Peloton is back in startup mode as it churns toward a turnaround

Selling on Amazon

Peloton was already at the top of the ecommerce news cycle this week before earnings arrived Thursday. The company announced a new partnership with Amazon that will set up a dedicated store on its US ecommerce site where Peloton offers its original Bike and strength product, as well as accessories and apparel.

Orders will be fulfilled by Amazon’s logistics network, and customers will have an option to assemble a bike themselves, or add on service from an expert.

In many ways, Amazon can seem like a natural channel for Peloton. Along with remaining in the online sales realm, people were already heading to Amazon to search for Peloton products. Amazon sees half-a-million searches a month for the connected fitness company’s goods.

Still, it’s worth noting that this move is an about-face for a company that had built its business through direct-to-consumer sales. It comes as other DTC darlings like Glossier, Allbirds and Casper are moving into the more traditional retail approach of diversifying channels.

McCarthy said moving into sales at third-party marketplaces and stores is an area that the company will continue to explore.

“We're learning,” he told analysts. “This is not a substitute for our own retail strategy. This is a recognition that we need to be where our customers are. Sometimes that's in the store, sometimes that's on our website.”

Subscriptions

Peloton is both a hardware and software business. It makes fitness hardware such as bikes and treadmills. With these, users pay monthly subscription fees to access workout content broadcast on the Peloton system. Going forward, a question for the business is whether it is the purchase-based hardware or the subscription-based software side that will drive its growth. McCarthy provided perspective on this to analysts.

“I think increasingly, the business is driven by the growth in recurring subscription revenue,” he said. “That has an inherently higher margin than the hardware side of the business, and so the long-term trend for margin is towards the software margin rather than the hardware margin.”

He added that content was the company’s “singularly unique competitive advantage,” nodding to the fact that many Peloton instructors have become celebrities in their own right. Adding better discovery and personalization that learns a member’s preferences are both ways it can be improved and ultimately connect with more members, McCarthy said.

“This is why Netflix beat Blockbuster, and this is among the reasons that Spotify has run the table with the world's largest streaming music service,” McCarthy said. “And the more content you have, the more important it becomes that you'd be good, even great at building that personalized user interface. So it is currently a focus for us, and we will be relentless about it.”

McCarthy also wants to double down on growing the user base of the company's app. He said it will implement a "freemium model," with tiered price points that provide access to different amounts of content depending on how much one pays.

McCarthy sees opportunity in content that is viewed by a subscriber through the app on another piece of hardware. The company has shied away from promoting this in the past, but McCarthy said the company is going to “lean into” it in the future.

“I would be delighted for you to use our content on somebody else's hardware if you already purchased it,” he said. “That's a big install base, and I think it's a big opportunity for monetization for us.”

Pre-owned

In addition to upping sales of new Bikes, Peloton is testing the sale of certified pre-owned hardware. A 10-day test conducted in the US and Germany “significantly outperformed" the company's expectations, McCarthy said. This also allows Peloton to extend the life of the hardware, which could impact production costs that were in part responsible for its current predicament.

Rental

Peloton introduced an option to rent a bike from the company, making it easier to obtain one of the $1,400 pieces of equipment. Known as fitness-as-a-service, McCarthy said this model is still in testing. But initial results of a small sample size lead him to be “guardedly optimistic” about its promise of finding footing. From the shareholder letter:

Our test results show the program is driving increased traffic to the top of our marketing funnel and clearly appeals to a younger, more value-conscious consumer. We’ve been in limited test markets, and since June, roughly 20% of all first generation Bikes have rented under this program. This equates to more than 5,000 Members paying $89/month for a first generation Bike rental with All-Access Membership. FAAS churn rates are under 3% for the initial months of membership, which is better than we were expecting, and beginning in September, we will expand marketing support of the program nationwide.

This points to how the company’s new programs can work together. McCarthy said certified pre-owned inventory can be used to fulfill demand for the rental program. At the same time, he acknowledged that there will be overlap in customers seeking rental, and looking to buy a certified pre-owned bike. But either way, that’s the value-minded consumer that the company is looking to reach as it seeks to increase its addressable market.

Self-install

The self-install capability made available through the company’s Amazon store points at where the company wants the design and setup process of its Bikes to go. If members set up their own bikes, it would eliminate coordination for delivery. Peloton also made design tweaks for the self-assembly version that decreased the weight of a Bike. This model can also open up more potential for international growth since it won't require a local relationship with assemblers.

In-person studios

Another area that could have potential for further exploration is in-person studios. The company is opening studios in New York and London, and McCarthy said the response to early preview events has been “electric,” with lines around the block and demand that crashed the company’s reservation system. Given the celebrity status achieved by instructors, there could be opportunities to expand in-person workouts elsewhere, but McCarthy said this would likely take place in specific geographies.

Where’s it heading?

McCarthy acknowledged that the brand is in a period of testing. The company has taken actions to right itself. It is also exploring new areas where it may find growth, and it is doing so with a focus on expanding its market size, rather than betting solely on a particular channel like direct-to-consumer. It's likely that not all of these new concepts will succeed. Others are likely to change form as they are tested further, and costs of scaling come ing to view. The company recognizes this. For most of these initiatives, these are "early days" of testing, as McCarthy put it.

“The path to success involves having more swings at the plate,” he said. “And so you've seen us deploy a number of initiatives to accomplish that objective. And we're going to connect with the ball. It's just a matter of time… From my Netflix experience and my Spotify experience, I can't tell you exactly which one of those initiatives can get us to where we want to go, but I am confident of the cumulative effect."

To be sure, Peloton has a mature business. A publicly traded company with 6.9 million members and $678.7 million in quarterly revenue is well past the initial growth that leads to a business model. But as it seeks a turnaround, it is behaving more like a startup – testing, learning and ready to double down on what works.