What Would It Take for Peloton to Keep Being Peloton?

Earlier this week, on the day of its fiscal second-quarter earnings, Peloton CEO and cofounder John Foley announced he was stepping down. Foley had been running the pioneering fitness-tech company since its earliest days, but pressure from activist investors proved to be too much. Barry McCarthy, the former CFO of Spotify, will take Foley’s place.

Foley’s resignation was the inevitable culmination of a series of unfortunate events. Peloton is best known for its expensive, internet-connected stationary bikes and treadmills, as well as the exuberant instructors who lead its video classes. But it poorly handled a product recall last year after a child was killed in a Peloton treadmill accident. Then Peloton’s big-screened pedal machines hit the small screen in a bad way: Two popular TV shows featured characters who suffered heart attacks while on the bike.

More concerning to investors was Peloton’s stock dropping 76 percent in 2021 as people started emerging from pandemic lockdowns and the demand for new bikes waned. According to this week’s earnings report, the company is still slowly growing its subscriber base, and its churn rate is low. It’s still valued at around $12 billion. It just isn’t growing as much as Peloton once expected. Foley always appeared confident that the company would be just fine, as exuberant as the internet-personality instructors he hired. Of course people would continue to buy $2,000 bikes and pay $39 per month on top of that. That thinking may have been the result of Covid complacency.

Now bigger players are kicking the Peloton tires, according to a recent report in The Wall Street Journal. Amazon has been floated as a possible acquirer. The Financial Times reports that Nike and Apple are in the mix as well. But as much as some investors want a sale, many customers may want Peloton to, well, keep being Peloton.

Spinning Out

With only 2.77 million subscribers, and a total of 6.6 million members—anyone who uses Peloton through a connected fitness machine or the mobile app—Peloton is by no means a massive company. But it has an outsize influence on the exercise industry. Calling it “fitness tech” doesn’t encapsulate it; Peloton has eclipsed the NordicTracks of the past, marrying compelling programming with premium hardware and, yes, capitalizing on the fact that people have been stuck in their homes for two years. Even before the onset of the p-word, Peloton had become the coveted c-word: Many software service providers boast about their online “communities,” but Peloton had achieved full-on cult status.

So what would it take for Peloton to survive entirely on its own, to not become Peloton Prime (Amazon), Peloton+ (Apple), or Pelotown (Nike)? First, it needs to adjust its cost structure and generate more cash, analysts and entrepreneurs say, to weather the storm. It’s already working on that, to a point. This week Peloton announced a “restructuring program” (tactlessly laying off 2,800 employees, some of whom learned of their status when their Slack access was revoked), reduced its planned capital expenditures for the year, and said it would wind down plans to build and occupy a $400 million manufacturing plant in Ohio. But the company also lost $439 million in its most recent quarter, and both its scrapped factory plans and its acquisition of equipment-maker Precor last year were costly.

“When you look at companies like Ring, Eero, Anki, and Fitbit, they were all large enough to be visible but not large enough to have a cash stockpile to make it through hard times,” says John MacFarlane, the cofounder and former CEO of wireless audio company Sonos. “Companies like Sonos and Roku—and Peloton—all got large enough that they can survive a crunch. Hardware-software companies just need a lot of cash.”

Eric Min, the CEO of virtual cycling platform Zwift, says Peloton mistook a temporary increase in demand for an established trend. “When a company ebbs and flows like that—not just the stock, but more like people’s habits—you have to consider how you’re going to sustain a business through changes in consumer behavior.”

Min says Zwift, which plans to introduce a “major hardware product” within the next 12 months, has differentiated itself from competitors by supporting user-generated videos in the app. “If it’s just instructor-led video content, it’s not scalable. It’s just not creative enough.”

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