Is Peloton really so unfit?

Peloton has gained a lot of recent attention with reports of slowing sales, unhelpful fictional heart attacks and investors calling for the CEO to resign. A share price comparable to that before Covid-19 is certainly eye-catching for a business that has grown paying subscribers from around 1 million to around 3.2 million last year. Something has changed significantly.

Confidence in the business is clearly a factor. After struggling to meet demand for equipment at the peak of the pandemic Peloton invested in factory capacity only to recently halt production due to falling demand. Last year the business recalled its treadmill due to safety issues. Despite quadrupling sales revenue in 2 years Peloton remains loss making and like many is navigating inflation across its supply chain that will dent equipment margins. The fact that directors made contrasting gains from selling stock post public offering has further frustrated investors.

The context has clearly changed post Covid, but the need for fitness solutions that fit consumer lifestyles remains.

Management decision-making aside the addressable market for Peloton remains huge. Alongside around 200 million gym members globally, the digital fitness market is set for sustained strong growth with more wearables, more data, more gamification, etc. Of course, post pandemic the context has changed, but the return to normality in 2022 is not a surprise scenario and hybrid working should endure for some years to come.

Confidence and context (alongside excessive investor and company optimism) will explain some of the share price slide, but questions on Peloton’s ability to compete are also in the mix.

Peloton is highly substitutable

Vaha, Nordic Track and Zwift: consumers can find connected fitness benefits in many ways and via many models

Peloton’s competitors have expanded and evolved. Alongside the re-emergence of physical gyms (with social connection and breath of equipment advantages) direct competitor Echelon has grown fast by offering more affordable bikes. For outdoor enthusiasts turbo trainers in combination with apps such as Zwift bring their bike and exercising indoors. Beyond treadmills and cycles the choice of virtual fitness class subscriptions including the likes of Apple Fitness+, Fiit and Alo Moves has multiplied. Established brands such as Nordic Track have added screens for streaming and brands such as Vaha lead with standalone fitness mirrors that Peloton does not offer. You get the point – choice has expanded with consumers able meet and mix specific preferences and fit their budgets.

Clear advantages for acquiring subscribers are absent

A paying community of around 3.2 million is a valuable asset for Peloton who offer a range of revenue generating accessories. The Peloton brand is also synonymous with in-home fitness and high-spec equipment. Advantages for attracting new customers, however, look less obvious. The company’s plans to widen access with lower priced equipment in 2022 will probably not be helped by current manufacturing costs or premium-price associations. Protection from patented tech also looks doubtful given recent US rulings concluding that most connected fitness hardware involves some form of on-demand classes and leaderboards. Zwift and Rouvy are connecting with existing bike owners avoiding the barrier of high priced equipment (or the hassle of supply). Of course, the likes of Amazon, Apple and Meta have access to large audiences.

Learning?

Connected fitness is an attractive race and Peloton is still on the leader board

Peloton is a reminder of the need to objectively know the competitive strengths of your business model, resources and capabilities. Peloton’s connected fitness proposition has a wide range of potential substitutes with different advantages. As with a car purchase the upfront equipment investment will help brand loyalty and retention of buyers. But for many it will be a financial and perceived barrier to becoming a subscriber. For consumers focused on virtual training Peloton will need to continually improve the content and experience in the absence of any truly unique features.

Peloton has failed to emerge from Covid as an outright winner with distinct advantages. That said, with a committed community, a lower cost-base and more focus on what their subscription offers (where most future profit will come from) a move up the leaderboard is possible with some serious sweat.

The problem for Peloton, however, is growth will be speedier and easier if they are acquired by a major company that can bring advantages. Think about what Amazon could do through accessing Prime customers, extending Peloton connected fitness benefits to own-brand equipment or developing health propositions for existing members. Peloton is certainly not fit enough to pedal away from a serious and advantaged buyer.

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