The Growth Story
The Founder of Crossfit, Greg Glassman, is a free market thinking Libertarian which I relate to and respect. While looking at Crossfit you have to accredit this thinking for the rapid growth of this grassroots fitness movement. In lieu of control, Glassman let the market dictate the growth, saturation and quality by steering the Crossfit business model towards licensing and away from franchising. There is no doubt that this decision was vital in taking Crossfit from a small grassroots movement to a global powerhouse in the fitness industry. I am a student of the markets and I am by no way trying to Monday quarterback one of the best growth stories in the last decade but simply observing where Crossfit has come from and where they are going. I will also add in a few thoughts on what I think would make for some interesting shifts within the business model to sustain growth and quality long term.
3, 2, 1, Go…
While I appreciate the free market licensing model approach that Glassman took I also believe this has caused issues along the way with the community and the brand. Without the strict controls of a franchise this has allowed for quality control issues and over saturation in select markets. This is a bit of a catch 22 since the low cost and minimal barriers to entry for affiliation and certification being the driver for a high market adoption rate and growth. The question now is what effect does the licensing model have on the Crossfit brand long term?
I have always respected Glassman’s unapologetic position regarding his business model and there is no doubt we agree on far more than we disagree on. However, the part that has troubled me along the way is that in order for their to be a true free market then you can not put restrictions on consolidation. Until recently, (Reebok, Crossfit NorCal, Crossfit Invicitus) it was only possible for an individual or organization to own one affiliate. In my opinion, this defeated the purpose of the free market principles that Crossfit stood for. The model has incorporated small barriers to entry and no specific standards for their affiliation and training which leaves it to the market to decide which affiliate should survive and which should not. I think this makes sense in theory but in practice it has not quite worked out that way and I believe that is a direct result of consolidation restrictions. This has created a conflict in the free market model and dissension within the community.
There will always be die hard loyalists within any high growth company that do not question anything about the model but any high growth business must address certain conflicts within their model over time in order to succeed long term. This style of conflict resolution is no different than each of us as Crossfitters went through as we started to challenge our traditional fitness methodologies.
So where do we go from here?
I have recently had several discussions with affiliate owners regarding their business models and future plans for their affiliate. I would consider each of these affiliates to be top performers and premium brands in their market. I have also spent time in a few of the bottom performers and value brands in my own region to understand the disparity in pricing and quality among the premium and value brands. This is by no means an exhaustive study and more opinion than fact but based on these conversations and observations I believe there is fundamental issue in Crossfit with over saturation of affiliates in certain markets due primarily to rapid growth from low barriers to entry. This issue is is leading to pricing and quality issues. With that said, I believe that Crossfit is reaching a saturation point in certain markets that may push quality affiliate owners to deaffiliate from Crossfit. Let me explain how we got to this point and where to go from here.
The common result of high growth industries and companies is fragmentation and over saturation. Once growth starts to flatten which it always does this typically causes quality and pricing issues. When several companies are fighting for the same customer the typical strategic response is to price lower than the competitor. Over time this typically creates a fairly efficient choice of quality and prices for the customer to chose from. In a free market this is great for the customer but in regards to Crossfit I believe this to be an issue long term. Since most small business owners natural reaction is to reduce price this typically means a reduction in quality. A reduction in quality is a major problem to Crossfit given the complexity of movements and standards and if gone unaddressed could be detrimental. How have markets typically dealt with the over saturation and fragmented nature of a high growth industry?
I believe that consolidation is a fundamental business strategy that will help mitigate the long term issues that Crossfit is facing. If I were advising Crossfit HQ I would highly recommend adopting and encouraging a consolidation strategy. Consolidation will allow the premium brands that are producing a quality product and strong cash flow to utilize their skills and additional capital to acquire other competing affiliates. This will in return create economies of scale among good operators and healthy functioning business owners with long term stability. Ultimately, consolidation will help to stabilize pricing and quality among the affiliates.
Crossfit HQ could also benefit through consolidation by creating a new layer of affiliate fee’s for multiple affiliate owners. Since these affiliate owners will be benefiting from economies of scale it is only natural that Crossfit HQ also benefit from helping their affiliate owners increase profit margins through consolidation. Since Crossfit affiliates are traditionally run as lifestyle businesses this will allow for the owners that are struggling to get by to have an exit opportunity and in some cases remain involved in some capacity. Based on my conversations, I think a high percentage of affiliate owners went into Crossfit ownership with the best of intentions but may have underestimated the cost and effort that would go into running an affiliate. Consolidation allows for Crossfit to naturally find its sustainable long term saturation and pricing levels while still maintaining free market principles.
I am very pleased to see Crossfit NorCal, Crossfit Invicitus and Crossfit Reebok expand their footprint with multiple locations. I hope this is a new trend in the Crossfit free market which will help to stabilize pricing, saturation and quality long term. As a professional investor and strong supporter of private enterprises I always want to see high growth businesses sustain their brand and quality long term and in this case as a Crossfitter I am even more vested.
I hope this blog helps to spur conversation and debate among the Crossfit community about the idea of consolidation in Crossfit. My opinions are based on historical trends in markets and my experience with dozens of high growth companies. There is only one certainty about the markets and that is uncertainty which means companies must be continually evolving, challenging and changing. Constantly Varied!
For those of you that are in the school of if its not broke don’t fix it or Crossfit is still growing why question its methods. Well, I suggest all of you go look at the history of Kodak and Blackberry that literally went from market leaders to bankruptcy or the brink of bankruptcy because of that mentality. No company is immune to competition and leap frog innovation so it is imperative that Crossfit HQ and the Crossfit Community think strategically about the direction of the Crossfit business model.
Below are a few additional questions to add to the debate that I did not get to address in my blog but the question of culture is a very relevant discussion to have along with consolidation.
Can Crossfit encourage consolidation while simultaneously maintaining the unique culture that drives customer loyalty and growth?
Would Crossfit members in metropolitan areas like the option of choosing from multiple locations under one membership or would this take away from the cultural experience that Crossfit offers?
Crossfit affiliates are location sensitive businesses, would consolidation help to mitigate the problem of losing Crossfit customers that go to bad performing affiliates due to location?