Peloton's Battle for Survival: Inside the CEO's Transformation Strategy
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The most challenging realization for any leader is the first sight that something is not working. It could be the gradual decline in revenue quarter after quarter, or that sinking feeling when a competitor disrupts their industry and gains an unrelenting edge.
A recent and widely publicized example of such a scenario unfolded with Peloton.
Let's rewind to early 2020 when Covid-19 wreaked havoc worldwide, causing massive disruptions. Interestingly, a handful of companies, such as Peloton, actually thrived amidst the chaos. With people confined to their homes and a significant portion of their competitors unable to operate due to closures (think gyms), Peloton found itself in a remarkably advantageous position. And boy, did they seize the opportunity!
In the fourth quarter of 2020, Peloton experienced an extraordinary surge in sales, reaching a staggering 172% growth, with revenue exceeding a remarkable $607 million. The future seemed bright for Peloton, indicating positive prospects for the long term.
Peloton fully bought into their success, anticipating the hyper growth in e-commerce sales to continue, even when covid-19 eventually phases out and normal living picks up again.
In all fairness, some of the top analysts across North America agreed with Peloton, predicting the growing fitness company to keep on rising through sustainable growth. Case in point below:
Out of 24 analysts issuing a price target for Peloton, the average estimate based on current fundamentals is $116.33, and an overwhelming majority–more than 90%–have issued either a buy or strong buy rating on the stock.
~ Forbes.com, Oct 2020
However, beneath the seemingly calm surface, trouble was brewing. Gradually, these barely noticeable warning signs transformed into significant organizational challenges that posed a threat to the company's very existence.
First, the company faced a severe blow financially and in terms of public relations due to a string of recalls. Tragically, the incident that triggered this chain of events was the unfortunate death of a 6-year-old child while using one of their treadmill products.
Their initial brand strategy, which focused on catering to affluent customers, proved profitable initially. However, over time, this approach impeded Peloton's expansion and made it challenging to justify the high manufacturing costs associated with their hardware. Consequently, the company became constrained by a low growth ceiling, hindering their ability to achieve substantial progress.
Perhaps the most damaging blow came from the easing of restrictions worldwide. As lockdowns lifted, many dedicated Peloton users returned to their previous habits, opting for gym memberships and outdoor team activities once again. This outcome was the exact opposite of what both experts and Peloton had anticipated.
Before Peloton could comprehend the full extent of the situation, their stock price plummeted to less than $14.00 USD per share, dropping below their initial public offering (IPO) price.
It became crystal clear to Peloton’s board they were facing more than just growing pains, resulting in founder and CEO John Foley, stepping down from his position.
Enter Barry McCarthy. A past Spotify and Netflix executive that was brought in to turn things around from the bleak situation Peloton has found itself in.
As Barry assumed the position of CEO in early 2022, he recognized the dire need for significant transformation in order to restore Peloton to its former days of greatness. In my exploration, we’ll look into Barry's initial strategy, examining the techniques employed, anticipating the challenges that lie ahead, and gaining insights into the organization's new prospects as we venture into the second half of 2023. This is the beginning of Peloton’s battle for survival.
It all starts with a concrete plan and a pivot into new waters, so let’s take a look at that next.
Step 1: Identifying The Change
In the initial stages of change, the stakes can feel astronomical. The questions that arise, both for yourself and your team, along with the decision-making process, can be overwhelmingly daunting.
Have we truly uncovered the root causes, or are we merely addressing the symptoms of deeper issues?
Do we possess the necessary data to accurately identify the pain points?
How will the proposed changes, once implemented, impact the very essence of our company—the DNA that defines us?
Perhaps most crucially, will we garner the support and buy-in from our employees, customers, and shareholders?
Each of these points necessitates careful consideration, as their consequences can reverberate far and wide.
For Peloton, they first needed to stop the bleeding and significantly reduce the losses they experienced every quarter. Barry McCarthy understood that being on the offensive wasn’t the right tactic at the early stages but that didn’t stop him from painting the picture to create that ever important North Star to guide the direction of change long term.
