Few companies create an entirely new consumer market and reach icon status—and then set out to reinvent themselves. But that’s the hill the at-home, interactive-exercise firm Peloton is now climbing.
Peloton was one of the freewheeling successes of the first year of the COVID-19 pandemic. When the world went into lockdown, droves of people who couldn’t go to a health club turned their homes into one with Peloton’s pricey bikes and treadmills. Exercise enthusiasts used them with a devotion that earned them the nickname “Pelo-people.”
But the company struggled to keep up with the intense demand, which led to shipment delays, followed by pricing confusion and a series of public relations bungles—just as the pandemic eased and people began returning to gyms. Peloton scrambled by recalling items and dropping prices, amid an onslaught of competition from copycats.
“You’ve got a nice, clean product line. Everybody can understand it,” says Harvard Business School Professor Robert J. Dolan. “Then it got incredibly complicated.”
In May, Peloton reported its biggest quarterly loss since its 2019 initial public offering and said it borrowed $750 million to help its cash flow.
Dolan, HBS’s Baker Foundation Professor, examines what business leaders can learn from Peloton’s journey in his case study, Peloton Interactive, Inc.: Creating the Immersive Connected-Fitness Category. The main takeaway: The company could have avoided some of its problems had it kept things simple.
‘Things were going through the roof’
John Foley founded Peloton in 2012 partly to solve a challenge in his own life. He and his wife fed on the energy of high-end boutique fitness classes, but they had demanding jobs and young children, so fitting in workouts when and where they were offered wasn’t working.
“These classes left us energized, refreshed, stronger, and ready to take on anything,” Foley explained in Peloton’s 2019 registration filing with the Securities and Exchange Commission. But “we were often left without time, without options, and without the feeling of ‘being our better selves’ that we sought.”
“I figured there must be a way to make these workouts more convenient, more affordable, and more accessible. And my hunch was that if I could make it possible, others would want it as well,” he said at the time.
Foley’s hunch paid off: Customers flocked to his $2,245 stationary bikes and $4,295 treadmills, both of which had touchscreens for Peloton-produced digital workout videos featuring glamorous trainers with loyal followings. Growth was brisk: Revenue in 2019 was some $915 million, doubling that of 2018.
The pandemic provided the perfect setting for expansion, as holdouts who remained committed to in-person classes could no longer head to gyms and fitness studios. At the end of June 2020, Peloton had 1.09 million subscribers, 113 percent over the previous year, with people paying $39 a month for the videos they could watch on their bike and treadmill screens.
“Things were going through the roof,” Dolan says. “Then they hit a lot of bumps.”
Backlash from a holiday 2019 ad foreshadowed problems to come. In the ad, a fictional husband gifts his wife a Peloton, and the wife documents her yearlong use of the bike, leading some to suggest that she craved her husband’s approval. Critics in a New York Times article called the ad “sexist and dystopian,” and The Atlantic published a piece with the headline: “Peloton Doesn’t Understand the People Who Love It Most.”
‘A pretty hard fall’
By early 2021, equipment shipments were delayed, as Peloton’s manufacturer struggled to keep pace with demand. A child died in a treadmill accident, and dozens of other people were injured. That prompted a product recall.
The company was in the midst of a complicated product line expansion to offer two bikes and treadmills at different prices in an attempt to reach people who were turned off by the original products’ cost. In August 2021, the company dropped the original bike’s price to $1,495; the treadmill that was still on the market cost $2,495, with a similar name but not the higher price of its recalled sister product. Longtime users and potential new customers alike were confused.
Then, a main character in HBO’s Sex and the City reboot died in an episode that showed him working out on a Peloton bike. The plot twist seemed like a metaphor for the brand’s troubles.
“They did this very complicated product line extension,” Dolan says. “Foley pioneered the interactive-exercise market, and [people] give him credit for that. Innovation is great, but if you haven’t figured out a renovation strategy [for the long term], you can drive yourself into a ditch.”
Peloton’s valuation and stock price reflected the depth of that hole: The company was worth $3.3 billion as of June 21, a fraction of its almost $50 billion market cap in January 2021. Its shares now trade for less than $10 a share, down from an intraday high of $170 in December 2020. “That’s obviously a pretty hard fall,” Dolan says.
Meanwhile, Peloton attracted a flock of competitors: NordicTrack and Bowflex, established home equipment providers, along with SoulCycle and Exxentric’s Flywheel, began marketing their own interactive workouts.
Dolan says Peloton also hurt itself by offering its whole archive of videos to non-Peloton customers for $13 a month. Bowflex encouraged people to pair its bike with Peloton videos—creating a Peloton-like experience at a much lower cost, “so Peloton created a gateway [for a rival],” says Dolan.
Still a viable business
Even so, Dolan says Peloton retains a number of advantages. “They still have an incredible user base,” he says, with 3 million subscribers—four times the number in 2019, despite the problems of 2021.
The monthly customer churn rate of lost customers is less than 1 percent, and the videos the company produces are more popular than ever: They now generate 33 percent of Peloton’s total revenue, up from 20 percent in 2020. And Peloton still has 75 stores in the US and two studios for video production.
“The large subscriber base and devotion of many make it a viable business, but with significant management challenges,” Dolan says.
The next year or two may be telling. Amid questions about whether Foley might sell to Amazon or another mega-company, in February Peloton brought in Barry McCarthy, former CFO at Netflix and Spotify, to serve as CEO to revive the company’s pre-pandemic focus. Foley is staying on as executive chairman and retains 80 percent of the voting power.
The company has cut 20 percent of its workforce and will raise the subscription for Peloton users to $44 a month, the first increase since Peloton launched. The non-Peloton price for access to videos will remain at $13.
“They’re trying to get their costs down, trying to build their base,” Dolan says. “I don’t know if they’ve figured out where they want to make their money, from hardware or software. Given McCarthy’s experience with Spotify and Netflix, McCarthy appears to be saying, ‘We’re a subscription company.’”
Will inflation change the game?
But Dolan says that can be “an enormous risk.” As US inflation remains high, “everybody is thinking, are there discretionary expenses we can get rid of? Can I trade down my Peloton subscription?”
Since the subscription increase began June 1, “Three million subscribers are wondering, what is he [McCarthy] going to do?” Dolan says. “I’m not sure he’s got a lot of levers to pull.”
Despite the risk, Dolan believes Peloton does appear to have a future.
“It’s not like they’re a high-tech company, wondering if a drug will get FDA approval,” Dolan says. “No surprises are coming down the pike. The game is pretty well staked out. So we’ll see.”
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