11 minute read
TOUR DE GARAGE: THE GAMIFICATION OF HOME WORKOUTS
Peloton achieved a profit for the first time since its IPO, turning over US$89.1m from a loss of US$47.4m a year earlier. These results smashed analysts’ earnings estimates. The company has captured a reasonable chunk of the home fitness market and does not expect sales and market share growth to slow down any time soon, with sales crushing estimates with an increase of 172% this year. Peloton is innovative in the way it generates cash flows; not only does a customer have to make a sizeable purchase for a home exercise bike or treadmill with the integrated software, but they also pay US$39 per month to receive workouts and fitness plans etc. Over the past few quarters, the company has built huge brand awareness despite a piecemeal advertising spend, achieving this instead through clothing and merchandising sales. As such, the company has amassed a hefty US$1.8bn in cash, ready to spend on improving and developing its products.
In the last three months, Peloton’s user base has increased 113% from the year before, accumulating a whopping 3.1m members in total including both equipment-needed and equipment-free
plans. Peloton has clearly capitalised on the closure of gyms, but is this solid performance over the Coronavirus period foreshadowing the future of the company, or is it just a fad?
Lululemon is a luxury designer and retailer of athletic clothing and leisurewear, targeting its products to upper-middle-class individuals, and rather than a general mass fitness market, leading to an accidental move into the fashion market. Lululemon centres its growth strategy around three factors: product innovation, digital growth and accessing international markets. Lululemon, just like Peloton, has observed a surge in demand during the pandemic, as can be seen by its expectationbeating results this year.
It is important to recognise the significance of Lululemon’s growth, at a time when traditional bricks and mortar retailers are surviving hand-to-mouth. Online sales of apparel and accessories were up 157% this year, but with its stores contributing around three quarters of total sales, an increase in online traffic is a welcome one. The company is making strides to crack the international markets; e-commerce sales in China and Europe are now experiencing triple digit growth.
Despite the company’s pedigree in clothing, the recent acquisition of MIRROR, sees Lululemon taking advantage of new consumer trends. MIRROR is very much what it says on the tin; a traditional wall mirror that, once hung and plugged in, becomes an interactive workout screen, where users partake in live home workouts, while keeping an eye on their performance stats. Much like Peloton, customers pay a subscription membership to gain access to new workouts and system updates. At around US$1,000 per unit, it is difficult to see whether customers will find value in MIRROR, particularly in an age where a wearable sports watch can be purchased for just a fraction of the price. The right marketing will be key.
A social movement is changing the face of exercise; the winning formula is not yet clear, but new and innovative products give us a flavour of the future. The ‘gamification’ of home exercise is only likely to increase as the pandemic takes hold of the life we have been used to.
Both Lululemon and Peloton are leading the way; one an apparel company, breaking the home fitness market, the other a home fitness company breaking the apparel market. Both have shown how the synergy of both can drive growth and brand awareness, paving the way for more established players to leverage their brands and replicate the model.
CHANGING CONSUMER HABITS
The life of the office worker has changed dramatically this year. Working from home became the norm, leaving city centres across the UK deserted, hitting the retail, hospitality and entertainment industries hard.
Since the initial lockdown began back in March, the habits of workers in all sectors have changed. Whether that be office-based workers, retail staff or those from the Building and Manufacturing sectors - every industry has experienced change this year. Pre-COVID-19, city-based workers worldwide would contribute to their local economies, purchasing morning coffees, dining out at lunchtime and partaking in a spot of retail therapy at the end of a busy day.
As these norms grounded to a halt during that initial lockdown over seven months ago, businesses, hospitality venues and traditional stores were forced to adapt to avoid disappearing altogether.
While some sectors are still at the mercy of the virus and are unable to operate in even socially distant environments, others are recovering, with some even performing better than before the pandemic.
During the national lockdown earlier this year, non-essential retail stores were among the worst-affected business following their forced closure. As you would expect, this had a devastating impact on the high street. Footfall on the UK’s high streets fell 34.9% yearon-year in September 2020.
In March 2020, overall retail sales fell by 5.2% as many stores were ordered to close by the UK Government on 23rd March. This decline was then dwarfed by the largest fall on record, with the volume of retails sales dropping by 18.1% in April 2020. When drilling down into this data, clothing sales suffered more than any other area, falling by 50.2% compared to the previous month when it fell by 34.9%.
Although the high street is regaining some of its previous popularity, there is no doubt that online retail became the new norm despite shoppers keeping a tighter hold on their purse strings due to the prospect of financial insecurities. Online sales as a proportion of all retailing reached a record high of 22.3% in March 2020 as consumers switched to online purchasing during lockdown. This impressive figure then rose to 30.7% in April and 33.4% in May before slowly declining as the year progressed.
With online retail excelling during the temporary closure of the high street, many brands took advantage. Online home appliance specialist AO.com reported a retail sales increase of 62.9% year-on-year during the 16 weeks to 31st July 2020. Similarly, other electrical, homeware and DIY retailers also profited as consumers used the lockdown period to make home improvements. For example, Kingfisher, the parent company of both B&Q and Screwfix, reported sales rising by a quarter in June 2020.
