Beleaguered fitness company Peloton said Tuesday it will replace CEO and co-founder John Foley as the brand seeks to win back market and consumer confidence. Barry McCarthy, who has held leadership roles at Spotify and Netflix, will become the new CEO, effective Wednesday, the company announced.
“Today’s leadership changes are the culmination of a succession planning process that the Board and John have worked on together over the last several months," according to a statement from Peloton released Tuesday morning.
The company also announced it would be slashing 2,800 jobs, or 20 percent of its corporate workforce. It will also pull back on its Ohio factory, a $400 million investment that was expected to bring more than 2,000 jobs to Troy Township.
Peloton is said to be attracting interest from potential buyers, shortly after it was called out by an activist investor who said the company should try to sell itself and fire Foley.
For would-be buyers, the draw isn’t the company’s connected fitness equipment, but the billions of data points it has on its customers.
“The main draw to acquire Peloton would be all the data generated by Peloton’s well-heeled subscribers,” said David Wagner, portfolio manager at Aptus Capital Advisors.
Amazon is exploring the idea of buying Peloton, The Wall Street Journal reported last week, while the Financial Times separately named Nike as another prospective suitor. And Dan Ives, analyst at Wedbush, suggested that Peloton could be a good acquisition for Apple, saying it “would make strategic sense” for the iPhone maker to build on its existing connected health initiatives connected to its Apple Watch device.
It is a swift and ignominious fall from grace for a one-time darling of the “stay at home” economy. When Peloton reports earnings on Tuesday, it will be from a very different position than the company was in as recently as a year earlier, when it was valued at nearly $50 billion. Today, that figure is closer to $8 billion.
Last month, minority shareholder Blackwells Capital called for the company to look into selling itself and pushed for firing Foley, whom it blamed for “multiple leadership failures” that drove down Peloton’s share price value. In a letter it sent to the company’s board, Blackwells ticked off a laundry list of missteps, including “high fixed costs, excessive inventory, a listless strategy, dispirited employees and thousands of disgruntled shareholders.”
While Peloton is the most visible and has a commanding lead in terms of market share, there are other players in the connected-fitness space, and one company says those could be eroding Peloton’s edge. Research firm M Science found that Peloton’s market share in the at-home fitness category for equipment with $1,400-and-up price tags ticked up at the end of 2021 to just above 70 percent, but it failed to reach 2019 and 2020 sales in November, despite Black Friday promotions.
Peloton has already taken some drastic steps, temporarily stopping the manufacture of its flagship stationary bicycle and higher-end Bike+, along with its Tread treadmill, CNBC reported, citing internal documents. (CNBC also found that Peloton expects that it won’t produce any of its Tread+ treadmills, which were the subject of a safety recall in 2021, in its current fiscal year.)
The hardware part of the business, despite being the vehicle that lets Peloton collect all the data and dollars from customers, is where the company has faced the most problems, from the Tread+ recall to supply chain challenges.
“We have a significant amount of fixed costs associated with our supply chain, particularly within middle and last mile logistics,” CFO Jill Woodworth told investors on the company’s November conference call, noting that these cost pressures were impacting margins.
As the nation moves more towards reopening and a sense of post-pandemic normalcy, Peloton has struggled to correctly assess demand, Foley said. “Consumer behavior and supply chain inputs have been very challenging to predict in the short term,” he told investors on the same conference call.
While the company is most closely associated with high-end stationary bikes, analysts say the would-be buyers who have reportedly expressed interest in acquiring it would be more motivated in Peloton’s vast trove of customer data, especially health-related metrics.
“The value here is in the customer base and the data around those customers, and with any software platform, that’s the appeal of the acquisition,” said Logan Purk, a research analyst at Edward Jones. “I think if you’re parsing through the data, you could see the customers’ habits and traits… so you can cater to that kind of customer base as you push more into exercise and fitness,” he said.
Wagner said hardware sales would probably be the least important part of the deal, especially for a bigger technology firm like Amazon or Apple. “A lot of the data surrounding the health information for its clients, for its users, is going to be the most value additive,” he said. “The cross-selling optionality there is infinite when you have someone’s health data.”
Forrester Research senior analyst Anjali Lai said that a potential buyer could benefit from merging Peloton’s customer data with its existing trove of customer behavioral insights. “The big tech and established fitness brands can expand their reach in the health space and become much more embedded in customers’ lives,” she said via email. A company like Amazon or Apple could use information about people’s exercise habits in order to target sales of other fitness or wellness-related products and services such as health-tracking, music and entertainment, for instance.
Peloton’s subscriber base, which numbered roughly 2.5 million as of the company’s last quarterly report in November, is another important asset, since membership subscriptions account for roughly two-thirds of the company’s revenue. “In general, Peloton’s value proposition is not so much in the hardware as it is in the subscription revenue,” said Sarah Henry, managing director and portfolio manager at Logan Capital.
Henry said that among the companies that have reportedly expressed interest, Nike would seem to benefit most if it were to acquire Peloton. “Conceptually, in considering Nike, one of the strongest elements of their investment strategy is this idea of community, and that’s an intangible Peloton really brings to the table,” she said. Other analysts pointed out that Nike’s large brick-and-mortar retail footprint would benefit efforts to sell Peloton exercise equipment.
Any deal would come with risk, though, Henry added. “They’re not a company that has done a ton of acquisitions,” she pointed out. Relative to tech heavyweights like Amazon and Apple, Nike is also much smaller and doesn’t have the same degree of cash reserves.
There are other roadblocks to a sale, not the least of which is Foley’s unwillingness: As the founder, he and other key executives hold the lion’s share of voting power at the onetime pandemic home-fitness juggernaut. “That’s the challenge with the buyout of a founder-led company, which implies the deal would need to be big enough that the board can’t say no, because there’s fiduciary responsibility to shareholders,” Purk said. The prospect of regulatory scrutiny also could dull the appetite of would-be buyers.
But for the right company, Peloton could be worth the investment, analysts say. “I think with any of the big tech companies making this acquisition, it boils down to growing a customer base and offering another service to keep people in your ecosystem,” Purk said.
“The question is, for any strategic buyer, how much of a premium is there — and that’s the big question,” said Ken Leon, director of equity research at research firm CFRA.
For every Peloton user who could potentially become an Amazon Prime member or Apple Music subscriber, the pipeline could work in reverse, as well. Leon said it is hard to tell how large the untapped demand for Peloton is, but it could be sizable, given the increased interest in health and fitness triggered by Covid-19.
“In the pandemic, individuals were really looking for well-being and fitness,” he said. “The total addressable market is unclear, but it’s probably very large.”