Peloton has gone from sprinting to sputtering to the finish line

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Image: Reuters/Shannon Stapleton
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A Sex and the City character dying on its exercise bike was, weirdly, the most fitting end to Peloton’s 2021. The end of Mr Big in December made an already hurtling stock sink another 11%. Now, the company has hired McKinsey to review its cost structure, and has halted production of its bikes and treadmills.

The at-home fitness company, founded in 2012, experienced unprecedented highs when gyms shut down in 2020. At the end of June 2020, Peloton had doubled its customer base to 3.1 million, compared to a year earlier. In August 2020, it filed to go public. Peloton’s 2020 revenue was $1.8 billion—double what it was in 2019.

But in 2021, that success started unraveling rapidly as covid vaccinations became available and the world—read, gyms—started opening up. The company’s sales fell 17% from a year ago in the quarter ending Sept. 31, 2021, and it lowered subscriber and revenue expectations. People began selling “like new” or “barely used” Peloton equipment for half the retail price on Facebook and Craigslist.

There were also other problems. Peloton struggled with supply chain constraints, and, in May 2021, the company had to recall more than 125,000 treadmills after reports of a dozen injuries and a child’s death.

The Peloton stock will be booted from the Nasdaq 100, the exchange’s benchmark tech indices, on Jan. 24.

Will Peloton go out of business?

The omicron surge did not increase demand, suggesting that Peloton’s loss of luster is becoming a perpetual problem for the business. In November 2021, the firm revised its forecast to say it would end the year with 3.4 million fitness subscribers instead of the 3.63 million it had earlier predicted. It slashed revenue expectations for the year from $5.4 billion to $4.6 billion. It also froze hiring.

The company is still in damage-control mode. Yesterday (Jan. 18), it announced price hikes, tacking on an extra $250 for the delivery and assembly of some bikes, and $350 for some treadmills in the US. It’s also considering closing stores and slashing jobs.

The road to recovery will be tough. Besides brick-and-mortar gyms, Peloton also faces stiff competition in the high-end home fitness industry from the likes of Hydrow, Tonal, and Lululemon’s Mirror.

“Peloton is no longer the only game in town,” investor Neil Patel writes for Motley Fool. “It’s no wonder engagement, as measured by average monthly workouts per connected-fitness subscriber, dropped to 16.6 in the last quarter, the lowest level in a year and a half. ” (It was 20.7 a year ago.)

Having said that, Peloton is still a $13 billion company. And it hasn’t been all bad news. For the June-September quarter, the firm’s subscription revenue nearly doubled to $304 million from a year ago.

Can Peloton win the subscription fitness market?

Subscribers and subscriber revenue are “what we want to see grow long-term, because it should be a high-margin business for the company,” Motley Fool analyst Travius Hoium writes. “The challenge in 2021 is that hardware sales, which are bigger numbers than streaming subscriptions, fell hard, overshadowing its strength in the subscription business.”

Even Peloton founder John Foley has described the company as “more akin to an Apple, a Tesla, or a Nest or a GoPro—where it’s a consumer product that has a foundation of sexy hardware technology and sexy software technology.”

Bikes and treadmills are one-time spends, but digital fitness programs are gifts that keep on giving. And Peloton’s roster of celebrity trainers sure help the stickiness. Plus, the company has been fiercely protective of its on-demand classes, suing copycat companies.

However, tech giants could cost Peloton its hold on this business. Apple, Amazon, Google, and Meta are all building their own health platforms.

“Apple is the clear leader with Apple Watch, Fitness/Health apps, Apple Fitness+ etc.,” writes analyst Neil Cybart, adding that Apple Fitness+ is “basically free when thinking of the Apple One bundle.” Compared to this elite crowd, “Peloton is on track to be a Fitbit 2.0—a company unable to compete with the giants subsidizing health and fitness tracking as an ecosystem feature.”