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Peloton’s big whoops

The pandemic was the best thing that happened to Peloton until it was the worst.

A Peloton exercise bike.
Cari Gundee rides her Peloton bike on April 6, 2020, when things were bad for America and excellent for Peloton — at least temporarily.
Ezra Shaw/Getty Images
Emily Stewart covers business and economics for Vox and writes the newsletter The Big Squeeze, examining the ways ordinary people are being squeezed under capitalism. Before joining Vox, she worked for TheStreet.

Peloton is in a pickle.

In 2020, the at-home digital exercise company could not get its products out the door fast enough. It surpassed $1 billion in quarterly sales during the last three months of the year, and leadership fretted its profits could take a hit as it invested to try to keep pace with pandemic-induced Pelotonpalooza. People waited weeks and months for their bikes and treadmills to be delivered. Alongside companies such as Zoom and Clorox, Peloton’s stock was a solid stay-at-home bet on Wall Street. But nothing lasts forever.

Fast-forward to 2022, and Peloton finds itself in quite a different spot. The good news: It has caught up on the supply side and finally has bikes and treadmills readily available. The bad news: The demand it’s trying to catch up to is no longer there. CNBC’s Lauren Thomas reports that Peloton is going to hit pause on production for a while.

“Peloton has been plagued with a supply-demand mismatch since the pandemic started,” said Simeon Siegel, an analyst at BMO Capital Markets who has been bearish on the company for quite some time. “The problem has basically inverted.”

Over the course of the Covid-19 pandemic, many people have found out more about the supply chain than they ever imagined. American consumers are accustomed to things just showing up at their doorsteps or on the shelves when they want, no questions asked. Everyone knows about supply and demand theoretically, but everything we’re learning about them in practice now is, to quote the meme, against our will.

The public health crisis has thrown many parts of the economy out of whack, and it’s made doing business more complicated across industry after industry. There have been plenty of well-documented kinks in the supply chain. (Who knew there’d be this surge of interest in shipping containers?) There’s been all sorts of weirdness in demand as well. (Remember when everyone wanted yeast?)

What makes doing business extra tricky in pandemic times is it’s hard for companies to know how long anything will last, and whether and how much to adjust. Peloton took the optimistic view; it thought its pandemic surge would last forever. Now the company and its investors are learning the hard way that this may not be the case.

“Forecasting a business, at the end of the day, is tied to supply and demand as opposed to emotional content. Peloton has one of the most powerful and best marketing departments I’ve ever seen in an industry; their storytelling is unparalleled,” Siegel said. “The problem is that when you start believing your own stories, you start making decisions accordingly.”

I love Peloton, but there is a limit on how many Peloton bikes I will buy, which is one

I bought my Peloton bike in June 2020. Things were not good for me in the sense that I barely left my home, which is why they were so good for Peloton. I spent upward of $2,000 on it and waited two months for it to be delivered. Part of it came semi-broken, and I was terrified I’d have to wait another two months for it to be replaced and for me to finally live my stationary bike dreams. (I did not.)

I really like the Peloton a lot. I use the bike itself or one of the other exercise classes available through my subscription most days. I also share my subscription with a coworker, meaning our combined activity makes me look very fit. I have my favorite instructors, and I talk about Peloton an embarrassing amount. I also am not going to buy another bike, nor am I going to buy the treadmill, both of which Peloton spent the 2021 holiday season advertising to me in my email inbox — often at a discount — heavily.

Part of what has happened with Peloton, Siegel explained, is that the company misunderstood the demand surge that took place at the start of 2020. “The primary question surrounding Peloton was did the pandemic pull forward demand, or did it expand the audience side?” he said. “Based on all the data we had been seeing throughout the pandemic, it seemed like this was a pull forward. And the company, on the other hand, viewed this as an expansion and built accordingly.”

In other words, people who would have bought Pelotons in 2021 or 2022 instead got them in 2020, but more people didn’t necessarily want them overall. Peloton had a lot of things break its way at the start of the pandemic — it had home equipment and content ready to go, for example, compared to competitors such as SoulCycle. And unlike basically all other gyms and fitness studios, it didn’t depend on in-person attendance. Still, those breaks weren’t really enough.

The company has tried to bring more customers into the mix by playing around with the prices of its products, which are definitely high. It started cutting prices on its original bike, released a less expensive treadmill, and last year slashed the price of its bike even further. As the Wall Street Journal notes, it looks as though some of those price cuts worked for a while — sales of its products excluding treadmills jumped five times over after it lowered the cost of its bike in August 2021. Still, sales were down for that quarter, and cheaper products mean lower margins. Peloton is going to raise prices this year: As of January 31, it is charging $250 for the delivery and setup of some of its bikes and $350 for the delivery and setup of some of its treadmills.

