Only a year ago, Peloton was, quite literally, riding high. Demand for its high-end stationary bikes was through the roof as the pandemic closed gyms. The share price on Feb. 12, 2021 was $154.67. By the time news hit Tuesday that co-founder John Foley was stepping down as CEO, and that the company was shedding 2,800 jobs, the price had dwindled to just $37.05.
With rumors swirling that Amazon, Apple, and Nike are all interested in buying Peloton, these moves appear designed to keep the company independent rather than being acquired. But Peloton’s new CEO Barry McCarthy, the former CFO of Spotify and Netflix, will have his work cut out for him if he’s aiming to orchestrate a comeback.
What happened to cause such a stunning slide? Questionable decisions by Foley and other C-suite management certainly contributed to the company’s woes.
Peloton’s first mistake was simply being short-sighted and growing too fast. As sales skyrocketed during the COVID-19 lockdowns, executives at the company ramped up production, rolled out a ill-fated treadmill and went on a hiring spree in California and New York.
Amidst this expansion, the company didn’t seem to recognize that it might hit a wall in demand. With bikes costing around $2,000 plus a $39 monthly fee for access to classes, the market for the bike was, from the beginning, rarified. Moreover, while the monthly subscription insures some repeated value from customers, one person or household is still unlikely to become a repeat purchaser of the company’s bikes.
Data collected by Thinknum shows that Peloton rapidly tried to step up its hiring during the pandemic, going from having only around 200 open jobs in April 2020 to looking to hire for as many as 722 roles in April 2021. As 2021 drew to a close though, the writing was on the wall with sales going back down as the availability of vaccines allowed people to return to the gym, and the number of open positions dropped from 674 on Oct. 17 to just 213 by Nov.1 3.
The company’s headcount grew significantly between the start of 2020 and the present. Data Thinknum collected from LinkedIn shows about 1,600 people identifying as Peloton employees at the start of 2020, compared to 5,400 just before the layoffs were announced.
Foley acknowledged in an earnings call Tuesday that the company made a number of "missteps," including scaling its operations "too rapidly." "We own this,” he said. “I own this and we're holding ourselves accountable."
Peloton fans should know that none of the on-camera staffers are being laid off, so you’re safe to schedule your favorite class with Cody, Christine, Tunde, Ally Love, or whoever your favorite instructor is. The corporate side of the business will see 20% of the layoffs. Raising some eyebrows from observers, severance packages will include a one year digital subscription to the Peloton app (which costs $12 a month).
The company will also stop developing its factory in Ohio, which it announced in May 2021 as its first manufacturing center in the U.S. This move is expected to save the company $60 million. The development came after Peloton temporarily halted production as demand waned. Cost cutting measures further include reducing the number of warehouses Peloton owns and operates and revamping the delivery contracts the company has with third-party providers, a move that is designed to save Peloton $800 million annually.
Peloton has also long struggled with how to best market its bikes. The company’s 2019 Christmas television commercial ,which depicted a husband gifting his very thin wife with a Peloton so she could get in shape, faced so much backlash it wiped $1.5 billion in value off the company. Then in early 2022, Peloton faced a barrage of bad headlines when the Sex And the City reboot And Just Like That… killed off Mr. Big with a heart attack that started while he was riding his Peloton. The company responded with an ad featuring the actor who portrays Big, but it had to be pulled quickly after allegations of sexual misconduct against him surfaced.
The company has bounced back before, though. In 2019, its share price took a hit when short-seller Citron Research said it was overvalued. Citron pointed out that “while Peloton has enjoyed a first mover advantage, the lack of differentiation of its bike has finally caught up to it as the competition is not only making virtually identical exercise bikes but ones that are both more affordable and functional.” Bowflex, Schwinn, and Echelon are just a few of the companies making bikes that cost less than $1,000 that do everything Peloton does. The difference? These bikes don’t require an attached screen, they use tablets – and they don’t charge monthly fees. Still, the company emerged even stronger as the pandemic boosted sales.
Can Peloton survive the current crisis or will it ultimately go the way of Flywheel, a one time competitor that had to liquidate? Overall, analysts see the restructuring, hiring of McCarthy, and cost cutting as smart moves by Peloton. Shares closed up about 25% on news of the restructuring. And McCarthy has experience in subscription based businesses, having spent eight years at Netflix and helped take Spotify public in 2018, so he may have the know-how to turn things around.
But not everyone believes that the company has taken the necessary steps to get itself back on the path to success. Activist investor Blackwells Capital, which owns a less than 5% stake in Peloton and had been pushing for the company to consider a sale and oust Foley before the recent announcements, said Tuesday that the changes do not go far enough as it continued to urge the company to pursue a sale.
The investor said that in making himself executive chairman, Foley “does not address any of Peloton investors’ concerns.”
Blackwells continued: “Mr. Foley has proven he is not suited to lead Peloton, whether as CEO or Executive Chair, and he should not be hand-picking directors, as he appears to have done today."
