Peloton’s sprint into the future in times of COVID
Chance or intention? As the world entered lockdown, Peloton’s stay at home business model becomes one of the few viable alternatives for millions of people who seek to stay fit. COVID-19 has disrupted fitness behavior and can be a golden opportunity for Peloton to increase its presence and expand its total addressable market.
The Product
Peloton Interactive was founded in 2013 and sells high-end fitness devices and digital content to its users. Peloton’s strategy is designed to sell more than hardware products. It seeks to offer users the studio experience without the need to leave their homes.
Its first product was a $2,000 bike with a 22-inch touch screen, where fitness fanatics could access on-demand classes with energetic Peloton instructors. Peloton bikes now start at $2,200 and treadmills at $4295 and are paid in 39 monthly installments of $58 and $111, respectively.
Customers can choose from two membership services.
All-Access membership: At $39/month, there is a subscription option for users who have purchased a bike or a treadmill. Users have access to unlimited classes and content, which includes live-streaming and on-demand cycling, running, boot camps and yoga classes. It also includes performance tracking and additional profiles for family members.
Digital Membership – At $12.99/month, users can download the Peloton app and have access to classes and content that require no equipment. Unlike the all-access membership, anyone can subscribe to the app as it is not linked to the Peloton bikes or treadmills.
Growth & Competition Pre-Covid
Some analysts have looked at Peloton with caution, suggesting it could be a middle disruptor and have a fate similar to Go Pro, where after an initial fanfare, it experienced modest growth.
Peloton’s strong community and social features give reason for a brighter future for the company. Peloton was a pioneer in the fitness devices and digital content space and has benefited from one-sided network effects. The Leaderboard functionality allows users to see their performance compared to others and connect with friends. In 2019, 43% of Peloton users entered the community through a friend or family member, up from about 25% in 2017. These network effects not only serve to further accelerate customer adoption but also make the product stickier. Due to this trend, the company was intentional about lowering the price of its digital app. In fact, at first glance, it may seem futile to even compete in such a crowded market that could likely experience a price war to the bottom. But the digital app not only accelerates massive adoption — it is also part of the customer acquisition strategy for its hardware business and all-access membership, where 80% of its revenue originates.
Despite its first-mover advantage in offering connected hardware devices, competition in the fitness industry is fierce. In normal, pre-COVID circumstances, Peloton competed with companies that offer at-home products and services (from hardware to apps) as well as traditional gyms, running, and cycling studios.
Peloton’s CEO has argued companies like SoulCyle or gyms are not direct competitors. He claims it targets people in their 20s and 30s who go to gyms and attend studio classes, while Peloton’s demographic are high-income individuals (and their families) between the age of 35 and 65, many of which live in suburbs and have less flexibility to go to a gym. That may have been the case in a pre-COVID world. Many who chose instructor-led classes preferred the in-studio experience and did not want to commit to one single cardio modality. With COVID-19, that has changed. Since the outbreak of the pandemic, it is fair to say that those who seek a sophisticated cardio workout are more likely to run to products like the Peloton bike.
Despite the entrance of competitors in the hardware offering, Peloton has grown 128% and 108%, in 2018 and 2019, respectively. In February 2020, a month before the US and most of the West entered lockdown, Peloton had about 712,000 all-access members and over 2 million digital user members. Peloton has created a strong brand community but this has come at a high cost: $600 million has been spent in sales and marketing over the past three years.
How does COVID-19 change the ride for Peloton?
Since March, demand for Peloton products has surged. On April 24th, Peloton’s stock price rose by 9% after 23,000 members signed into one of its virtual classes. The number of downloads of its digital app was 5 times higher in March than in February and some analysts have included Peloton on their bullish stay at home stock list, along with companies like Zoom and Netflix.
Average delivery time has spiked from 2 weeks to 5 to 7 weeks, as Peloton struggles to keep up with the increase in demand. This means customer acquisition cost, which was a concern, has dropped as a result of the unusual conditions the world is undergoing.
Will these promising results and hype around Peloton outlive the pandemic? How can the company ensure it is the one capturing this opportunity?
Some analysts have attributed this surge in membership during COVID-19 as an acceleration of demand rather than real expansion. But given that the period COVID-19 is expected to last, although, in less strenuous circumstances, the fitness market could be facing permanent change in consumer behavior. This could be an opportunity for fitness connected devices to witness an increase in its addressable market.
It is fair to say that the traditional digital app users will probably not push users to switch to more expensive alternatives amidst a major global economic downturn. But it can certainly serve as an opportunity to attract people who in normal circumstances would not exercise at home and preferred the in-studio experiences. Although strict stay-at-home orders are expected to be eased with time, it is hard to imagine packed studio cycles and gyms anytime soon. Second waves of the virus are also likely to restrict people from certain out-of-home activities like attending socially dense gyms or studios. Fear of contagion and hygienic concerns might also live longer than we envision, further pushing people to seek products similar to Pelotons’ hardware.
Cautious Optimism
Peloton has reason to be optimistic but needs to be realistic about the challenges it faces
It should be wary of the economic recession that lays ahead and the implications it may have on its brand and membership acquisition. Although direct competitors entered the market after Peloton, they have been able to provide cheaper hardware. Furthermore, as demand may well continue to peak, it should be thinking of its relationship with suppliers and logistics providers to continue to provide acceptable delivery times and a functional service.
Peloton might consider double downing on COVID-19 and creating a cheaper version of its treadmill and bikes. It can also capitalize on the surge (and despair) for fitness equipment by renting bikes for smaller periods. It is a way of putting less of a financial burden on consumers while also exposing them to the Peloton experience. With a retention rate of 95%, the company has proved that both its product and experience are attractive. The hype around it right now is great and grounded in happy customers, but whether it can capture even greater portions of the market will depend on its ability to creatively capitalize on the opportunities created by COVID-19 and adapt its long-term strategy.
Sources:
https://www.cnbc.com/2020/03/31/peloton-much-stronger-after-coronavirus-analysts-say.html
https://www.cnbc.com/2016/01/08/pelotons-race-for-home-cycling.html
https://www.investopedia.com/peloton-s-risky-business-model-4768768
https://techcrunch.com/2019/09/22/why-buy-peloton/
https://seekingalpha.com/article/4339023-sizing-up-peloton-against-disruptors