Many of the products presented at the International Health, Racquet and Sportsclub Association trade show last month in San Francisco were upgrades of existing products, but some new products were introduced. That may have surprised some people, considering the state of the economy during the past few years and speculation that manufacturers had cut back on research and development. However, it didn’t surprise manufacturers, many of whom deny that they decreased R&D spending.
“The rumor mill is that all these other companies are cutting back on R&D,” says Tim Porth, executive vice president of product development and marketing at Octane Fitness, Brooklyn Park, MN. “We didn’t want to cut back. We wanted to be more efficient. We kept every project going that was on the list, even through the economic downturn. We knew it was one thing that could help us come out of the recession with a bang.”
Some manufacturers—Octane, Technogym and Precor—even say that they increased spending on R&D during the recession.
Flavio Venturi, group product manager for Technogym, Gambettola, Italy, says the company’s R&D grew although the rate of that growth did slow a bit—although not enough to stop the company from introducing several products in the past two years, including the Crossover, Group Cycle and Visio entertainment.
Bob Baumgartner, product manager at SportsArt Fitness, Woodinville, WA, says: “SportsArt isn’t the biggest company in the business, but we decided focus [on new products] was more important and that we shouldn’t cut back. We want to continue to have innovation and have something different from what everyone else offers. That’s how we were able to come up with the Green System.”
The Green System, which SportsArt introduced last month, is a group of eight fitness products attached to an inverter that harnesses human-generated power from exercisers and feeds it back into the power grid as usable energy.
And yet some fitness equipment manufacturers did cut back on R&D. At the end of 2008, Brunswick Corp., the parent company of Life Fitness, Schiller Park, IL, concentrated on controlling costs, says Chris Clawson, president of Life Fitness. But moving into 2009 and 2010, Brunswick began to “loosen the purse strings,” meaning Life Fitness could step up product creation. In 2010, the company brought to market products that were in development in 2009, he says.
“Some companies just stopped doing R&D, which is bad, because even though you are conserving cash at the moment, you don’t have anything in the pipeline, so when they get on the other side...they don’t have anything on the other side of the pipeline,” Clawson says.
Kevin Corbalis, executive vice president of marketing and product development for Star Trac, Irvine, CA, says his company, which last year filed an Assignment for the Benefit of Creditors, slowed R&D a bit during the recession, but after being acquired last year by Michael Bruno, who also owns Land America Health and Fitness Co., Xiamen, China, Star Trac gained the benefit of the additional engineering resources of Land America.
Star Trac’s R&D cuts were based on the return on investment.
“Whenever we look at opportunities, we want to provide the best fit for a value stream that our customers will want and desire,” Corbalis says. “Those are the areas we invest in. Through the recession, a lot of companies pulled back on their research and development, but a lot of businesses still view their product development engine as their future revenue, and their investments have to have positive payback. In some cases, it’s making modifications to current lines, and sometimes it’s putting new technologies and new platforms into play.
“The recession didn’t change our dynamic on how we look at development,” Corbalis adds. “It’s an investment that needs to have a payback for the business.”
Cybex International, Medway, MA, also did not spend as much on R&D during the recession.
“Our R&D is a percentage of sales, and sales is not what it was in 2008, but it is higher than it was last year, so we are always running at a fairly constant percentage,” says Ray Giannelli, senior vice president of R&D, Cybex. Still, even as R&D expenditures dropped, Cybex hired R&D people in-house, making this budget line a fixed expense.
“What happens is the longer [that in-house people] are here, the more valuable they are because the more in-tune they are with the product and the process,” Giannelli says. “We figured out a way to have in-house people for the same money that we are spending outside, and we can have more things done. It’s a way to get more things done for the same money.”
Adam Hubbard, director of product management at Precor, Woodinville, WA, agrees that in-house R&D can be a major advantage for a company.
“It allows us to deliver the best final product,” Hubbard says. “It gives us better control of the final product. We want to have a competency and an intimate knowledge of everything that we are building. Sometimes when you outsource, you are also outsourcing those ‘learnings’ and that knowledge. Where we’ve found that valuable is when we set out to develop the next generation product, we don’t have to start from scratch—we have the people and the learnings that worked on that product’s predecessor from six years ago and all of the lessons learned and all of the things we want to do better. And if those learnings have been outsourced, then you are kind of starting from scratch again, so you are only as good as your outsource partner.”
All the manufacturers contacted for this story do most of their R&D in-house, but each outsources certain areas. On the development side, the majority of manufacturers develop the equipment internally but get many components from outside companies that specialize in making the components, such as tread belts or the motor drive for the treadmills. Many also get the software and entertainment systems from partner companies.
“The things we outsource are the things we don’t do or the things we don’t do well,” Clawson says, adding that keeping R&D basically in-house helps a company get products to market faster.
But in-house R&D has its disadvantages, in particular that companies may not release as many products, Hubbard says, adding, though, that the number of products released may not be that important.
“The club owner is saying, ‘I don’t need 30 new products every year, but everything you deliver has to be well thought out, it has to be highly reliable, members have to like it,’” Hubbard says. “So we focus on quality, not quantity.”
Keeping that expertise in-house has become even more important as R&D has become more expensive.
“Our cost of R&D is significantly more expensive,” Hubbard says. “What we believe will be a result is that the barrier of entry into premium commercial fitness equipment will be raised. It’s going to quickly evolve into a world where it’s much less about the steel and plastic and more about the user experience and software capability. The manufacturers that you see that were able to sustain business 10 years ago, that barrier of entry will be significantly raised, so it will be harder for smaller manufacturers to survive.”
R&D costs are higher because of the software and electronics involved in equipment today, Giannelli says.
“You are not looking at something mostly mechanical, but mostly software now,” Giannelli says. “Our industry is small and the amount of technology required to do this is large, so it’s becoming increasingly expensive to do this. It’s the price of business these days.”
Some manufacturers may cut back on hardware R&D because they think further innovation in this area is limited and that innovation and differentiation are now more on the software side, Baumgartner says.
Clawson says the slowdown in R&D by some companies hasn’t affected the number of new products released. Life Fitness introduced about a dozen products in the past few years, Clawson says, including plate-loaded equipment, new console technologies and a new mobile application for its Virtual Trainer program.
Matrix Fitness, Cottage Grove, WI, which also does most of its R&D in-house while partnering with technology companies for software and other programs, launched 19 new commercial strength products last year, says Mark Zabel, vice president of global marketing for Matrix.
However, some manufacturers say that product launches in the industry have slowed.
“We already saw fewer new product innovations in [this year’s] IHRSA show,” Baumgartner says. “It may impact the future. I think, though, that people are going to have to show that they have something different. So companies are going to have to focus properly and draw their resources to what helps the person who wants to get fit.”
Corbalis adds that club operators are staying with their portfolios longer. Whether this slowdown in purchasing will have a lasting effect, Corbalis won’t speculate, saying it depends on the club and what the owners are trying to accomplish.
“We are seeing some movement and more purchasing activity,” Corbalis says. “It seems the market is at a more stable point than it had been. We’re seeing that the overall market business available dropped, but it certainly has been stable over this past year. The clubs need to be profitable, and they are going to do what is right in their micro economy. They will make decisions that are appropriate for their venue.”