Inside CultSport: How Cult.fit is flexing its D2C arm

“The middle segment at an affordable price point is really under-tapped. This is the market we want to be in and that is where we are targeting the CultSport brand,” said Sharma, adding that investments will continue with plans of opening CultSport walk-in stores, as D2C switches to an omnichannel play in India.

Commenting on Cult.fit’s nearly Rs 700 crore loss in pandemic-hit FY22, even as revenue grew 35 percent to Rs 126 crore, “FY23 results will be diagonally opposite,” said Bishnu Hazari, CFO, Cult.fit — which has moved to an asset-light, franchisee model in its fitness business.

With Cult.fit’s fitness business turning operationally profitable after recovering from the pandemic injury and CultSport moving on the path to profitability, “Cult.Fit as a company would be targeting EBITDA profitability in FY24,” said Bishnu Hazari, CFO, Cult.fit. And, that’s in preparation for an IPO.

Shamik: We think it is a $6 billion market and growing at about 25-30 percent (YoY). It is fragmented. There are many well-known brands, but they play in one or two sub-segments. But, there hasn't been a wide play of a brand that is trying to solve India's sporting and fitness needs across the board. We want CultSport to be that brand. We want to be the market leader in terms of being the Indian brand that plays across all sporting and fitness product needs.

The few brands we have are mostly foreign brands, which don't meet Indian needs in terms of quality or price points. And, the price points are way too high. Then, there are other products which are unbranded, and lack in quality. So, the middle segment at an affordable price point is really under-tapped. This is the market we want to be in and that is where we are targeting the CultSport brand.

Shamik: COVID had a hugely disruptive effect on all retail. During 2020 and 2021, people were working indoors and hence there was a spike in demand for treadmills, spin bikes, dumbbells and so on. Also in sub-segments of sportswear like yoga pants etc. These products are now facing a flattening of demand in 2022.

Outdoor products like cycles, gym wear and sportswear, which saw a suppression in 2020 and 2021, have witnessed a spike in the current year. Nutraceuticals have had a relatively steady growth as they faced no big impact on whether you are training indoors or outdoors. So, all three categories of products have seen different shifts in demand.

CultSport, the D2C platform of Cult.Fit, has completed more than a year of operations since its expansion in October 2021. How has the performance been and what are some of the levers that are driving growth for the vertical?

Shamik: We have expanded the business significantly in terms of the number of products and the types of products we offer as well as the channels and customers. We did this in two ways. Firstly, by expanding our in-house capabilities into other areas. Secondly, by acquisitions. We have done three acquisitions over the last year and that has expanded our portfolio.

At the same time, we also increased the channels, primarily selling on our Cult app to people who are already members. Last year, we started selling on marketplaces — Flipkart, Amazon, Myntra and so on. We are also selling on our own website, CultSport.com. In the last year, with all of this work, the business has grown significantly, at least 4x. We expect that this year will be a significant growth over last year.

Shamik: The acquisitions have been very good for us. For example, in the cardio segment, we were not there in treadmills and spin bikes. OneFitPlus acquisition has really helped. They were already the leader in that segment and we have maintained the market share there and we are still the leader overall. This includes online and offline.

On the outdoor cycle side, Urban Terrain had just started out when we acquired them. That is an area which has been built in-house over the last year. Now, we are the online leader in cycle sales. There are obviously companies which are 50-year-old like Hero, Atlas and so on, which have a lot of non-sporty bikes. If that’s included, the market is obviously much bigger. If you look at the sports and fitness use case bikes that are sold online, we are already the leader there.

Shamik: There is a huge gap in the footwear market between the price points of a Nike, an Under Armour or an Adidas and the quality that Indian manufacturers provide at a Rs 700 price point. In the middle, there aren't too many products. The CultSport-branded footwear has got a positive reception. That is where we see a lot of growth over the next two to three years.

In cycles, we are launching electric-powered bikes that are hybrid. Those kinds of bikes are very popular in China and other countries and are starting to get introduced in India. Another segment we are looking to launch towards the middle of next year is smart watches and other kinds of sports and health-related wearables. These are two-three areas where we think a lot of future investments will be needed.

Shamik: So, we look at acquisitions from two points of view. We primarily look at acquisitions from the product capability perspective. If the company that we are talking to has a unique product differentiation in terms of either quality of the products that they are making or some kind of service they offer that makes the product stand out.

Secondly, the brand, while important, is not a particularly key criteria for us. We already have a strong brand. We are fine taking the products and then rebranding it into the Cult family. Or, in some cases, if the brand is already dominant, we keep the brand. That to us is the secondary question. The first question is to build high-quality differentiated products.

We look at acquisitions with a different lens than a house of brands company, which might look at only financials. We look at it more from a product-quality perspective. But, we are open to that. We continue to have discussions. None that I see are imminent, but over the next year, those conversations will continue. Maybe, something will happen.

Shamik: We are already distributing our products at multi-brand outlets (MBOs). Cycle stores have CultSport bikes. Nutraceutical stores have started stocking CultSport protein powders. Apparel and footwear will be in some of the stores across the country next month.

Sometime next year, we will be experimenting with starting CultSport branded Exclusive Brand Outlets (EBOs) and getting into an omnichannel model, where customers can experience the product at the store and either pick it up right there or have it delivered to home.

Initial foray will be in the top five or six tier-1 cities, where Cult.Fit gyms are already present. Most of the stores will be in the micro markets, where there are already a lot of Cult members. For example, in Bengaluru — HSR or Indira Nagar — where there is high-awareness for Cult. We will not be building a very large network outside of these familiar micro markets in the first two years, because a lot of growth is possible just within these familiar micro markets.

Shamik: The D2C business is already 1/3rd of the revenue and the fastest-growing segment. We see that in the next year or two, this should become 50 percent of our overall revenue. In another year or two, we could be making more revenue from e-commerce and D2C as compared to fitness services.

That is a significant positioning of the company and its own P&L compared to what it was pre-COVID. Soon, we are going to be known as much for our products as we are for our fitness services. That gives you a sense of the importance of this vertical and the scale at which it is growing.

Shamik: For us, D2C is a one-year-old business. It will continue to scale up and we will keep on investing in it. However, even in D2C, we have not been very operationally negative. In fact, there have been months this year, when we have been operationally profitable. But, we are not trying to generate operating cash like we are in the fitness services business. We run it at the verge of being operationally profitable every quarter. Slightly negative to zero is what we aim for.

Obviously, every new category will require investments to put up a team and get the procurement. In some cases, we go deep into manufacturing, which requires capex investment. We will continue to do that next year because we want to get into new categories.

However, the existing categories will continue to run at operationally neutral or slightly positive. Overall, the business will still be operationally negative just because of the new categories we are entering. Plus, we are also going to be entering into omnichannel like we talked about as well as continue to grow CultSport.com, which has grown significantly in the last year.