games follow wildly different training programs than the rank and file members of individual Crossfit gyms.  But again, I don't want to get into efficacy arguments about the Crossfit regimen.  It is intense physical training.

I give this particular bubble 3-4 more years before the stresses due to an unsustainable model begin to challenge the brand and the entire business model.   I am not saying it will disappear completely.  People still watch Texas Hold'em poker shows...but viewship, prize money, and registration to major events are all down 30-50% from their peaks.  The inputs and outputs are different, but the causes and effects are the same.

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