Fixing Peloton
Things are not going well for Peloton, one of my 2022 Brands to Watch. The stock is trading at about $13 a share, a remarkable fall from its peak of over $160. The company lost a staggering $757 million in the latest quarter. Perhaps more concerning, the company has a vast amount of inventory and the firm is now scrambling to raise funds. You can read about the dismal results here.
The inventory situation is particularly stunning. As of March 31, Peloton had $1.4 billion in inventory. Sales of products were $594 million in the latest quarter, or about $200 million per month. This means Peloton has over 7 months of inventory if sales continue at the current pace. Of course, this seems optimistic since sales are dropping like a stone, down 42% since last year.
It is hard not to wonder: Can Peloton turn things around?
The Amazing Peloton Brand
With all the bad news, it is easy to forget that Peloton is a truly remarkable brand. The firm has 3.0 million subscriptions and 7.0 million members. Measures of customer loyalty are absurdly strong: churn rate is low, net promoter score is high.
The Peloton instructors are remarkable brands, too. Each one has a personality and style. Leanne Hainsby has 314,000 followers on Instagram. Cody Rigsby, just back from an appearance on Dancing with the Stars, has 1.2 million.
People don’t just like Peloton. People love Peloton.
A New Course
Can Peloton find its footing? I think it can, but it won’t be easy. One question is whether the firm can come up with enough money to simply survive the next year or two. Finding cash is job one.
Four moves seem particularly important right now.
Focus on Existing Customers
There is a basic model for business creation: you attract new customers and then, over time, these customers generate cash. The first part of this, attracting new customers, is difficult and expensive. Profit comes from existing customers.
A simple way for Peloton to improve financially is to scale back new customer acquisition. If the firm stopped losing money on new customers, it would start making money from existing customers.
This wouldn’t mean giving up on new customer acquisition forever. Once the company has stabilized it can resume investing money in growth.
At the moment the new CEO Barry McCarthy is sticking with the goal of getting to 100 million members. The quicker he lets go of this wishful thinking the quicker Peloton will get back to health.
Stick to the Core
Peloton’s core business is the bike. The firm has expanded to other types of classes in recent years and added a treadmill.
One of the reasons Peloton has struggled is that it expanded too far. Launching a clothing line, for example, was just a bad idea. Athletic clothing is a complex and challenging market and Peloton was just not ready for the expansion.
At this point, Peloton should focus on its existing offerings. Promote and support the core products until things have stabilized.
In terms of innovation, the focus should be on finding ways to keep the platform engaging for current users. People have to keep using Peloton!
Reduce Expenses
There is no question that Peloton needs to dramatically cut back on expenses, and the new CEO is working on this. The cuts should impact every part of the company.
Quite simply: a company supporting 3 million subscribers just doesn’t need the same level of spending as a company on its way to 100 million subscribers.
Some of these cuts might hurt. Does Peloton really need more than 50 instructors? Can the company trim back the number? How about slowing the pace of content creation? A ride created two years ago isn’t dramatically different than a ride created yesterday. Most Peloton rides have no reference to current events. They are timeless, so old content is cheaper than new content.
Perhaps some cutbacks could be positioned as benefits. How about the Top 25 rides of all time? Or Cody’s Classics?
Now you might worry that paying instructors less will cause them to leave and take users with them. But where are they going to go? I can’t imagine that Olivia, Emma, or Cody wants to start teaching at the local Orange Theory.
Perhaps the first, obvious move is stopping all production and furloughing all factory workers as the company works through its massive inventory.
The key is to cut spending without degrading the user experience.
Roll Back the Planned Price Increase
Peloton recently announced plans to increase the monthly subscription fee from $39 to $44.
This move makes perfect sense on the surface. Customers are loyal, and most won’t drop the subscription with a $5 increase.
But when your business is in trouble, a price increase isn’t going to help customer retention. Peloton’s biggest asset is its base of existing users. Is now the right time to risk retention with a price increase? No.
I also worry about threshold pricing. With a monthly fee of $44, a Peloton costs more than $500 per year. It technically rounds to $1,000. I worry that there is a symbolic level for some riders.
Better Days Ahead
If Peloton takes these steps, things should improve. Cash flow should get better. The number of subscribers will level out, but profits will appear. The company will become sustainable.
Then Peloton can focus again on growth.
Some rough number show the upside. Peloton had subscription revenue of $370 million in the latest quarter. On an annual basis this would be $1.5 billion. How much does it cost to support the existing subscriptions? How much does it cost to create and offer the classes? Perhaps $500 million? This would leave profit of $1 billion per year. At a 15x multiple, that would be a $15 billion company, almost 4x the current company value. That is with no growth and no price increase.
One good thing about the current situation, and perhaps the best thing about Peloton’s position, is that expectations are low. When your stock is quickly closing in on being completely worthless, there is a lot of room on the upside.
Even a small improvement would be refreshing and a dramatic change of pace.
There are better days ahead for Peloton if the firm abandons dreams of becoming the next Nike and the focuses on the basic tasks of running a profitable business and building a brand over time.
thanks professor nice article. an interesting area that may warrant a separate discussion is how companies transform from a hypergrowth start-up to a profitable post-IPO company. in my limited experience, start-ups exhibit value by showing audacious growth rates. and the pressure to maintain that typically is what drives upside-down balance sheets. the million dollar question becomes when and how to make the transition? do it too soon and you left a ton of potential on the table. do it too late and you enter the death spiral.