Some companies are so badly managed that they transcend the boundaries of their own profits and losses and become cautionary tales for an entire era. Pets.com immediately conjures memories of the dot-com bust, just as Bear Stearns stands in for the Great Recession and WeWork for the excesses of 2010s Silicon Valley.
Could Peloton be the pandemic equivalent of these forebears? Recent events indicate that it may be headed that way. Before a pop this morning, the company’s share price had lost as much as 84 percent of its value since its peak a year ago. A $400 million factory in Ohio is now kaput. One of its treadmills was involved in a child’s death. The company is even taking a beating in the fictional realm.
Embattled CEO John Foley — who may be a cat — announced today via press release that he was stepping down to become an executive chairman of the board and that the company was laying off 2,800 people (their severance packages include, I am not making this up, a year’s subscription to Peloton). Blackwells Capital, a hedge fund that’s been pushing for Foley’s ouster, released a devastating and amusing PowerPoint presentation that includes some memorable quotes from the man like, “I think I’m not a very good manager,” and “I’m not sure [my colleagues would] say I have many strengths at all.” Points for honesty?
The central problem with Peloton is that its leaders, including Foley, suffered from a dire lack of imagination. It feels like the company just couldn’t picture a world where people would have a ton of free time and extra money and would want to leave their own house. This is in part why the company has been on the downswing for a year, more than half the pandemic.
Nobody is predicting that Peloton will fold or go bankrupt (though it may very well get bought by Amazon, Nike, or some other giant). Problems like this can be fixable, at least from a corporate standpoint. Layoffs are one way of doing that. Moving resources from money-losing businesses to moneymaking ones is another.
But the challenges are formidable. The company projects that it’s going to make as much as $1 billion less than it had projected during this fiscal year than it had projected, a roughly 20 percent hit. And it has systemic problems that will be hard to fix. The bikes cost as much as $3,000, and a significant chunk of them are financed through Affirm, the buy-now pay-later lender. The terms of the deal here are important. You can still pay for a Peloton bike on a month-to-month basis for no interest, and that’s because Peloton pays Affirm to keep that charge at 0 percent in order to keep the number of customers rolling in. Think about that. It’s paying for users who are essentially paying on credit and can walk away at any time.
Here’s Jill Woodworth, the CFO, on the Tuesday call: “Currently, we are not generating nearly enough hardware profitability to achieve our goal of covering customer acquisition costs, which means it is critical for us to rebuild this margin structure.” This deal ends next year, which would effectively result in a cost hike on anyone using the bike. While it’s not clear how many people are taking advantage of this deal, Peloton is Affirm’s biggest customer, and an analysis of some debt deals by the Financial Times seems to hint that it might be around 1 million. If the pandemic really wanes and people want to go back to gyms, why would they continue to pay a comparable amount of money for just one piece of equipment when they could get so much more at a Crunch?
Foley, who bought a $55 million, four-acre house after his company’s shares had already lost most of their value, admitted that he made strategic errors to investors on Tuesday morning: “We scaled our operations too rapidly. And we overinvested in certain areas of our business. We own this. I own this, and we are holding ourselves accountable.” Of his replacement, the former Netflix and Spotify CFO Barry McCarthy, Foley said, “We’re super-excited that we found him. We fell in love.” McCarthy has his work cut out for him, and we’ll see how long the honeymoon lasts.
In a way, the rise and fall of Peloton is a bit like that of Uber. The ride-hailing service expanded everywhere because it was so cheap — but that was an illusion created by all the venture-capital money that was subsidizing each and every ride. Today, Ubers tend to be more expensive than yellow cabs in New York City. If you replace “VC money” with “stimulus checks and low rates from the Federal Reserve,” Peloton was essentially coasting on the same business model.
That Peloton is struggling to recapture its 2020 mojo doesn’t make it special; the pandemic economy is sputtering out everywhere. Netflix and Facebook, for instance, are finding it harder to make money now that their audience is a little bit less captive. The difference is that Peloton already had some deep-seated problems before COVID-19 — when it went public in late 2019, it didn’t exactly dazzle — which the company chose to ignore in favor of a fantasy that the enormous growth it experienced the year later was sustainable. It’s too early to say, but the company’s baffling shortsightedness may just make it a member of a club no company wants to join.