“My goal for Peloton is to become a global connected fitness platform with 100 million Members. That’s equivalent to roughly half the world’s global gym memberships. It’s a long, long way from where we sit today. But we sit at the epicenter of technology enabled fitness, a long-term secular growth trend. Who doesn’t want to live a healthier, happier, longer life? We will share more about how we plan to participate in that growth in the months and years ahead.
In my experience, companies that don’t know where they’re going generally get there (that's not a typo). I’m determined not to be one of those companies. Connected fitness is a strategic choice. Strategy is always about choice, what to invest in and what not to. You won’t see us investing in or owning something that doesn’t serve our connected fitness strategy.
I’ve been in the CEO role of Peloton since February 9. During those three months I’ve focused on: 1. stabilizing the cash flow 2. getting the right people in the right roles and 3. growing again. We’re making progress on all three priorities.”
~ Barry McCarthy
Numbers 1 and 2 will come with all sorts of difficult decisions and number 3, along with becoming “a global connected fitness platform” is where the change has to stick for the long term.
By aligning with Peloton's three transformation objectives as a guiding principle, I conducted an in-depth analysis to unveil the comprehensive scope of their transformation plan and its progress over the past year. It is worth noting that the proposed change plan is ambitious, yet holds significant potential for success if executed effectively.
Here is the transformation plan as I see it.
Phase 1
Stabilizing Cash Flow
Reduce workforce headcount to manageable levels
Eliminate the majority of resource commitments with suppliers
Transition key roles, such as member support, offshore
Increase the retail price of premium products (i.e. Bike+ & Tread)
Reduction of retail presence and greater emphasis on e-commerce
Getting The Right People In The Right Roles
Beefing up the software engineering team
Key leadership hires for the legal and commercial functions
Phase 2
Growing Again
Transitioning into a subscription first model
Offering additional tiers outside of their premium lineups
Eliminate the constraints of equipment to join the Peloton ecosystem
I assume this multi-phased plan was put in place after carefully reviewing data gathered internally along with forecasting macro-level trends expected to hit the fitness industry. Transitioning into a subscription first model is the most interesting part of the transformation plan. However, given Barry’s experience with both Spotify and Netflix, the writing was on the wall that this was the most likely direction they were headed.
If you’ve read any of my previous articles it should come as no surprise with what I’m about to say. Creating a plan is generally tough. Executing on the plan is a whole other level of difficulty.
Next, let’s look at how Peloton set their plan in motion.
Step 2: Executing The Plan
With the magnitude of Peloton's transformative goals, navigating the path to success won't come without its challenges. In this endeavour, prioritizing transparency becomes paramount, alongside securing unwavering commitment from the diverse array of stakeholders who will feel the impact of what’s to come.
In Peloton’s captivating 2002 Q3 Shareholders letter, Barry McCarthy skillfully sets the tone by acknowledging the tremendous effort invested in the ongoing transformation. The power of change truly takes hold when it permeates every level of the organization, extending beyond the leadership team. By expressing early gratitude, McCarthy takes a crucial step towards securing initial buy-in from all stakeholders, as noted in his opening remarks:
“Turnarounds are hard work. It’s intellectually challenging, emotionally draining, physically exhausting, and all consuming. It’s a full-contact sport. That’s why I want to begin this Shareholder Letter with a shout out and sincere thank you to the employees of Peloton who are working hard to make this company successful.
I also want to thank our 7 million Members whose passion for Peloton gives meaning and purpose to our work. Turnarounds also are incredibly stimulating and engaging, the decisions never more consequential, the urgency ever present, the teamwork never more central to the mission.”
~ Barry McCarthy
Words can only take a company so far, however. in the following months after this shareholder letter, Peloton proceeded to layoff close to 50% of its workforce. While this was needed from a cost cutting point of view, it resulted in a negative ripple effect across shareholders and employees.
Again, hiding these difficult decisions only makes things worse and fosters mistrust with the wider team. Barry seems to know this and continued along the path of transparency with his email to employees around the time of change:
We continue to make strategic changes to our operations and workforce. Following last month’s exit from owned-manufacturing in Taiwan, we are now restructuring our final mile delivery capabilities by expanding our work with our third party logistics (3PLs) providers. As a result, we are eliminating our North American Field Ops warehouses, resulting in a significant reduction in our delivery workforce teams.
