Peloton’s Crash Will Keep Burning

Lower future sales would certainly compound problems for a company whose current sales volumes don’t even seem to be enough to sustain continued production. Citing a confidential presentation dated earlier this month, CNBC reported Thursday that Peloton is temporarily halting production of its connected fitness products, noting a “significant reduction” in demand due to price sensitivity and heightened competition.

Peloton’s shares tumbled another 19% after the news. Just over a year ago, Peloton announced a $420 million acquisition of commercial fitness provider Precor in an effort to gain significant U.S. manufacturing presence and cut down lead times for its equipment amid booming demand.

For years, Peloton represented an aspirational lifestyle, selling, among other things, fitness equipment that was as coveted as the figure it could earn you. Not too surprisingly, it came at a price only so many people could afford to pay, let alone wanted to.

Next came price cuts. Amid a global pandemic where, for many months, consumers had far fewer out-of-home exercise options, these were initially highly effective. YipitData shows that when Peloton lowered the price of its original bike in late August of last year, U.S. sales of its connected fitness products, excluding its Tread, increased fivefold in less than two weeks.

That was a needed boost for Peloton, whose sales of all its connected fitness products still fell more than 16% year on year for the quarter ended September 30, 2021. But it also revealed a prospective customer base that is especially price sensitive. That is precarious for a company that Wall Street estimates ended last calendar year with more than 17 percentage points of gross margin dilution relative to the end of calendar 2019. The rub: Peloton needs the margin boost, but it also needs the sales.

Starting Jan. 31, Peloton will be raising prices for its original bike and its Tread either by charging new customers for delivery and setup or by raising the base prices, depending on the customers’ location. The difference is significant: Peloton’s website shows U.S. customers will effectively be paying around 17% more for its original bike, for example, adding in delivery and setup costs. For reference, last August, Peloton cut the price of that product by roughly 20%.

At its annual shareholder meeting in December, Peloton reportedly discussed the potential of charging for delivery and setup. Growing inflation and supply-chain expenses have led many retailers to raise prices. Indeed, even IKEA, which Peloton reportedly referenced when discussing price hikes internally, said a few weeks ago it was raising prices by about 9% on average across its markets. But not all companies have that luxury—especially those selling luxury goods. Consumers shopping at IKEA not only notoriously have to do their own assembly, but still need a bedframe and a dresser, regardless of the price. Multi-thousand-dollar exercise equipment? Less so. The need to shell out for essentials elsewhere only takes away from consumers’ pool of disposable income Peloton is vying for.

BMO analyst

Simeon Siegel

said in a note Wednesday that, while he has long advocated Peloton increasing rather than decreasing prices to improve margins, “this feels like another indication of a company operating a large-scale trial and error, testing options on its customers in real-time.”

Lately, it seems like Peloton is throwing a lot of ideas at the wall and seeing what—if anything—sticks. CNBC also reported earlier this week Peloton is working with managing consulting group McKinsey & Co. to review its cost structure, looking at potentially cutting some stores and even its apparel division. YipitData shows Peloton had nearly 150 stores open world-wide as of the end of last year, up from less than 100 stores at the end of 2019. It launched a private label apparel brand less than five months ago.

For a company that is trying to “democratize fitness,” moving to democratize costs seems a bit at odds.

Write to Laura Forman at [email protected]