🔒 As Peloton announces its latest product, co-founders John Foley and Hisao Kushi announced they are leaving the troubled premium-priced brand. The question is: can a rowing machine that's 3 times more expensive than the competition save the company?
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Peloton's Route To Restore Fortunes
It's finally here! After much hype and a ton of teasers, Peloton have unveiled the "Row", their new, premium priced $3,195 rowing machine (and don't forget the $44/month subscription charge!).
- Row is a product that's priced substantially above the highly-popular competition. Which begs the question, "who/what do Peloton want to be?" A luxury, high product (think Ferrari) or a mass market premium product (think Apple).
- Peloton is drowning in inventory it can't sell. It is sitting on over $1 billion worth of inventory whilst demand for its bikes and treadmills has collapsed. Peloton's hardware revenue declined by 55% year over year in the fourth quarter to $295 million.
- The company is losing money hand over fist! The net loss for the last full year was a staggering $2.8 billion on $3.6 billion of revenue. With the collapse in demand for new bikes and treadmills, which drives the subscription numbers, Peloton's numbers will almost certainly get worse before they get better.
Peloton is working to cut costs by reducing headcount, closing 86 retail stores and moving away from in-house manufacturing to use more 3rd party producers. But cost-cutting won't solve the company's demand problem. And it's hard to see how a $3k+ rowing machine will turn it around either.
Or, how across the board price increases will do so too! Last month, Peloton announced price increases in the US for its flagship bike and treadmill products.
- Bike+ will increase by $500 to $2,495, while the cost of a Tread will rise by $800 to $3,495. At a time of rising inflation and a decline in discretionary spending! (BTW, remember that Peloton cut prices just 6 months ago.)
Other initiatives include embracing sales of its products through a 3rd party for the first time. Now, Amazon will handle distribution and shipping. Plus, allowing customers to self-assemble their products, creating a second hand bike resale market, and rolling out a rental service that allows customers to rent bikes on a month-to-month basis without any long-term commitments.
What Exactly Is Peloton's Strategy?
The significance of the new product is that it signals Peloton's next step in broadening the product range from (just) the Bike+ and the Tread (treadmill). The intention is clear, even if the execution isn't - to increase subscriber numbers.
When CEO Barry McCarthy took over at the start of 2022, he set his sights on eventually having 100 million paying members.
There are currently less than 3 million paying members and numbers are declining.
But at over $3k a rower, when the competition is priced less than half that, the Row's pricing strategy is in question if the goal is customer growth.
I get what Peloton are trying to do, to a point. It's the execution that's at fault. The point of the hardware (bike, treadmill, rower) is that these are Peloton's railway lines. Once a customer has bought (invested) in the machine, they're compelled to use it. Which means shelling of $44/month for the courses, videos and content.
Without the content it would be like buying the latest TV and refusing to pay for Netflix or Apple TV.
Put another way, Peloton is following the same strategy as Apple (just not as well executed, yet) - make your hardware products highly desired and charge a subscription for the things you do on them. Peloton's challenge is that they're not Apple, nor do they have anything like the depth and breadth of utility as Apple.
Meanwhile, there's much speculation that Peloton will be acquired. Its market cap is now (only) $3 billion compared to $58 billion at its peak during the Covid pandemic. Peloton's share price has bombed too.
From a peak pandemic high of $162 a share, Peloton is now trading at $9 a share.
Likely acquirers are Apple or Amazon, who could snap up the fitness brand without breaking a sweat.
- Apple is a lifestyle brand where every second looking at an Apple product means you're not looking at someone else's.
- Amazon has the largest bundled subscription service in the USA with over 160 Prime customers. Adding in premium products simply enhances the Prime brand even further.
Both brands want to retain our attention (30 mins on a rower and I'm all yours!). Both Apple and Amazon have "health and fitness" on their strategic agendas. Both Apple and Amazon have the means to take subscriber numbers to 100 million!
Other suiters include Nike, Lululemon (spent $500 million acquiring Mirror in 2020), Adidas, and Google (owners of Fitbit).