It’s been a rough several months for Peloton. Concerns about the safety of its treadmills caused it to recall some of its products last year. The last time it reported earnings in November, it cut its annual revenue forecast by up to $1 billion. More recently, it weathered the And Just Like That debacle (Mr. Big dies after a Peloton workout). The company recovered quickly, releasing an ad with actor Chris Noth — only to pull it after sexual assault allegations against the actor came out the same week. Now, it’s reportedly hired consultancy McKinsey to help it sort out its cost structure, which could entail halts on production and layoffs. Its market cap peaked at about $50 billion; on Friday, it was just under $10 billion.

In an open letter to customers and employees on Thursday, Peloton CEO John Foley seemingly disputed the production halt, saying the company is “resetting our production levels for sustainable growth.” He did acknowledge tumultuous times, including that layoffs may be on the table. However, he declined to go into much detail, citing a “quiet period” before the firm’s next earnings report on February 8.

What’s apparent is that Peloton’s leadership has been doing a bit of guessing its way through the pandemic, and some of its guesses have been wrong. Foley himself has recognized that the demand surge made the company “a little undisciplined” in its decisions. Securities and Exchange Commission filings show that executives and insiders at Peloton sold nearly $500 million worth of stock in 2021, before its stock price took a big hit, though most of those were prescheduled sales. That means some executives, including Foley, aren’t feeling Peloton’s stock price drop as much as they might have.

Peloton did not respond to a request for comment for this story.

Planning in a pandemic: Hard (but high-paid executives are supposed to be good at it)

Peloton’s pickle is not Peloton’s alone. For a lot of businesses, it’s been really hard to figure out what’s a blip in the pandemic economy and what’s an enduring shift.

You can look at the lumber industry as an example. One thing that contributed to the surge in lumber prices and lumber shortage last year was that when the pandemic hit, there was a huge jump in demand for lumber as people decided to build houses or take on home improvement projects. Producers were skeptical about whether the heightened demand would persist, so they were slow to ramp up production to try to catch up. In hindsight, some would probably have done some things differently. At the same time, imagine if back in March of 2020 Purell’s parent company had decided to build eight more factories. That would have been way too much.

Getting the supply chain right and matching demand is always a key part of any business. Every company, like Peloton, has had to navigate grounds shifting underneath them during the pandemic. Arzum Akkas, an assistant professor of operations and technology management at Boston University’s Questrom School of Business, explained that the No. 1 rule in business forecasting is that forecasts are always wrong. There’s generally a range within a certain level of confidence decision-makers target. Covid-19 has introduced an X-factor that makes that range, and therefore the margin for error, wider for businesses.

“They have to make the range bigger in terms of forecasts, and they have to consider bigger risks for supply and plan accordingly,” Akkas said. “They cannot plan their operations assuming that I’m going to get what I want when I want it.”

While striking the right balance has been harder during the pandemic, it’s not impossible — or, at least, plenty of companies have managed to avoid the situation Peloton finds itself in. Akkas pointed to Walmart and Amazon as examples of businesses that have successfully managed pandemic choppiness in terms of operations. Peloton’s “operations are not strong. Whose muscles are strong? Walmart, they are masters in operations plans,” she said. “The companies that we don’t hear about on the news get it right. If Amazon got it wrong, we would hear about it.”

So what’s next for Peloton? It’s hard to say. Perhaps it will manage to turn things around, cut costs, unfortunately via layoffs and store closures, and figure out how to get more people buying its products again. Maybe there’s a deal to be made or a prospective buyer out there, such as Apple.

Peloton’s fanbase is certainly strong. It has 6.2 million members, including digital-only subscribers (meaning people who use its app but didn’t buy any equipment). As of November, it had nearly 2.5 million connected fitness subscribers, meaning people who own one of its products and also pay to use its fitness content, like spin and running classes. Foley also noted that Peloton has a less than 1 percent churn rate, meaning people stay once they’re signed up. Still, it’s hard not to look at boutique fitness trends that came before Peloton, including those in the spin space like SoulCycle and FlyWheel, and wonder whether Peloton won’t face the same fate.

Apart from its missteps, Peloton might also just be a victim of timing — timing that was first very advantageous and now not so much. In a nutshell, the pandemic was the best thing to happen to Peloton until it was the worst, Siegel said.

“The company misread the demand cues, engaged in very heavy spending, and the pandemic helped whittle away at Peloton cash while, ironically or not, spotlighting how great connected fitness was and helping their competitors fundraise,” he said. Perhaps had Peloton not been so poised to meet the moment two years ago, or had the pandemic not happened, it might be in a better spot today. “I would be talking about a very strong growth company that had drastically less brand awareness but a drastically better revenue arc that was coming into its own and with a competitive set that was drastically less capitalized.”

Peloton hasn’t imploded, so if you’re a member, don’t panic. Also, your favorite instructors like Cody Rigsby and Robin Arzon are going to be fine. Many of the people who were there early on made a lot of money off Peloton’s pre-pandemic IPO as the stock surged, assuming they cashed out on at least some of it. Plus, the trainers have gained fame in their own right.

During workouts, one of Rigsby’s common refrains is, “Get your life together.” It’s advice he should maybe give to his employer.