3 Reasons Why Peloton is Struggling
Peloton’s story sounds like a classic fall from grace. During the height of the COVID-19 pandemic investors couldn’t get enough of the stock driving it up to a market cap. high of $50 billion last January. Now Peloton is valued at $2.9 billion. What happened? That’s what investors and fans of the brand want to know. As the saying goes, all that glitters is not gold.
What a global crisis does is it reveals who you are. While Peloton had a cult following before the pandemic it wasn’t quite ready to be sent into the stratosphere when the pandemic hit. This is clear by the number of missteps it has made over the past few years ranging from overestimating demand to poor quality control. If you are curious about why Peloton is struggling then consider these three areas that have created great headaches for the at home fitness brand.
1. Over estimating demand. During the height of the pandemic with gyms closed around the world or opened and presenting a potential health risk fitness enthusiasts started working out from home. Peloton quickly became the brand of choice for many people seeking a way to stay healthy and fit under difficult circumstances. Peloton’s sales were on fire at that time with sales in its fourth quarter ending June 30th, 2020 up an eyewatering 172% to reach $607.1 million.
But was demand likely to last forever? Of course hindsight is 20/20 but one could argue if a once in a lifetime event could cause people to rush out and buy at home fitness equipment once that event was over people would return to their old stomping grounds, after all we are creatures of habit. Peloton co-founder and former CEO John Foley did not share that view. Instead he said: “when I hear Peloton being a Covid story in the press, it annoys the crap out of me, because what we’re building is here to stay, and it’s going to grow,” Foley also said that Peloton would be "one of the few $1 trillion companies." Riding a wave of success Peloton aggressively increased production.
While it is convenient to work out from home one of the reasons people work out at a gym is for the social aspect. I can remember a time I was at the gym and a group fitness class was cancelled. I overheard one of the participants of the cancelled class say: “should I just go home now?” Even though she could have used numerous pieces of equipment at the gym she preferred exercising in a group setting. Although you can take a Peloton class virtually with many other users at the same time it isn’t a replacement for human interaction.
While a lot of fingers are pointing at Peloton it wasn’t the only company to overestimate demand. Amazon and Shopify and many eCommerce companies thought the surge in online orders would continue after the pandemic faded into the distance. But eCommerce sales have fallen from a peak of 16.4% in the second quarter of 2020 to 14.3% in the first quarter of this year. Amazon has slowed hiring and Shopify cut its workforce by 10% earlier this year.
Another signal that some of our pre-pandemic habits would return was the high level of resistance to the closures of stores and gyms. If you didn’t like being couped up during the pandemic why would you want to spend more time at home when it becomes safe again to congregate in public spaces? By November of last year visits at gyms were nearly at pre-pandemic levels.
With consumers reviving their old habits Peloton has paused production for various amounts of time for several of its products including its Bike, Bike+ and its Tread+. There are also thousands of bikes and treadmills sitting in warehouses waiting to be sold. "It is clear that we underestimated the reopening impact on our company and the overall industry," said Foley. Speaking about Peloton’s third quarter 2022 results, Bernstein Analyst Aneesha Sherman had this to day: "This quarter was all about the problems with hardware. Hardware sales were half of what they were a year ago, and hardware inventory is double what it was a year ago. So there's just too much hardware sitting in warehouses that isn't selling, and it stems from the oversupply and the over-ordering over the course of the pandemic. This is the big challenge."
2. Product quality issues. While Peloton is a premium priced brand the quality of its products do not always live up to that expectation. Last March a six-year-old child died after an accident involving a Peloton Tread+ treadmill where the child was pulled underneath the machine and killed. The United States’ Consumer Product Safety Commission said the Tread+, which retails for around $4,300, posed “serious risks to children for abrasions, fractures, and death.” The commission also said that at the time there were 72 reports of incidents where either pets or people were injured using Peloton Tread+ treadmills.
Peloton initially fought the commission’s allegations but in May of last year Peloton backed downed and recalled 120,000 Tread+ machines. Peloton has also reduced revenue it previously recognized by $140 million to account for anticipated and actual returns of its Tread+ machines. It also didn’t help that last year a character from the Sex and the City reboot, And Just Like That, as well as the show Billions died after using a Peloton bike.
Last year the Consumer Product Safety Commission also found that the touchscreen could fall off of Peloton’s Tread treadmill forcing 6,450 Tread machines to be recalled.
Peloton’s bad luck or self-inflicted wounds do not stop there. Earlier this year it was reported that last September Peloton noticed some of its bikes in one of its warehouses was rusting. Instead of having the manufacturer fix the problem, Peloton covered up the rust on bikes costing between $1,500 and $2,500 with a chemical solution. “It was the single driving factor in my beginning stages of hatred for the company that I had spent the previous year and a half falling in love with,” said a Peloton outbound team lead.
Instead of sending the bikes back to the manufacturing floor Peloton implemented the quick fix as a way to keep up with heightened demand. “Some of these bikes were delivered with rust and we weren’t allowed to swap them out,” said a customer service agent speaking about customers who called in complaining about receiving a rusted bike. “Those were awkward conversations because I had no leeway to make any exceptions.”
Back in 2020 customers complained about the pedals coming off of their Peloton bike, at times causing injuries. This led Peloton to recall 30,000 bikes in October of 2020.
The Consumer Product Safety Commission is not done with Peloton yet it plans to fine Peloton for violating federal safety laws related to its recall of treadmills last year.
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3. Over-spending. In December of 2020 Peloton announced its acquisition of Precor an exercise equipment manufacturer for $420 million. The deal gave Peloton more than half a million square feet of manufacturing space. Then last May Peloton announced it was building a $400 million factory in Ohio. But amid falling demand Peloton decided to scrap the Ohio facility. “The Ohio factory and Precor acquisitions were huge mistakes,” said a former Peloton executive.
But the money trail doesn’t stop there. Throughout most of its history Peloton has incurred eye watering marketing expenses which it has used to fund its growth. In Peloton’s 2021 and 2020 fiscal years its sales and marketing costs were $723 million and $477 million respectively. Peloton made $3.2 billion in 2021 and $1.5 billion in 2020. This means that in 2021 and 2020 it spent 23% and 33% of its revenue respectively on sales and marketing expenses. A healthy rate of sales and marketing expenses as a percentage of revenue is around 10%. Peloton has spent a lot of money on marketing to increase brand awareness as well as keep rivals like Mirror, Tonal and Hydrow at bay.
But this approach has come at a cost. As Bloomberg writes: “If he [Foley] hadn’t spent the previous two years chasing the dream that the pandemic represented the company’s trillion-dollar future—if he hadn’t spent hundreds of millions of dollars on marketing, built half a factory, and hired thousands of people who now are being fired—Peloton would probably look like a success story.”