Wheels come off Peloton sales strategy

Raising prices after recently lowering them, Peloton seems to be running out of good options.

Lately, it seems like Peloton is throwing a lot of ideas at the wall and seeing what – if anything – sticks. Above, a Peloton bike on a showroom floor. Picture: Getty Images / AFP

The wheels have come off the Peloton story and now the company wants its customers to pay for its own repairs.

With Peloton’s shares down about 80 per cent over the past year, the fitness equipment maker is reportedly exploring multiple avenues to cut expenses. One of them: asking new customers to shoulder some costs.

Come the end of the month, Peloton will start charging US consumers for delivery and set-up of some of its connected fitness devices, according to its website – a quiet but material change that could have big repercussions on future sales volumes.

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 on Thursday that Peloton was 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 per cent after the news. Just over a year ago, Peloton announced a $US420m acquisition of commercial fitness provider Precor in an effort to gain significant US 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 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, US 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 per cent, 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 January 31, Peloton will be raising prices for its original bike and its Tread either by charging new customers for delivery and set up or by raising the base prices, depending on the customers’ location. The difference is significant: Peloton’s website shows US customers will effectively be paying around 17 per cent more for its original bike, for example, adding in delivery and set up costs. For reference, last August, Peloton cut the price of that product by roughly 20 per cent.

At its annual shareholder meeting in December, Peloton reportedly discussed the potential of charging for delivery and set-up. 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 per cent on average across its markets. But not all companies have that luxury – especially those selling luxury goods. Consumers shopping at Ikea not only 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 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 McKinsey to review its cost structure, looking at potentially cutting some stores and even its apparel division.

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

Heard on the Street

The Wall Street Journal