Peloton turned working out into a religion.
It was the perfect recipe to motivate us when we needed it the most.
Let’s face it: everyone wanted to be a part of Peloton.
And, then we didn’t.
Just like that, the company went down in flames.
So, how does a company go from having a seemingly perfect product for our times to downright
desperation?
Well, here's how.
That quote seems straight out of a legal thriller.
But it was real life, and it was Peloton struggling to contain a shitstorm in January 2022.
Meanwhile, all the headlines agreed: there was no saving Peloton.
And, to think that, in 2020, as the world was in lockdown, Peloton had seen record numbers.
To understand how everything changed, we need to go back in time, and no.
Not to the pandemic.
Peloton's core problem started long before.
So let's go back to 2012.
That's when John Foley told his colleague, Tom Cortese, that he had an idea.
It was almost impossible to attend the expensive cycling sessions at his favorite studio.
The classes were either packed or expensive, or both.
Foley wasn't the only one.
As a Barnes & Noble executive (hey, at least he made the right choice back then), his life
reflected that of many around him.
It wasn’t only about trying to work out.
Foley had noticed that people loved a specific instructor, making those sessions harder to
attend.
Foley's idea was to create all of that experience at home.
People would have an excellent at-home exercise bike with a screen that allowed users to stream
their favorite lessons from their favorite instructors.
It's a great idea, right?
Well, fast forward to late 2018 and early 2019, and the company had sold more than 400,000
bikes.
The company had also launched a treadmill, selling more than 120,000 and it's safe to
say that people were addicted to Peloton.
Mind you, back then, there was no sign of this.
People even tattooed the Peloton logo!
Peloton also earned high praise from the media.
Some even called it the future of fitness and, to a degree, it would become true.
But, wait.
What was the secret drug that kept people hooked on Peloton?
Foley’s idea had transitioned perfectly from theory to practice.
You could either drop in to a class with your favorite instructor or stream it whenever
you wanted.
Plus, there was a tight sense of community and competitiveness.
Instructors would call out members reaching 100 classes or even one thousand.
There were leaderboards and endless ways of connecting through social media.
The instructors became celebrities.
They were household names, literally, as people loved one or the other.
Peloton replicated real life.
A famous instructor would fill up a class in no time.
But, with Peloton, thousands could join.
Each class had its vibe and pace.
Users weren't the only ones head over heels for Peloton.
Investors dished out big bucks.
By 2019, Peloton had seen close to $1 billion in investment, a valuation of around $4 billion,
and talk of an IPO.
So, this company was a hit before the pandemic, yet we are making a video.
Why?
Well, because, from the start, some parts of the equation were a bit off.
Let's talk about the pricing.
The costs in 2018 and 2019 were as follows.
A bike had a price of around $2000.
Then there was a fee of $39 a month to stream the lessons, both live and on-demand.
Plus, there were other costs.
That's a big chunk of change.
Even when the idea was in its earliest stages, pricing was an issue.
You see, once Foley and Cortese had the idea, funding came relatively quickly.
They managed to raise $400,000 from angel investors, taking a lot of that money (and
an entire year) to create a sample bike.
Peloton raised another $3.5 million to further fund the operation with that bike.
Then, get this.
Peloton took to crowdfunding.
That's right, they had all this money and still used this resource.
By the way, we just made a really cool crowdfunding video.
Check it out on our channel.
That's right, Peloton took to Kickstarter, but not for money.
Instead, to create buzz, to spile people's interest.
But, here's the catch.
Peloton had only presold 200 bikes because they were so expensive.
At $1500 each, this was a product that many people thought twice about funding.
Still, back then, It didn't seem to matter much because Peloton had created so much buzz.
Also, there was the allure of instructors and a sense of community.
It seemed that all of this could compensate for the price tag.
Still, there were some critics out there.
Every product that Peloton launched raised eyebrows.
Peloton's first treadmill, the Tread, generated the same reaction.
It cost about $2500, and the Tread+ could cost up to $4300.
That’s a lot of money and there are cheaper competitors out there.
Still, people wanted in.
