When Nautilus purchased Octane Fitness in January for $115 million, it may have caused some people to scratch their heads. Exactly which Nautilus had done the purchasing?
During a break at the IHRSA 2016 show in March, Bruce Cazenave, CEO of Nautilus, Vancouver, Washington, shared with me more about why his Nautilus, the public company that is known for its Bowflex, Schwinn and Universal home market brands, decided to purchase Octane Fitness, Brooklyn Park, Minnesota, and add a commercial side back to its business.
After all, Nautilus had the Nautilus commercial brand in its mix until 2009 when the company sold the commercial assets to Med-Fit Systems. Med-Fit subsequently sold it to Core Health and Fitness, which is also based in Vancouver, Washington. Nautilus licenses the Nautilus and Schwinn names to Core Health and Fitness to use on its products.
Still confused? Well, suffice it to say that Core Health makes products with the Nautilus name for the commercial market, and Nautilus now sells Octane Fitness equipment for the commercial market.
"We always liked commercial, but you have to have the right kind of business model to be successful in the commercial market," Cazenave said. And Octane has that kind of business model, he added.
When Nautilus sold its former commercial assets prior to Cazenave joining the company, it did so because it had lost $100 million in three years and was in a distressed state, Cazenave said.
"A lot of it was because they were not doing commercial correctly," he said.
At that time, the company also was asset heavy, owning its factories.
"We were doing leases, doing all kinds of things that Octane does not do," he said. "Octane has a very thriving commercial business that is done very differently than what the old Nautilus did."
During the past five years, the Nautilus brands, which include Nautilus, Bowflex, Schwinn and Universal, have grown enough that the company has turned around, he said. Cazenave invested some of the cash back into the business, but he wanted to use some of the profit to grow Nautilus at a faster pace. So, he began looking for a partner to help.
"We wanted somebody who was in the specialty, higher price point commercial market that had a big component of international and had a big strong innovative pipeline and that also had tremendous relationships with the commercial and specialty markets," he said. "So Octane basically checked off on all of those."
With the Octane purchase, Nautilus is seeing even more growth. The company announced its first quarter 2016 earnings on Monday, noting a 25.7 percent revenue increase from first quarter 2015, much of that due to the addition of Octane.
Cazenave called the integration of the two companies "a marriage made in heaven" because there are no redundancies.
"Nautilus has a lot of assets that could lend themselves positively into Octane in terms of supply chain, warehousing, marketing capabilities," he said. "They have a lot of things on their own we don't want to mess with: innovation pipeline, customer relations. Their sales team is phenomenal in terms of knowledge of the product and selling and support. It's a great ability to take what really works well for Octane and use that for Nautilus' organic business. And also the assets that we have at Nautilus and bringing that to help Octane grow faster and more profitable on a longer basis."
Cazenave said Octane will help Nautilus ramp up its international business, too. Two percent of Nautilus' sales came from outside North America while Octane had 22 percent, but combined, the company would bring in about 6 percent of its revenue from outside North America, still leaving it room to grow to the 30 percent or 40 percent of non-North American sales that many of the other large manufacturers have, Cazenave said in March.
Nautilus already does good business in Europe, Australia, New Zealand and Asia, except China where the company just started doing business toward the end of 2015, he said.
"Latin America, to be honest with you, we are not there yet," Cazenave said. "Octane is, but Nautilus hasn't been. And so they are introducing us to potential marketers that can help us carry the home use products into the Latin American market."
Octane also has some of the modalities that Nautilus has in the home use market and those could lend themselves to the commercial and specialty markets, he said. The process to do so will not come overnight, he said, but his team is working on how to bring some of the higher-priced Octane products into the home market and how to bring some of Nautilus' home products to the commercial market.
One of the first products that will cross over is the Schwinn Airdyne Pro bike, which was made available to fitness retailers in April and will be available commercially in the fourth quarter. Cazenave said in March that this product would fit in Crossfit facilities and studios.
"We launched that bike under our Schwinn brand back in September last year with the goal being to get into the specialty retail and then eventually into the commercial gyms," he said. Without Octane, he said it would have taken Nautilus three years to get the bike into the commercial market because Nautilus had just one salesperson for the specialty market. With Octane's channels, that three-year period will be compressed to less than a year, he said.
As with all purchases, integration will occur and that will take about two years, Cazenave said.
"But the nice thing about it is, [Octane] is already thriving and running well on its own, so we don't have to interject a whole lot," he said. "All we have to do is bring some of our capabilities, particularly on the back end. I would call it financial controls. Because we are a public company, we have to do certain things that a private company does not have to do in order to be able to produce our SEC (Securities and Exchange Commission) documents."
Octane will be reported as part of the company's retail business, he said.
"One of the things we like about our business model is that a lot of our financial success is that we are very asset light," he said. "We don't believe in having our own factories. We like finding strong partners, just like Octane has, that you can develop a relationship with and produce great quality products. We have a lot of people in Asia looking over our factories making sure that quality goes into every piece before it goes into a container. Octane does the same sort of thing."
Partnerships in manufacturing also allow a company to move if it has to or easily ramp up manufacturing quickly with a second factory, he said.
The Octane Fitness purchase wasn't the only big manufacturing purchase to make news this year. Life Fitness' parent company, Brunswick Corp., purchased Cybex International, Medway, Massachusetts, in January.
Cazenave said the consolidation in the industry is good for the industry because it will draw attention and investment from private equity groups.
"I do I think it a great industry to be in," he said. He pointed to the many demographic groups, such as aging baby boomers and the Millennials who want to get into fitness as well as the obesity issue that business owners are fighting by incorporating fitness memberships or corporate fitness facilities into their employee offerings.
"I think that is all great tail winds, not only for North America but for around the world, that is going to support our business," Cazenave said. "I am really encouraged about this industry."