At the height of the COVID-19 pandemic, when consumers were itching to stay fit while stuck at home, the popularity of internet-connected stationary bikes and treadmills that you could use at home skyrocketed. Peloton led the pack with its energetic instructors and extensive platform. The company’s stock soared, and its followers surged. The demand became so large that Peloton announced plans in May of 2021 to build Peloton Output Park, a dedicated Peloton factory in Troy Township, Ohio. However, less than a year later, Peloton announced its plans to sell the building and land as the company continues to undergo major restructuring in a post-COVID landscape.
So, how can Peloton continue to survive on its own amid rumors of tumbling stock and possible acquisitions? Breaking down some of the fitness giant’s recent struggles, our attorneys discuss important lessons and takeaways from this developing story.
Following a decrease in product demand and a decline in the company’s stock, Peloton began to adjust its cost structure and focus on strategies to generate more cash to weather the current storm. Recently, the company revamped its management team, laid off thousands of employees, closed showrooms across the country and reduced its planned capital expenditures as part of the effort to slash $800 million in costs. For example, in addition to pulling out of Peloton Output Park, the company announced its plan to end in-house manufacturing all together in July, instead electing to expand its current relationship with Taiwanese manufacturer Rexon Industrial, which had already been building Pelton’s treadmills. Focusing on the revenue side of the equation, Peloton expanded a rental program whereby customers can now get a Peloton Bike and access to fitness classes for $89 per month instead of incurring an initial outlay of $1,445 for the bike and $44 per month for fitness classes.
Dropping manufacturing was a tough reality to grasp for many fans behind the brand, but these actionable steps are a positive development to announce to shareholders and hit on how necessary it is for companies to focus on generating cash flow to help survive the ebbs and flows associated with any business. The company’s apparent shift to focus on its content reachable by a larger consumer segment instead of its tangible product is using a page out of a playbook used by several other companies in the 21st century. Despite successfully gaining its initial following amongst the classes, Peloton is electing to further prioritize the monetization of its content by getting it to the masses going forward. Peloton’s move to capitalize on content should perhaps come as no surprise with Barry McCarthy, the former CEO of Netflix and Spotify, at the helm.
Keeping Investors Happy
As Peloton’s stock plummeted back to pre-pandemic levels, the company received pressure from investors of the company to consider acquisitions. In fact, it was rumored that Amazon, Nike and Apple were eyeing Peloton as a potential acquisition. In August, with Peloton’s decision to start selling its bike and other accessories through Amazon, the idea of an acquisition continued to remain a possibility. With its image tarnished by the events of the past year, Peloton’s script changed from a growth story to a turnaround story.
While the company deserves more time to cut costs and get the business back on track with a positive cash flow before entertaining acquisitions, it is important for Peloton, as well as other companies, to listen to its investors, especially since those investors have the ability to help with the company’s turnaround.
Keeping PR Positive
Another concern at Peloton’s forefront is the negative press it has received in recent months. For instance, Peloton’s name was plastered in headlines following a six-year-old’s tragic death in a treadmill accident, leading to a fight with the U.S. Consumer Product Safety Commission. Critics slammed Peloton for not proactively recalling its treadmill or better understanding its stakeholders’ expectations and concerns. According to the Wall Street Journal, Peloton estimated its treadmill recall would cost the company $165 million in the first quarter of 2021.
This PR nightmare illuminates important takeaways for business leaders. Namely, companies need a focused approach to crisis management, an ability to pay swift attention to concerns and a capability to accurately forecast consequences.
Handling Excess Inventory
Peloton mistook a temporary spike in demand for its at-home fitness platform, manufacturing an inventory of bikes and treadmills that far exceeded demand at increased price points. By not being able to correctly predict and understand changes in consumer behavior, the company was left with too much inventory. Peloton recently announced several initiatives to better monetize inventory and address this issue.
On Oct. 3, 2022, Peloton finalized a deal with Hilton Hotels to bring its equipment to every single hotel in the 5,400 international portfolio. Hilton Honors members also became eligible for a 90-day free trial of the Peloton app. This announcement brought a 6% rise in Peloton’s stock price. Additionally, Peloton recently entered into a deal with Dick’s Sporting Goods that will bring Peloton hardware to Dick’s store locations. Both of these new deals are a good start to help the company drop some of its excess inventory and introduce new consumers to the brand. However, the company’s inability to manage its supply chain is a lesson for companies about the importance of working hard to understand how supply and demand can evolve to increase the accuracy of forecasts. Incorrectly forecasting demand can only lead to inventory pile ups or missed opportunities for sales.
Excitement for the Peloton platform still exists today, and enthusiasm for the brand should certainly continue, even if at a smaller scale, as the company continues to handle these obstacles. Although arguably delayed in initially grasping them, Peloton now seems to understand its biggest problems and is fighting to fix them. However, what will be in store for the company in the long term if incremental demand growth stays minimal? The company is staying independent for now, with a new rowing machine recently unveiled, but will that strategy change if the firm receives the right acquisition offer? It is too soon to tell, but nonetheless, Peloton’s story provides important reminders and lessons for businesses of any size and in any market.
For additional questions or concerns regarding the content of this article, please contact KJK’s Corporate & Securities Chair Steve Bersticker (SCB@kjk.com; 216.736.7219) or attorney Samantha Cira (SMC@kjk.com; 216.736.7232).