While demand in DIY was clear across the board, there appeared to be both winners and losers in the clothing retail space with brands boasting a strong online presence out-performing those who were slow to adapt. For example, BooHoo’s sales rose by 45% year-onyear in the six months to 31st August as consumers turned to online shopping. However, Matalan’s sales dropped by 72.5% year-on-year in the 13 weeks to 30th May as it was hit by the closure of all non-essential retail stores. Similarly, TK Maxx (-42.3%) and Next (-34%) both recorded concerning year-onyear drops in sales. Meanwhile, Cath Kidston had already agreed to close all of its stores for good as part of a rescue deal at the peak of the pandemic in April.
Another of the hardest-hit sectors has been hospitality. While overall high street footfall is down sharply on last year’s figures, evening footfall has seen the harshest fall. Between the hours of 5pm-8pm, the figure was down 42.1% in September year-on-year, and falling by 44.7% after 8pm.
The closure of non-essential shops and offices in our towns and cities has had a dramatic knock-on effect to the hospitality sector. Despite the revival of the sector brought about by the government’s Eat Out to Help Out scheme, the industry is still at risk. The Restaurant Group (TRG), which owns chains such as Frankie and Benny’s and Chiquito, slumped to a £235m loss for the 26 weeks to 28th June 2020, while the firm permanently closed 120 restaurants over the summer. Elsewhere, pub chain Greene King is set to close dozens of its pubs with 800 jobs at risk following a slump in demand.
In the entertainment sector, Cineworld recently announced that all of its cinemas would be closed “until further notice” due to the lack of demand and lack of new box offices titles. The release of the latest James Bond film, initially set to be launched in April 2020, has been postponed twice already, while Disney’s latest bigbudget title, Mulan, was made available on streaming platform Disney+ immediately rather than launching in cinemas.
Without the millions of workers flooding the towns and city centres across the UK, a host of sectors are set for a bumpy ride in the months ahead. Despite Christmas fast approaching, further restrictions may limit consumer spending. “While some sectors are still at the mercy of the virus and are unable to operate in even socially distant environments, others are recovering, with some even performing better than before the pandemic. ”
ONLINE SALES
RETAIL FOOTFALL
ONLINE SALES AS A PROPORTION OF TOTAL SALES
0 0 0 -10 -10 -10 -20 -20 -20 -30 -30 -30 -40 -40 -40 -50 -50 -50 -60 -60 -60 -70 -70 -70 -80 -80 -80 -90 -90 -90 JANUARY FEBRUARY MARCH APRIL MAY JUNE JULY JANUARY FEBRUARY MARCH APRIL MAY JUNE JULY JANUARY FEBRUARY MARCH APRIL MAY JUNE JULY RETAIL FOOTFALL (CHANGE YEAR-ON-YEAR)
20 20 20 0 0 0 -20 -20 -20 -40 -40 -40 -60 -60 -60 -80 -80 -80 -100 -100 -100 FEBRUARY MARCH APRIL MAY JUNE JULY AUGUST SEPTEMBER FEBRUARY MARCH APRIL MAY JUNE JULY AUGUST SEPTEMBER FEBRUARY MARCH APRIL MAY JUNE JULY AUGUST SEPTEMBER SEATED RESTAURANT DINERS (CHANGE YEAR-ON-YEAR)
CHANGING CONSUMER HABITS 2020
ONLINE SALES AS A PROPORTION OF TOTAL SALES
THE FCA HAS EXTENDED A HAND
JAMES ROWBURY | INVESTMENT RESEARCH COORDINATOR
With the pandemic in its full throws, business operations across all industries have been stretched and had to adapt to deal with the crisis and its wide-reaching impact. Not least, the financial services sector has dealt with navigating both a rocky year in markets, and increased customer anxiety. As many grapple with the prospect of a reduced household income and an uncertain outlook, financial advisers and investment managers have become a lifeline for their clients in providing the reassurance, advice and access to capital when it is needed most.
One of the more challenging aspects of a financial professional’s role is implementing new regulatory changes and ensuring clients are being serviced appropriately, but evidence is now suggesting both implementation and enforcement of regulations have fallen significantly since the start of the COVID-19 crisis. In fact, the Financial Conduct Authority (FCA) has only handed out four fines this year, despite having issued 17 this time last year, a record low.
At the end of April, the burden to the financial services industry had become acutely clear and, in response, the FCA issued a statement outlining a raft of delayed activities and regulatory changes, citing an increased focus on firms supporting their clients during this period. Helpful no less for advisers looking to assist their clients at this critical time, the move has also alleviated pressure on the FCA, in order to direct resources to more critical matters. Perhaps the most significant of changes was the delay to the Senior Managers & Certification Regime (SMCR), back in July this year. Originally set to take effect in early December, the new implementation date has been kicked into March of next year to alleviate the pressure on firms significantly affected by the COVID-19 crisis.
Also atop the checklist was the incoming suitability review around retirement income advice, which the financial watchdog has now classed as ‘non-critical’, raising questions as to whether its implementation will in fact be indefinite. With a mandate to produce the best outcomes for clients, these radical moves seem sensible; a less-burdensome programme of regulations has allowed advisers to shift focus onto the issues that really matter to clients.
Firms should welcome the FCA’s lenience on new rules, but remain vigilant that delays can also mean backlogs. By no means should the foot be lifted off the pedal at this time, but instead take the concessions as a means of preparing for a post-pandemic compliance focus. Guidance and policy statements are available to read on the FCA website (www.fca.org.uk) and it is prudent to utilise this vital resource to endorse these rules; after all, they are here to create better outcomes for our clients.
