It’s been a trying couple of years for Peloton, the world’s leading interactive fitness platform. From a peak price of nearly $163 a share in December of 2020, Peloton today trades around $13 a share - a roughly 50% discount on its IPO price of ~$25 a share.
So what happened?
The outbreak of COVID-19 and the implementation of lockdowns catalyzed growth that the company wouldn’t have even dreamed of. As the world locked down, encouraged not to get within six feet of other human beings, and our belt sizes started to creep up, the value proposition of at-home workout equipment became more and more attractive.
As a result, Peloton saw its top line grow from just $435 million in 2018 to $4.022 billion in 2021. To facilitate that growth, the company also grew its headcount by more than 105% between 2020 and 2021, added retail stores throughout the US, started proceedings for the acquisition of Precor, and began planning an onshore manufacturing facility to make its hardware.
However, as the at-home dynamics of the pandemic begin to subside, the good times seem to have moved on from Peloton. The firm lost nearly $757 million in the first three months ending March 2022, and the downtrend in the stock price has meant that its market cap has taken a 90% hit in less than two years.
Management’s Response - The Strategy Shift
It’s normal when times get challenging for companies to cut jobs, and Peloton is no different, having announced an 800 job cut (roughly 10% of its workforce) recently. Strategically, Peloton also stated that the company “will reduce [its] retail presence across North America, although the closures may not occur this year.” The company has 88 stores across North America.
To further cut costs, Peloton also plans to eliminate its North America field operations warehouse, and outsource the delivery of its products - which as a customer, myself, was one of the most impressive parts of the Peloton experience.
To manage some of the unit cost implications, Peloton announced it would raise the price of its Bike+ by $500 to $2,495 and its Tread product by $800 to $3,495.
Opening Up The Amazon Sales Channel
Interestingly, Peloton announced today (August 24, 2022) that it had struck a deal to sell some equipment and apparel through Amazon. Consistent with management’s shift to leveraging established sales channels to access customers, this move allows Peloton to be less reliant on its physical stores in exchange for Amazon’s reach.
Announcing this partnership resulted in a 20% pop in the stock price the day before its quarterly earnings call. Coincidence?
Quick Aside - Are People Working Out Less?
According to Peloton’s most recent 10-Q, the dynamics around actual workouts on Peloton’s Connected Fitness Subscriptions is interesting. While there has been substantial growth in same quarter (three months ended March 31) 2022 versus 2021 Ending Connected Fitness Subscriptions, jumping from 2,080,860 to 2,961,767, and there has been noticeable growth in Total Workouts from 149.5 million to 164.6 million during the same period, the number of average monthly workouts per Connected Fitness Subscription has fallen sharply, from 26.0 to 18.8. That’s more than 7 fewer workouts, on average, per month per subscriber.
This points to a stark shift in the stickiness or engagement of users on the platform. Is the drop off driven by new subscribers who are far less likely to work out everyday in a month pulling the number down, or is this a general shift across all subscribers using the product less?
Both are concerning scenarios, especially against the backdrop of falling cash flows and total assets. If longer-tenured customers are finding the platform less engaging and if the kind of new customer Peloton is attracting is less sticky (or less inclined to use the product frequently), we have the recipe for impending customer retention issues.
That said, despite a rising average net monthly Connected Fitness churn, from 0.31% in 2021 to 0.75% in 2022, those numbers are significantly low enough to point to some natural level of customer churn typical of any subscription business.
Customers have patience - they will allow a brand or company that they enjoy work to figure out how to best run its business. It’s a lot like supporting your pocket band. Not every song that comes out has to be perfect, the support still sustains - as long as there remains the belief that the band will be phenomenal (again) one day.
Peloton has enormous brand equity, ranking top of various lists for the best consumer brand over the last few years.
But here’s what I see: more expensive hardware, same software, less customer service, more outsourcing. All of this speaks to less value to the customer.
The issue, therefore, lies in simple supply and demand dynamics, which dictate that raising prices, while perhaps buoying profitability on new and continuing customers, should lead to falling demand. Considering the customer acquisition and retention issues that Peloton is facing, and what looks like severe unit economic headwinds, the question to ask is whether Peloton can absorb any hit to the demand of its products and services.
What I’m Looking Out For Now
The truth is you can’t cut your way to a great, enduring business. Remember, Apple Air Pods are a Fortune 50 company by revenue on their own. Announcing the Amazon sales channel tactic is clever from a market segmentation and demographic standpoint. The kind of household that is an ardent user of Amazon Prime probably has the means, and the lifestyle, to take on Peloton workout equipment.
However, sales channels don’t make up for poor pricing and customer demand problems. It will be important to see subscription numbers - whether they have fallen dramatically as a function of inflation - and whether demand has fallen off as a result of the price increases.
Peloton has a great brand, but shaky decision making at the executive level through the pandemic - especially when you consider the outlandish growth plans and spending the company took on at the height of the pandemic - seem to have set the company up for challenging times ahead.