Are Peloton’s recent struggles due to managerial hubris or indicative of deeper issues with its business model? Brand strategist John Ensminger unpacks the Peloton story.
The fitness industry has a long history of fads and gimmicks, fuelled by vicious cocktail of society’s overemphasis on looks and the general disdain most people feel about exercising. Whether it was the explosion in popularity of Jane Fonda’s Workout in the 80s, the Ab Roller in the 90s or Zumba in the 2000’s, most fitness crazes eventually fell out of favour with consumers, who were in search of the next great workout that would slim them down in as little time and sweat as possible.
When Covid-19 shuttered gyms worldwide in 2020, consumers were left to figure out their new exercise routines at home, both to stay physically active and to maintain their mental health. This led to an enormous growth in at-home fitness products as well as outdoor gear, with brands like Peloton, Mirror, Tonal, and Nautilus experiencing massive growth rates from 75%-125% YOY in 2020. Many fitness brands thought the pandemic was one of the best things to happen to their business, only to experience significant operational and consumer headwinds in the ensuing months.
Peloton, the at-home fitness brand that makes stationary bikes and treadmills serves as the poster child for the boom-and-bust cycle that’s faced the at-home fitness industry. While its stock price grew fivefold in 2020, its recent troubles (more on that to come) has driven its price back to pre-IPO levels. While a company’s share price is not always an accurate indicator of its true potential, this article delves into Peloton’s business model, explores its recent struggles and outlines potential options for the future.
Peloton Core Business: Fitness Equipment Manufacturer or Content Provider?
When Peloton launched its business in 2012, it was well aware of the poor track record of most home fitness equipment. Often, the consumer, having made a sizeable investment for a stationary bike or treadmill, actively uses it for a few months. Eventually, boredom and/or a lack of progress set in, ultimately relegating the equipment to a forgotten corner.
The primary reason for the boom and bust cycle in fitness is that while 80% of US consumers believe wellness is important, less than 25% actually exercise regularly. According to the CDC that’s because they don’t find exercising enjoyable nor make the time. Why would there be TVs embedded on most treadmills at the gym, if not to distract users from the drudgery they are enduring while exercising? (Author’s note: Case in point, I can exercise for hours outdoors but my mind can barely survive 30 minutes running in place or climbing a fake set of stairs when at the gym).
What made Peloton’s consumer value proposition unique, was that while its users were still buying a piece of fitness equipment, it was Peloton’s content that really hooked them. Through a monthly subscription model, users can access a library of exercise classes that are led by rock-star-like instructors set to heart pumping music. The classes proved so popular that some of Peloton’s top instructors have very large social media followings. Pelton’s ‘razor’ (equipment) and ‘razor blade’ (content) business model enabled the company to build long-term consumer commitment worth $3.500, over twice the initial price of the bikes.
Prior to and during in the first year of the pandemic, Peloton user metrics were outstanding. Connected Fitness subscriptions grew over 300%, and an increasingly engaged community was working out with Peloton almost daily. Struggling to keep up with demand the first year of the pandemic, Peloton feverishly tried to bolster its supply. They announced the building of a US factory and purchased Precor, a fitness equipment brand focused on the gym & hotel channel, for access to additional manufacturing capacity.
Yet, Peloton came tumbling down in the back half of 2021. A product safety recall of its Tread+ treadmill, factory shutdowns because of excess inventory, the layoff of 20% of its workforce and replacement of its CEO has raised questions whether these were just operational errors that can be addressed, or if Peloton will be the next at-home fitness brand to join a long list of fitness fads that no longer exist.
“Peloton has been plagued with a supply-demand mismatch since the pandemic started,” said Simeon Siegel at BMO Capital Markets. “The real question was whether the pandemic was a pull forward of demand or an expansion of their customer base. Based on all of the data we had been seeing throughout the pandemic, it seems like this was a pull forward.”
Mixed Pricing Signals
There’s little question that spending $1.800 on a stationary bike is a major investment for most consumers, especially when low-cost gym memberships run as low at $10/month. Recognising that price remains an entry barrier for many consumers, Peloton drastically cut prices in 2021, on average by 20%-25%. Yet, just five months later, Peloton announced it would start charging for delivery and setup, thereby negating the previous price cuts.
Business Model Changes
While these operational issues could be overcome with the right leadership, the most fundamental question is the sustainability of Peloton’s business model. To do this, Pelton will need to expand its consumer base, emphasise content as an entry into the brand and reenergise it’s most valuable asset, Connected Fitness subscribers:
- Appeal to a broader demographic
Like many premium brands, Peloton appeals to a small segment of the overall market. Over half (55%) of its users have a household income greater than $100.000 compared to just 38% of the US population. Expanding its product offering to appeal to more price sensitive customers while not being perceived as going down market is a delicate task that few premium brands have managed successfully. While Nike may be able to sell shoes for anything between $50 and $500, there are many examples of brands like Reebok or Ralph Lauren who lost their cache chasing revenue.
- Leverage content as an entry into the Brand
While most subscribers own some Peloton equipment, the company offers users access to its content using their own equipment for only $13/month. Expanding this segment of the business could be a low-cost approach to get new consumers hooked on Peloton content. The incremental costs to stream existing content to additional users would be so low that Peloton could practically give it away for free. Since many people find exercising boring, getting them excited about their favourite instructors and classes would ease concerns about making a major investment on exercise equipment. While there would be some risk of cannibalisation, Peloton would be able to build a larger following and gain greater consumer engagement.
- Offer greater value to Connected Fitness subscribers
Since Peloton has a high customer lifetime value, it’s extremely important that they continue to keep this profitable customer segment highly engaged. In addition to rewards for usage or incentives on additional Peloton gear, Peloton could look to expand its ecosystem to other brands that its customers would value. Many non-fitness brands have been trying to make inroads into the wellness category, such as Apple Watch or Google via their acquisition of Fitbit. Since Peloton is already integrated with these devices, a strategic partnership or acquisition by either company could provide Peloton a more stable financial footing and brand exposure to a much larger customer base.
While the future of the Peloton story has yet to be written, the rocky history of the fitness industry suggest a challenging road ahead. On the other hand, Peloton has a loyal and attractive customer base that many brands would love to be able to access. What we do know is that management missteps got them into their current predicament. A broader, more strategic approach to the future will be necessary for Peloton to survive and grow.
About the Author:
With 25+ years in the sports and fashion industry across the United States, Europe and Asia, John Ensminger, has worked with leading brands including Nike, The North Face, K2 Sports and Carhartt to develop breakthrough, actionable strategies that strengthen their brand position and drive growth and profitability. Feel free to contact John, or read more of his work here.