Inside Peloton’s Sprint to Find Growth | April 2022
Peloton Interactive Inc. is an at-home exercise equipment and media company known for its stationary bicycles and treadmills, as well as its on-demand workout classes. Former CEO John Foley came up with the idea for Peloton as upscale exercise studios (e.g., Orangetheory and SoulCycle) gained popularity in the mid-to-late 2000s. Foley and his wife frequented these types of fitness studios but felt it was difficult to find the time to attend after having children. He set out to develop a high-end bike and a media company that could deliver the energy of a boutique fitness experience to your home.
When he created the company in 2012, Foley had a difficult time convincing investors that Peloton would be a success. They doubted the size of the market and his ability to produce the bikes in addition to the classes. Instead, Foley turned to Kickstarter, a popular crowdfunding platform. Though the bike’s premium price (initially $2,200, later reduced to around $1,500) attracted criticism, Peloton pulled in a dedicated user base with an impressive 95% retention rate over a 12-month period at the time of its 2019 initial public offering (IPO).
During the early months of the COVID-19 pandemic, demand for Peloton’s products spiked. Amid stay-at-home orders and lockdowns, people found themselves stuck in their homes. While demand for out-of-home entertainment and activities (e.g., gym memberships, movie tickets, and museum tickets) plummeted, the demand for in-home entertainment and activities skyrocketed (e.g., home gym equipment, video game consoles, and streaming services).
Peloton, which had already become a well-known name in the home fitness arena, was the perfect solution for fitness enthusiasts who wanted to maintain their workout regimen in the comfort of their homes. By the end of 2020, the company’s share price hit its all-time high of $162 per share.
The pandemic lockdowns were a unique time for Peloton and other home fitness companies, eliminating gyms and other fitness studios as competitors for a brief time. Peloton considered this as an opportunity to win people over to the high-end virtual fitness community. Unfortunately, the company had a difficult time meeting the sudden demand. Peloton acquired a fitness machine manufacturer called Precor and broke ground on a new factory in Ohio to boost manufacturing capacity, but Peloton still could not keep up and its waitlist grew.
Meanwhile, Peloton faced negative publicity because of safety issues with its treadmills. First, the U.S. Consumer Product Safety Commission reported that the screen on the Peloton Tread could fall off, resulting in injuries. Peloton recalled its treadmills to repair the touchscreens. Its premium Tread+ model was also brought into the spotlight when a child died in an accident involving the machine. Initially, Peloton stood by its machine and its safety warnings, but ultimately the company agreed to recall the treadmills. To add to the pile of negative publicity, months later two major television shows (i.e., HBO’s Sex and the City reboot and Showtime’s Billions) featured characters experiencing heart attacks after exercising on Peloton bikes.
By 2022, Peloton had finally caught up on its waitlist, but, by this time, demand had dwindled as people returned to their everyday lives and routines and the pandemic waned. At one point, Peloton paused production because it had too much inventory. In fact, the company said it would abandon its Ohio factory with the former CEO and its new CEO Barry McCarthy agreeing the aggressive manufacturing expansion moves Peloton made were mistakes.
Today, Peloton’s stock price sits at less than $25, which is below its IPO price of $27 in 2019. Investors have made it clear they believe traditional gym chains are the winning horse in this race with gym operators such as Planet Fitness Inc. and Life Time Group Holdings pulling in millions from private fund managers this year. CEO Foley stepped down earlier this year, and the company announced plans to lay off 2,800 employees (about a fifth of its workforce) in a series of cost-cutting measures. Demand has plateaued and existing subscribers are using their bikes less.
Under new leadership, Peloton is refocused on improving its products and introducing new, innovative fitness equipment and technology. McCarthy, however, has expressed his belief that the media side of the company is perhaps the most valuable asset Peloton has and would be open to experimenting with the company’s business model and pricing strategy. The company has already begun testing a new pricing structure in select states in which users pay an increased monthly subscription fee that includes both the equipment and the online classes rather than paying for them separately. McCarthy, who draws on experience from his leadership roles at Spotify and Netflix, is attempting to reduce the cost of ownership and expand its potential market. Critics are uncertain if this will truly propel Peloton forward and say this move is a red flag that only highlights Peloton’s struggles in a crowded marketplace.
In the Classroom
This article can be used to discuss supply and demand (Chapter 1: The Dynamics of Business and Economics) and pricing strategy (Chapter 12: Dimensions of Marketing Strategy).
Why did Peloton grow during the COVID-19 pandemic?
What factors have contributed to Peloton’s struggles?
In your opinion, will adjusting Peloton’s pricing strategy help the company grow? Why or why not?
This article was developed with the support of Kelsey Reddick for and under the direction of O.C. Ferrell and Linda Ferrell.
Drake Bennett and Mark Gurman, “Spun Out: Peloton’s High-Intensity Sprint to Nowhere,” Bloomberg Businessweek, March 14, 2022, p. 50-53.
John Ballard, "Why Peloton's New Subscription Plan Is a Big Red Flag," The Motley Fool, April 2, 2022, https://www.fool.com/investing/2022/04/02/why-pelotons-new-subscription-plan-big-red-flag/
Matt Wirz, "Wall Street Bets on Gym Chains’ Getting Back in Shape," The Wall Street Journal, March 24, 2022, https://www.wsj.com/articles/wall-street-bets-on-gym-chains-getting-back-in-shape-11648070133