They were willing to pay those hefty prices, and the numbers make some sense.
After all, paying for individual classes is expensive in most big cities.
Gym memberships can rack up quickly.
Plus, Peloton offered payment plans that ended up being less expensive than other options
to some users.
The payment plan did go for 39 months, so it was a long one.
Still, it made sense if the company stayed in business.
But, hey, back then, it seemed like it.
Investors dished out $550 million in 2018, and Peloton continued its rise to the top.
2019 was no different.
Peloton claimed 1.4 million individuals with an account and stated that sales had grown
110% year-to-year.
So, when the company announced its IPO, people were excited.
Peloton aimed at an $8.1 billion valuation at a price share of $29.
But, the IPO didn't go as planned.
Peloton opened at a lower price than expected, and the media even had it rated as one of
the worst unicorn debuts of the year.
But, why?
Well, we'll get to it, trust me.
Because, just like life itself, this video takes a turn.
And, while many of us were scared or confused, Peloton wasn't.
It had the perfect recipe for those crazy times.
Sales saw triple-digit growth, reaching a 128% increase in Q3.
And shares were also riding high.
In January 2021, the company saw its share reach a high of $171,09.
Let's remember that the initial asking price was $29.
More importantly, it was seeing the lowest churn in its history.
So, that's great!
The conditions were perfect for that moment.
But, like all things, the pandemic would eventually end, even if it didn't seem that way at that
time.
Plus, there was another problem at hand than just lockdowns ending.
So, when the arteries that moved the containers and packages of the world began to falter,
Peloton's downturn started.
And it was fast.
After all, logistics were just one of the problems.
And, that’s the hard part of this video: where do we start?
Well, before all of this crazy shit happened.
The very essence of Peloton was flawed, to a degree.
So, we know that the devices are very expensive.
But, to investors' eyes, this meant that, with particular conditions, Peloton could
have strong margins.
That is, in very specific situations.
If X amount of customers ordered X amount of products, then Peloton would deliver with
good profit.
The more customers who ordered the bikes or treadmills with a payment plan, the better.
That's a steady cash stream for 39 months.
But, if those conditions changed, things could fall apart.
During the pandemic, things changed.
A lot!
Sure, everyone wanted a Peloton bike.
But, getting one was a different story.
There were so many orders that Peloton couldn't keep up.
Manufacturing the machines was a challenge, and getting them to customers was even worse.
Clients were paying a premium for a device they got months later, and the worst of it
was that Peloton was unable to really know when the product would get there.
Foley himself said in a letter that it could be from 5 to 6 times the average delivery
time.
Peloton made huge efforts to solve the problem.
In December 2020, they announced that they would buy manufacturer Precor for $420 million
to keep up with demand.
Investors breathed a sigh of relief.
A short one because the demand persisted.
In 2021, Peloton played catch up with demand.
At the same time, the world started opening its doors, and, let’s face it: no one wanted
to stay at home.
So, that’s one problem.
And, then, there’s this other issue that has nothing to do with the supply chain.
Let's say that you don't have any issues with a delivery, that you get your bike or treadmill
when you want it, and that you're happy.
How many bikes or treadmills will you buy in your lifetime?
Probably not more than one.
And Peloton knew this, even before the pandemic.
The product was costly, so they had tried to find ways to create cheaper products.
The company launched a fitness app that didn't require the bike or the treadmill for around
$20.
It included yoga, walking, strength training, and all that.
Now, that's great!
It is!
But talk about a saturated market.
Plus, the hype was about the bikes, the intense cycling lessons, and the music.
Not walking or yoga.
Not that there's anything wrong with that, but it wasn't the essence of Peloton.
So, the cracks were showing.
This raised a bigger question:
Was the excess of demand in 2020 a sign of how popular Peloton was, or was it just that
the pandemic fast-tracked demand?
People who brought the bikes during the pandemic would've bought them in 2021 or 2022.
But that didn't mean that others also wanted to buy them.
Then, there are the figures.
Sure, revenue had increased.
Sales had boomed, but so had the costs.
Due to marketing costs, that wonderful 2019 year saw the net loss go from $49 million
to $245.7 million.