Unfortunately, this means a number of team members will be departing the company. We know changes of this nature are never easy…..……After re-examining the resources required to provide our Members best-in-class support, we have also decided to reduce fixed costs by eliminating a significant number of roles on the in-house North America Member Support Team. In-bound Member support volume has been lower than forecasted, and like other parts of the business, we are going to expand our work with our third party partners. These expanded partnerships mean we can ensure we have the ability to scale up and down as volume fluctuates while still continuing to provide the level of service our Members have come to expect.
These are hard choices because we are impacting people’s lives. These changes are essential if Peloton is ever going to become cash flow positive. Cash is oxygen. Cash is life. We simply must become self-sustaining on a cash flow basis.~ Barry McCarthy
Looking at the present day, there remains uncertainty surrounding Peloton's overall reputation and whether it can be fully restored. However, considering the circumstances of the past 12 months, I believe that Peloton has managed to at least stay above water so far.
As for actually executing on their growth plan, Peloton has made significant progress here.
They have recently undergone a complete rebrand, expanding their identity from a fitness hardware company to a platform that enables fitness enjoyment anywhere, anytime. They’ve even began offering a free tier, growing their subscriber base to over 3 million users.
It will be intriguing to observe how Peloton plans to not only convert free members into paying customers but also tackle the challenge of reducing churn, which poses a significant obstacle to subscription-based businesses. Peloton's focus on improving customer retention will likely involve a combination of personalized engagement, continuous content updates, and innovative features that enhance the overall user experience.
With the core of their transformation underway, Peloton must now multi-task by continuing to deliver on their plans and monitor what they release into the wild, which will be the final part of this deep-dive.
Step 3: Monitoring Progress
Change is a dynamic process that thrives on a continuous feedback loop from various sources. This ensures that the intended results of the plan are realized as it unfolds.
In Peloton’s case, they are still dealing with a host of challenges in public perception due to further recalls and the continuous loss in capital (although it’s getting better). Creating various stage gates along their change journey will be pivotal to come out of this transformation alive.
Here are several strategies that Peloton, as well as any ambitious change leader, can implement to integrate monitoring and continuous improvement efforts effectively on top of their transformation initiative.
Build a Centralized Data Hub: That captures and structures data specifically for the transformation initiative. Everything from customer scores to increase in sales of new product can be consolidated. The key is to identify metrics that show your initiative is moving the needle without the message getting lost in the rest of the companies data.
Maintain A 2-Way Communication Plan: Information should be flowing relentlessly and catered specifically to a segmented audience. There should be a plan around frequency, channel and message that get’s sent to the public via planned PR all the way to your employees. having a way to collect information for these group will allow changes leaders to have a real-time pulse on perception as updates get released.
Introduce Rapid Retrospective Sessions: Break down your change initiative into manageable chunks and set specific time limits for each phase. To ensure effective progress measurement and outcomes evaluation, it's crucial to regroup with key decision makers at the end of each phase. In addition to compiling insights on what is and isn't working, it's important to ask the tough questions about the validity of your approach. Don't be afraid to pivot if the data suggests it's necessary. Rapid Retrospective Sessions empower you to adapt and optimize your strategy for success.
Set Limits for Optimal Performance: Enhance your centralized data hub with a powerful tool - upper and lower control limits for your vital metrics. Stay ahead of the game by keeping an eye on leading indicators, enabling you to detect potential problems before they escalate. How? By defining the ultimate boundaries of acceptability for the metrics you monitor. With Peloton, they can potentially track the number of internal defects discovered during their QA process, preventing production mishaps and costly recalls.
Peloton has a long way to go, no doubt. And it’s anyone’s guess if they will survive the mess they’ve found themselves in. However, I do feel Barry is the right person to transform Peloton and I’m curious to see what the end result will be. You can bet I’ll be closely watching.
This deep-dive served as an experiment into the type of content I plan to offer on this site from time-to-time. If you found the case study format more engaging than my usual articles, I would love to hear your feedback. Please share your thoughts by leaving a comment below or sending me a direct message.