Issue No. 198: Peloton’s Pivot

Peloton is revamping its business model and rethinking the merits of connected fitness.

By the Numbers

Reporting fiscal fourth quarter results last week, Peloton posted a net loss of $1.2B.

Marking six consecutive quarters in the red, and sitting on $1.1B in excess inventory, the company also saw revenue drop and membership decline as churn ticked up.

Looking on the bright side, CEO Barry McCarthy sees “significant progress driving our comeback.”

Attempting to right-size the business, the quarter’s losses included $415M in costs related to a broader $800M restructuring effort.

Since assuming the chief executive role in February, McCarthy has cut 3K+ jobs, closed showrooms, retooled equipment for self-assembly, unveiled a rental program, and just inked a distribution partnership with Amazon.

A risk, the company wants to maintain its premium positioning while also courting the masses.

No easy feat, as McCarthy dismantles founder John Foley’s vision for connected fitness, he remains committed to his predecessor’s goal of reaching 100M members.

The Dream

From the outset, Foley aspired to be a great technological innovator.

On multiple occasions, he said as much, comparing Peloton to Apple and Tesla.

Building “one of the most innovative companies of our day” and “biggest consumer-product brands in the world,” Foley was clear: Peloton wasn’t just another fitness company.

In his opinion, fitness equipment is a “dopey category with dopey products.” And gyms, like movie theaters, bookstores, and arcades, were ripe for disruption.

Playing the disruptor role, Peloton defined itself as a “technology, media, software, product, experience, fitness, design, retail, apparel, and logistics company.”

But more than that, charging a premium and attracting a cult-like following, Peloton became a religion.

Putting the “connected” in connected fitness, Foley believed Peloton’s magic was born from the integration of hardware and software, enabling a fully immersive workout experience.

Taking cues from Jobs and Musk, Foley pursued a vertically integrated, direct-to-consumer model where Peloton owned every aspect of the member experience.

Proving the naysayers wrong, from 2016–2020, Peloton grew revenue 100% YoY. In 2019, the company went public, notching an $8B valuation. A few months later, as the pandemic propelled Peloton to new heights, Foley completed the tech innovator’s journey, stating:

“I see this as clear as day: this thing is going to be one of the few $1 trillion companies.”

The Reality

In many ways, the pandemic was the worst thing that could have happened to Peloton.

Convinced his dream had come to fruition, and believing that lockdown-level demand would last forever, the company suffered through a series of miscues under Foley’s guidance, ultimately leading to his dismissal.

In an alternate reality, absent a global pandemic, maybe Peloton goes on to build the Apple of Fitness.

But now, as Barry McCarthy attempts to orchestrate a turnaround, he’s downplaying much of the hype surrounding Foley and Peloton:

“Founders walk this fine line between reality distortion, which is the vision of the thing they’re trying to build, and the capacity to see the world as it is… Did they scale their fixed cost structure proportional to the growth in revenue? No. Why? Because they assumed COVID was the new normal. And it wasn’t.”

Unlike Foley, who thought integration was the secret sauce, McCarthy disagrees. “The magic doesn’t happen in the sheet metal,” he said. “The magic happens on the screen.”

Good, better, best. Charting a new course, McCarthy is prioritizing content and community in hopes of appealing to a wider audience and optimizing subscription revenue.

To that end, on the latest earnings call, McCarthy laid out the company’s “good, better, best strategy… targeting not only the premium segment of the market, but the value segment of the market.”

In addition to outsourcing manufacturing, exiting brick-and-mortar retail, and nixing white-glove delivery, this new plan includes:

• Selling through Amazon and other third-party retailers to offload inventory and widen the brand’s presence.
• Expanding its rent-a-bike program to eliminate upfront equipment costs and remove barriers to the Peloton ecosystem.
• Enhancing its digital app to include tiered pricing and more features — the company has fewer than 1M app-only subscribers.

In the works, McCarthy has hinted at making Peloton’s content available on workout equipment from other brands.

Another possibility, going all in on fitness-as-a-service, Peloton could create an integrated platform for all aspects of well-being.

Looking ahead: Marrying the best of Foley’s vision for immersive workouts with a pragmatic approach to sustainable revenue, the company will attempt to straddle the line between connected fitness innovator and commodity.

According to McCarthy, the company’s big pivot will take time. But he remains confident that Peloton will reach 100M members. For now, they have about 93M to go.