These costs would increase in 2020 but not due to marketing, rather, due to the immense
effort to deliver these devices.
And in 2021, they increased by dealing with the chaos of production.
Now is a great time to talk about our sponsor, Recurring.
Recurring is a one-stop shop to track and optimize your recurring SaaS spend.
With Recurring, it’s easy to take back control of your SaaS.
Then, to top it off, there were legal issues.
Peloton faced a $300 million lawsuit from the National Music Publishers Association
for incorrect use of their music.
As a result, the company had to remove those songs, and, in turn, users complained that
their favorite tunes were missing.
Word is that they settled, but we don't for how much.
I'm sure it was a lot.
That wasn’t the end Peloton’s reputation problems.
Then, someone died.
In fiction and in real life.
In May 2021, Peloton had to rush to recall treadmills after one was involved in the death
of a seven-year-old.
Not only that, there were a total of 70 injuries.
But that wasn't the biggest blunder.
Instead, it's that Peloton had initially refused to recall the products.
It was only after the Consumer Protection Safety Commission pressured them.
In the end, the company had to recall 125,000 treadmills.
In the Sex and The City revival, "And Just Like That," Mr. Big has a heart attack and
dies right after getting down from a Peloton bike.
Spoiler alert.
Anyways.
Peloton's share plummeted 11% after the episode!
The company went all out to prove that it wasn't Peloton's fault but rather Mr. Big's
exuberant lifestyle.
Really, they're arguing about a fictional character?
But, there's a funny bit.
It turns out that Peloton knew it would be featured in the episode.
But they didn't know what degree of involvement the brand would have.
So, there you go.
Lesson learned.
Then, Billions happened, where another character had a heart attack.
But, he doesn't die, so, good for Peloton?
And that's how we go back to the beginning of the video.
There was a leaker, and Peloton had to stop information from going out.
But, what was the rush?
Well, in early 2022, word got to the media that in all this chaos, Peloton was stopping
production.
The initial report said that internal documents revealed that the company was trying to control
costs due to fewer sales.
The reasons for these actions were clear: shoppers' price sensitivity and amplified
competitor activity.
So, they were too expensive, and they didn't really stand out.
That's it.
Peloton's flaws had finally caught up.
CEO John Foley rushed to dispel the rumors and said that the information was incomplete.
Instead, the company was trying to control costs but wouldn't really pause production.
Peloton was revising all possible solutions, which included "production changes."
So, yeah: stopping production.
I mean, they're not going to make more.
But, no matter how much Foley tried to solve the issue, the report had done its damage.
That day, Peloton's share went down 25%, and there were no signs of slowing down.
In light of the reports, Foley did come out and say that layoffs could happen, aka, there's
no avoiding them.
Then, he also stated that churn was increasing.
It turns out that Peloton had finally caught up with demand.
But, the demand was no longer there.
In fact, signs of trouble had been brewing long before this.
In August 2021, the company lowered its prices by 20%.
Back then, it worked.
Sales increased five-fold.
But, by November, they had dropped again.
In desperation, they translated part of the cost to customers.
In January 2022, the company announced that it would charge customers for setup and delivery.
And that's the essence of this dilemma.
Now you had to pay $250 for the delivery and setup of some products.
Treadmills could command up to an additional $350.
So, an already expensive product just got costlier, which drew people away from it.
When the company filed its report in January, the writing was on the wall.
Sales were down and, with more expensive products, margins would go down too.
By the end of January, the company's stock had dropped 80% year-to-year.
And people weren't happy.
Well, some were.
Some investors even insisted that John Foley leave the company and suggested selling it.
But, at the making of this video, it hasn't happened and, if it does, it will change little
of the flaws that Peloton had.
Peloton’s product was perfect for one specific point in history.
But, things changed in a heartbeat.
As weird as that may sound, a company can't rely on a pandemic to thrive.
It's not all bad.
In the end, the good aspects will survive.
A community of users motivating and competing amongst themselves, the instructors, each
with their own flair, and the music.
The sessions, all of it.
But, I can’t say the same for Peloton.