An Economist’s Perspective: Long-Term Challenges Facing CrossFit’s Financial Growth (OPINION)
Having listened to many CrossFit affiliate owners both in person and in podcasts, it is hard not to compare their views of the business of CrossFit with that of the blind men considering the elephant.
At the affiliate level there certainly is no unanimity on the best approach going forward. Some affiliates have closed, others have gone exclusively online, and others have struggled to maintain a client base within the constraints of local COVID-19 regulations. What is clear is that from an affiliate’s perspective, there is no one-size-fits-all business model that is appropriate.
The economics of running an affiliate in extreme rental markets like New York City, San Francisco or Hong Kong differ from those in more affordable markets like Indianapolis, Sao Paulo or Reykjavik, and differ even further from places like Aberdeen, SD or Nairobi, Kenya or Nuuk, Greenland. An individual affiliate owner need not worry about the different markets or the different parts of the elephant; for CrossFit HQ it is a very different story.
The first consideration is the distinction between short run and long run.
What needs to be done today just to survive? Many of us have a “to-do list” for today’s chores. In the age of a pandemic, for an affiliate owner, such a list is critical. What do I need to do today to make sure that my affiliate can survive until the pandemic is over? The focus on today, on the short term, is understandable. The pandemic only heightens that short-term focus as it complicates almost every day-to-day issue, e.g. keeping the gym clean and safe, retaining athletes, and paying the bills. But focusing on the short run potentially threatens the ability to make decisions for the long run.
The second consideration is determining what are your long-term goals and constraints and determining how they can be addressed.
The best analogy is training for the Open. Most of us don’t want to be in the same position two or five or ten years down the road as we are now. We hope to be better versions of ourselves and that may mean simply being more fit and healthy or being better at pull-ups or muscle-ups or handstand walks. And we understand that our day-to-day programming — today’s “to-do list” — needs to be structured appropriately to make that happen. Affiliate owners need to ask the same question of themselves and their affiliate. But it’s not just a question of setting goals; it’s also a question of recognizing constraints and incorporating those constraints into the decision-making process.
A Distressing Comparison
A comparison with the fitness chain Curves should serve as a cautionary tale. Curves is a company of fitness facilities for women, with the original gym opening in 1992, franchising (not affiliation) starting in 1999 and growing to about 10,000 franchises by 2006.
Controversy associated with the owner and a less than ideal business model led to a dramatic drop in franchises with many disassociating with the brand and others simply closing. The current number of franchises appears to be about 350. Curves went from being ubiquitous to being an afterthought in about a year. Much of that story should sound distressingly familiar.
The standard assumption of economists is that firms attempt to maximize profits. That is not an unreasonable starting point, but as an economist who has worked extensively on the economics of sports, I take a different and more nuanced view. Focusing on sports clearly indicates that many franchise owners do not maximize profits. Owners of sports franchises generally do not want to lose money, but most are willing to trade profits for wins, at least up to a point. And the decisions that those owners make will be influenced by how much they value winning vs. how much they care about making money.
The quality of any affiliate depends critically on the quality of their coaches, and to attract and retain quality coaches implies paying them a living wage.
The same is true for other businesses, albeit in most cases not so explicitly, and that includes CrossFit. Under the previous owner, beyond making money, the goal appeared to be changing the world, e.g. taking on big soda and big pharma. It is challenging to look at the decisions made and fit them into anything approaching a standard business model.
With Eric Roza now in charge, there appears to be a focus on operating CrossFit as a traditional business, focusing on customers — affiliate owners, and athletes, both elite and the rest of us — and working to grow the business by meeting customers’ needs and desires. Eric Roza signaled that CrossFit would be run as a business by having Berkshire Hathaway as a partner.
What does that mean for CrossFit HQ and for affiliates?
First, it suggests an emphasis on growth. Roza has stated that his goal is to get 500,000 participants in the 2021 Open and over time increase that number to over one million. Those targets may appear unrealistic or aspirational, especially with COVID-19 still raging. However, over 1.8 million people have previously signed up for at least one Open. With advertising and word-of-mouth, Roza’s goals are not as far fetched as they may sound. Long-term Open growth suggests that the objective is to also increase the number of affiliates.
Second, to address your customers’ needs, you need to understand what those needs are. Previously, at least to this outsider, it appeared that there was little feedback from affiliates or athletes to HQ. Roza has reached out both to athletes and affiliates to get their perspectives. In addition, affiliates and athletes now have representative groups to convey issues and concerns to HQ.
Third and perhaps most importantly, there needs to be a business model at HQ level that generates profits — even if that is only a secondary motivation — and that also generates profits for well-run affiliates, whether they are in NYC or Nuuk.
Frankly, it is this last piece that appears by far to be the most challenging. Why? Consider three groups.
There needs to be a business model at HQ level that generates profits and that also generates profits for well-run affiliates, whether they are in NYC or Nuuk.
First, coaches. The quality of any affiliate depends critically on the quality of their coaches, and to attract and retain quality coaches implies paying them a living wage.
Second, athletes. The financial viability of an affiliate depends critically on attracting sufficient athletes to be able to cover expenses and to do so at a price that does not exclude a large fraction of the potential target audience. And third, underserved communities. How do you combine the first two factors to introduce CrossFit to audiences that may be most in need of improved health but have the least ability to pay?
This last point is primarily a long term challenge, albeit a challenge to begin addressing today. Are there a set of actions that HQ can begin to undertake for marketing, for pricing, for incentives, for growth, … that will make affiliates and HQ financially successful, coaches paid appropriately and athletes around the world and from all backgrounds paying reasonable fees? CrossFit starts with a revolutionary approach to fitness, an enthusiastic base of aficionados, and a growing ecosystem of external businesses that can facilitate progress.
Like a muscle-up, describing what needs to be done is relatively easy; constructing and implementing the correct strategy to get there is not.